1. This matter arises out of 124 references filed under Section 22A of the Securities Contract Act, 1956 (hereinafter referred to as "the Act"), by Bajaj Tempo Ltd. (hereinafter referred to as "the applicant-company") for confirming the opinion formed by its board of directors to refuse the registration of 26,550 shares, involved in 34 references, in favour of Bajaj Auto Holdings Ltd. (hereinafter referred to as "BAHL") and 12,050 shares, involved in 90 references, in favour of Bajaj Auto Ltd. (hereinafter referred to as "BAL") on the ground that the transfer of the shares is likely to result in such change in the composition of the board of directors as would be prejudicial to the interests of the company or to the public interest. The particulars of these references relating to reference number, date on which it was filed, number of shares involved, name of transferee, name of transferor, date of lodgment of the shares and the date of board meeting at which transfer was refused, are contained in the statement annexed hereto at annexure "A", 2. At the beginning of the hearing on September 7, 1990, it was agreed by counsel representing both the parties that all the 124 references covering 38,600 shares may be heard together for the reasons that the circumstances and the issued to be considered in all these references are common and the ground for refusal, the prayer made therein, the counter-reply filed by respondents are also identical in all these references. Hearings were held on September 7, 1990, November 27, 1990, and January 9, 1991.
3. Shri Anil Divan, senior counsel appearing on behalf of the applicant-company, stated that the decision to refuse transfer of shares in the name of BAHL and BAL was taken by the board of directors in the meetings held on December 20, 1986, August 27, 1987, September 25, 1989, January 15, 1990, February 15, 1990, and April 23, 1990, and the common and only ground of refusal for transfer of shares is as provided in Section 22A{3){c) of the Act. He pointed out that these 124 references are made in pursuance of the provisions of Clause (c) of Sub-section (4) of Section 22A of the Act seeking confirmation of the Company Law Board in regard to the opinion to refuse registration of transfer of shares in the name of BAHL and BAL. Referring to Article 52 of the articles of association of the applicant company under which the board has "absolute and uncontrolled discretion to decljne to register or acknowledge any transfer of shares", Shri Divan argued that the board has an unfettered right to decline to register any transfer of shares, notwithstanding the fact that the refused transferee is already a member. He pointed out that it is an admitted fact that BAHL is a constituent of the Bajaj group which is one of the largest MRTP groups in India and that the BAHL is a wholly-owned subsidiary of BAL and according to him, the Bajaj group holds more than 22 per cent, of the paid-up capital of the applicant-company. Referring to the structure of shareholding of the applicant-company, Shri Anil Divan pointed out that the paid-up capital of the company as on September 4, 1990, was Rs. 6,61,73,560 consisting of 66,17,356 equity shares of Rs. 10 each and this capital is held by more than 3,500 members. The financial institutions hold about 3,42,550 shares, i.e., 5.17 per cent, of the total paid-up capital. All the directors hold only about 60,670 shares, i.e., 0.9 per cent, of the total paid-up capital and the relatives of the directors hold 1,17,360 shares.
4. He then referred to para 7 of the reply by BAHL in which it has been argued that the rejection of transfer of shares is wrongful, arbitrary, illegal, mala fide, and not at all in good faith and contrary to and in violation of the provisions of Section 22A of the Act. He pointed out that it has been alleged by the respondents that the resolution passed by the board refusing to transfer the shares does not even care to state that the opinion arrived at was in good faith and refers to "facts and events si,nce then" which have not been properly set out either in the resolution or in the petition. Referring to sub-paras (a), (b) and (c) of para 2 of the counter-reply filed by the applicant-company on March 6, 1987, Shri Anil Divan argued that it is not incumbent to state in the board resolution that the opinion has been formed in good faith nor is it necessary to set out the facts and events which led the board to form such an opinion in the resolution.
Referring to Sub-section (6) of Section 22A of the Act, he pointed out that before making any final order, the Company Law Board has to give a reasonable opportunity to all the parties of making a representation including the transferor and the transferee and the company so as to establish the facts and circumstances on which the opinion was formed by the board of directors.
5. Shri Divan referred to the earlier board resolution of 1983 refusing transfer of 13,200 shares lodged by BAHL and BAL and stated that the applicant-company firmly believes that it is in their interest not to get inter-connected with an MRTP company. He also pointed out that from time to time BAHL and BAL have passed various resolutions to invest large funds in the shares of the applicant-company to increase their shareholdings. According to him, these investments are motivated investments which are not bona fide and looking at the successive purchases of shares by BAHL and BAL, in spite of low return on investments, there should be no doubt in any one's mind that these investments are being made with the only motive of destabilising the management. Disagreeing with the arguments of BAHL stated in reply of March 6, 1987, to the counter-representation of the applicant-company that the return on investment is not the only criteria for determining whether an investment is bona fide investment or not and that the question whether an investment is bona fide or not, is entirely irrelevant in view of Section 22A of the Act, Shri Divan submitted that the question whether the investment made is bona fide investment or not is important and very much relevant under the provisions of Section 22A of the Act. Successive investments made by BAHL and other constituents of the Bajaj group are very much relevant and show the intention and motive of the Bajaj group behind acquiring the shares of the applicant-company. In this connection, he referred to various board resolutions passed in the board meetings of BAHL from July 7, 1980, to March 15, 1988, and resolutions passed in the board meeting of BAL from March 18, 1981, to November 19, 1988, filed along with the applicant-company's reply dated August 8, 1990.
6. He also pointed out that BAL has deliberately not disclosed the fact that out of 1,700 shares lodged for transfer by two transfer deeds along with its letter dated November 17, 1986, transfer of 1,600 shares was approved by the applicant-company. Referring to the argument of BAHL that the acquisition of a mere 100 shares of the applicant-company will bring about a change in the composition of the board of directors of the applicant-company, Shri Anil Divan argued that as per the provisions of Section 22A of the Act, the board of directors is empowered, subject to confirmation of the Company Law Board, to refuse the transfer of shares, if such transfers are even likely to result in change in the composition of the board of directors. He further argued that in order to ascertain the possibility of change, it is not only the number of shares proposed to be transferred which are to be taken into consideration but the present holding of the proposed transferee, its supporters and their group are also material and should be taken into account. Similarly, the resources at the command of such transferee, its supporters and group and their intentions are also relevant to arrive at an opinion about the proposed acquisition of shares, he further submitted. He pointed out that the facts and figures about successive purchases by BAHL and BAL of the shares of the applicant-company and the financial position as disclosed by balance-sheets and working results of BAL and its holding company, clearly point out that they are not small investors and are not making these investments as genuine investors and have substantial resources at their command. All these facts lead to a clear-cut conclusion that these investments are being made with a view to gain control of the applicant-company.
7. Referring to the composition of the board of directors of the applicant-company, Shri Anil Divan pointed out that it is incorrect to say that the board of directors consists mainly of persons belonging to the Firodia group and the foreign collaborators Daimler Benz AG. Shri Anil Divan pointed out that there is a nominee director appointed by the financial institutions and there are other independent directors who are well known personalities in -the industrial circle. He further submitted that the decision taken by the board of directors refusing the transfer of impugned shares was a unanimous decision of the board of directors. Shri Divan denied the existence of any group such as the Firodia group and stated that the shareholding of foreign collaborators is not relevant in the present case. Regarding BAHL's allegation about the suppression by the applicant-company about Firodia's holding together with the Jaya Hind group and the foreign collaborators being more than 50 per cent, of the paid-up share capital of the petitioner company, Shri Anil Divan pointed out that there is no Firodia/paya Hind group and denied that such alleged group together with foreign collaborators holds more than 50 per cent, of the share capital of the petitioner-company. He also submitted a list of the 10 top shareholders of the applicant-company.
8. He then referred to the reply filed by BAHL to the counter-representation dated March 6, 1987, of the applicant-company and reply filed by the applicant-company to the said representation filed on September 8, 1987. Referring to BAHL's denial about the existence of any group as the "Bajaj group" and that the "Bajaj group" holds more than 22 per cent. of the paid-up capita! of the applicant-company, he pointed out that the Company Law Board in its order passed in the matter of 62 appeals under Section 111 of the Companies Act, 1956, filed by BAHL had given a decision about the existence of the "Bajaj group" and upheld the decision of the board of directors of the applicant-company refusing registration of 61 transfer deeds on the ground that the said transferee was part of the Bajaj group. He also referred to an interview given by Shri Rahul Bajaj, chairman and managing director of BAL, published in Business World of Sunday Observer dated August 7, 1988, which confirms the existence of the "Bajaj group" and his desire to make the applicant-company a part of the Bajaj group. Referring to the reply filed by BAHL on August 25, 1990, and the counter-reply of the applicant-company filed on September 4, 1990, and BAHL's contention that the Company Law Board order dated July 20, 1986, did not come to any decision about the constituents of the alleged Bajaj group as the said issue was not before the Company Law Board within the meaning of Section 2(18A) of the Companies Act, 1956, Shri Anil Divan pointed out that the provisions of Section 2(18A) of the Companies Act (before the deletion of the same by the Monopolies and Restrictive Trade Practices (Amendment) Act, 1984) and Section 2(ef) read with Section 2A of the Monopolies and Restrictive Trade Practices Act are applicable only when the question of dispute arises between the administrative authorities appointed under the Act and any person as to the existence of a group and such provision/procedure is not applicable when a business decision is to be taken by the board of directors of a company.
9. Shri Anil Divan argued that the intention behind the amendment to the Securities Contracts (Regulation) Act while inserting Section 22A was to protect the small investor and not small investment. The Bajaj group holds 22.80 per cent, shares of the applicant-company and this percentage would increase to 23.61 per cent, if the shares involved in various references are considered and, therefore, considering the resources of the Bajaj group and their investment in the applicant-company it cannot be said that they are entitled to protection under Section 22A of the Act.
10. Shri Anil Divan submitted that even by a mere possibility of an interconnection with an MRTP company or an MRTP group, the possibility of the change in the composition of the board of directors is created.
He pointed out that because of such a possibility of inter-connection, a chain reaction may take place and the directors of the applicant-company may resign from the board of directors in order to avoid the inter-connection between the family business and an MRTP company. He also referred to the decision of the Company Law Board in Herbertson's case (CLB Appeals Nos. 37 and 38 of 1978), wherein the Company Law Board took the view that inter-connection with an MRTP group could be prejudicial to the interest of the company as it would be disadvantageous for its growth and expansion.
11. Shri Shanti Bhushan, senior counsel appearing on behalf of BAHL and BAL, submitted that before the facts of this case are considered, it would be desirable to look at the principles already established through various court cases under Section 111 of the Companies Act prior to amendment of the Securities Contracts (Regulation) Act by introduction of a new Section 22A which was made effective from January, 1986. He first referred to the Delhi High Court decision in Ganesh Flour Mills Co. Ltd. v. T.P. Khaitan [1986] 60 Comp Cas 28. In this case, it was held that (at page 32): "The company court cannot look on patronisingly at the tendency displayed by managements of the companies or their shareholders to set at naught the too well-recognised concept of transferability of shares inherent in the company law and accepted all over the world. A public company cannot be relegated to the position of a personal or family affair. If they want to enjoy that privilege, they are at liberty to operate individually and form firms. In that case, there is no question of their availing of the benefit of limited liability appurtenant to a limited company. If, however, recourse to incorporation of a company is resorted to, then the personal or family interest becomes foreign and wholly irrelevant.
The position has then to be singularly looked at from the angle of rights and duties of a shareholder. The shareholding of such person, whether large or small, is always subject to the incidence of transfer.
No curbs or fetters can be entertained or imposed in order to protect the vested interest or to perpetrate the hold of individuals or families over the affairs". It was further held (at page 33): "The basic character of a public limited company that any member of the public is entitled to subscribe to its shares remains, and must be upheld to the exclusion of any individual or group interests. The approach in this matter has not to be allowed to be swayed by likes and dislikes of individuals or other considerations. That would be like placing momentary strains of expediency on the too well recognised concepts of a public limited company. It is futile to say that the sponsors of the company must in perpetuity continue to have a hold.Rather it is more the investment of the public money in the form of shares which ushers in the growth and development of the company. For the managerial capacities, the persons concerned are duly paid their emoluments, and they are not essentially removed or themselves leave on mere change in the share structure of the company. Moreover, those who continue to retain the shares still have a say in its affairs and profits commensurate with their holdings". Shri Shanti Bhushan argued that it is clearly established that the board of directors cannot use powers given by the articles of association for continuing in perpetuity the existing or promoter group.Bajaj Auto Ltd. v. N.K. Firodia [1971] 41 Comp Cas 1, in which a number of principles were evolved in order to protect the interests of the shareholders. According to him, the principles evolved were as follows : (1) In para 13 of the judgment it has been held "the directors will act for the paramount interest of the company and for the general interest of the shareholders because the directors are 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".
(2) In para 22 of the judgment it has been held that "where the directors have uncontrolled and absolute discretion in regard to declining registration of transfer of shares, the court will consider if the reasons are legitimate, if the directors have acted on a wrong principle or from corrupt motive".
(3) In para 25 of the judgment a reference was made to the Allahabad High Court decision in Muir Mills Co. Ltd.'s case [1900] ILR 22 All 410, where it was held that the discretionary powers vested in the board of directors to refuse registration of transfer of shares cannot be used to safeguard the director's personal interest.
(4) In para 30 of the judgment, it was observed that when the transfer was refused as it was likely to result in a threat to the smooth functioning of the management of the company and to avoid difficulties in passing special resolutions, the mere apprehension that special resolutions will not be passed is not a legitimate reason. It was also held that refusal to register shares and to continue the hegemony of any particular group would not be considered a legitimate reason.
(5) In para 34 of the judgment it was held that the discretion of the directors is to be tested as the opinion of a fair and sensible man in the interest of the company. The directors cannot act arbitrarily and unjustifiably.
13. Continuing his argument, Shri Shanti Bhushan further stated that it should be noted that the above principles were evolved at a time when the courts had a very limited role and there were no restrictions in the articles of association on the powers of the board of directors. He pointed out that with the introduction of Section 22A of the Act from January, 1986, this position has drastically changed in respect of listed companies and legislative restrictions are now imposed for the first time on the powers of the board of directors for refusing registration of transfer of shares. He pointed out that the appellate powers which are available under Section 111 of the Companies Act were somewhat restricted. Section 22A of the Act while giving original powers in respect of listed companies for forming opinion of the board of directors has given wider powers to the Company Law Board which were not available to the courts under their appellate jurisdiction under Section 111. In fact, in respect of listed companies as per Section 22A, the board of directors have, irrespective of whatsoever has been stated in the articles of association, powers only to form an opinion about the registration of transfer of shares and if in their opinion such registration should be refused it can be only on the grounds stated in Sub-section (3) of Section 22A of the Act.
14. Shri Shanti Bhushan then referred to the decision of the Company Law Board, Eastern Region Bench, Calcutta, in Sinclair Hotels and Transportation Ltd., In re [1989] 2 Comp LJ 49 (CLB), in order to enumerate the changes that have taken place after the introduction of Section 22A in respect of listed companies. He referred to para 19 of the decision where it was held (at page 64) ; "the board of directors of a company whenever they choose to refuse registration of transfer of any security under Clause (c) of Sub-section (3) of Section 22A of the said Act are required to consider the matter on the basis of proper and adequate evidence and they cannot rest their opinion in this behalf simply on presumption. We feel that there is no presumption in favour of the board of directors in their coming to the conclusion provided in Clause (c) mentioned hereinabove, and that a company availing of the said ground had necessarily to satisfy itself of all the requirements of the said provision of law from the evidence that may be produced before it." He further pointed out that it was held in that case that the onus is squarely on the applicant-company to establish that the various conditions laid down in Section 22A are fulfilled on the basis of material before it.
15. Shri Shanti Bhushan further argued that for testing the contention of the applicant-company, regarding likely change in the composition of the board of directors, the test prescribed was comparison of the existing shareholding structure with the shareholding structure which would come about if the impugned transfers are allowed. He further contended that the material placed before the board of directors should not be vague, should be specific and after evaluating such material the Company Law Board should be in a position to decide whether the board of directors had exercised their powers of forming an opinion in an honest manner.
16. Shri Shanti Bhushan argued that based on these decisions, it is clear that in order to fulfil the conditions mentioned in Section 22A of the Act, the applicant-company has to prove that the material available before the board of directors was specific, cogent so as to enable them to form the opinion in good faith based on the test of the shareholding pattern likely to emerge if the registration of transfer of shares is allowed and that such a transfer is likely to result in the change in the composition of the board of directors and that such a change is against the public interest and against the interest of the company. Shri Shanti Bhushan argued that the interest of the company and the interest of the management are distinct. The directors of the company are in a fiduciary position and they cannot use "interest of the company" to protect their own interest and continue their own management in perpetuity. He also pointed out that the applicant-company has not proved in any way either in the application made or various replies and affidavits filed by them, how the change in the composition of the board of directors, if at all such a change takes place, would be prejudicial to the public interest.
17. Referring to the structure of the shareholding pattern, Shri Shanti Bhushan pointed out that the foreign collaborators are holding 28 per cent, of the equity share and they constitute the largest single block.
If they change their mind of supporting the existing management, change in the composition of the board of directors can come up without the change in the shareholding. He, therefore, argued that if the transfers lodged with the applicant-company are allowed, there is no likelihood of change in the management as change in the management is entirely dependent upon the attitude of the foreign collaborators who are at presenting siding with the present management. Therefore, the apprehension expressed by the applicant-company is without any foundation. He also referred to the representation filed on behalf of the applicant-company before the Company Law Board, Western Region Bench, in an Appeal No. 1 of 1984 under Section 111 (BAHL v. Bajaj Tempo Ltd.) in which the applicant-company had admitted that along with Jaya Hind Industries Ltd., their directors and relatives who together hold 28.17 per cent, and the foreign collaborators who hold 30.15 per cent, shares, the Firodia management has the support of more than 58.32 per cent, shares. In view of this, there is no likelihood of any change in the composition of the board of directors and, therefore, the reference should be rejected.
18. In the hearing held on November 27, 1990, Shri Shanti Bhushan, appearing on behalf of the respondents, continued his arguments. He argued that it is the responsibility of the applicant-company to establish three chain-links, namely, (i) that there is a transfer, (ii) that such a transfer is likely to result in change in the board of directors, and (iii) that such a change will be prejudicial to the interest of the company or to the public interest. According to him, the 38,600 shares which are the subject-matter of these references, amount to only 0.8 per cent, of the total equity shareholding and will take the Bajaj group's holdings even accepting the figures given by the applicant-company, from 22.80 per cent, to 23.61 per cent. He further argued that the financial institutions hold 5.20 per cent, and as admitted in the pleadings filed in Appeal No. 1 of 1984 before the Company Law Board, the foreign collaborators, Firodias and Jaya Hind group together hold 58.32 per cent. Referring to the provisions of Section 114 of the Indian Evidence Act, he stated that there exists a presumption of continuation of this position, unless the applicant explains what are the changes in the shareholding of these three groups who together hold 58.32 per cent, and support the management. To a query from the Bench whether it is appropriate to determine the likelihood of change in the board of directors by a purely arithmetical test as suggested in the Sinclair judgment [1989] 2 Comp LJ 49 (CLB), Shri Shanti Bhushan replied that such an arithmetical test is absolute and enough in cases where the management has substantial control of the shareholding as the probability of the floating shareholders supporting the management is very high in such cases.
19. Regarding the argument of the applicant-company about the possibility of inter-connection with the MRTP group, Shri Shanti Bhushan pointed out that the value of assets of Bajaj Tempo has already reached Rs. 94 crores as on March 31, 1990, and it is likely to become an MRTP company. He also pointed out that the apprehension of the applicant-company that the Bajaj group will destabilise the management of the company is not well founded as for acquiring 25 per cent, of share the Bajaj group will have to obtain approval from the Central Government in terms of Section 30B(1) of the Monopolies and Restrictive Trade Practices Act.
20. In his concluding arguments, in reply Shri Anil Divan, appearing on behalf of the applicant-company, pointed out that the powers given to the Company Law Board under Section 22A are limited only to examining whether or not there was any material before the board of directors to come to the conclusion of refusal on the grounds stated and whether the board of directors had acted arbitrarily or perversely. He pointed out that successive board resolutions of the respondent companies to buy shares in the applicant-company, unlimited resources, the declared intention in press interviews, fear of loss of independent status because of the likely interconnection with the MRTP house should not be viewed as isolated instances as it creates a zone of uncertainty about the future of the company and, therefore, the board of directors had in their collective wisdom formed the opinion stated in the resolution. He further argued that public policy is not to destabilise good management and there is no unfettered free transferability of shares. He also stated that the alleged admissions in pleadings filed in Appeal No. 1 of 1984 before the Company Law Board should be read in the context of the affidavits filed and events that had taken place at that time and stated that he will be willing to file the entire pleadings in that appeal.
21. At the end of the hearing, the applicant-company was directed to file the pleadings in-Appeal No. 1 of 1984 under Section 111 of the Companies Act before the Company Law Board and also a statement regarding the voting results at the time of the annual general meeting or the extraordinary general meetings held since 1983. In the context of the alleged admissions in Appeal No. 1 of 1984 about the shareholdings, we had also directed the applicant-company to file the statement indicating the shareholding of the foreign collaborator and the Bacher family in 1963, and changes therein at the time of consideration of these transfers and a statement about the shareholding of Jaya Hind Industries Ltd., their members and relatives in 1963 and changes therein at the time of consideration of these transfers. In response to these directions, information was filed by the applicant-company. On behalf of the respondents, a written statement containing observations on this information was filed which was objected to by the advocate appearing on behalf of the applicant-company as according to him the comments include a number of new grounds which were not earlier advanced by the respondent. We heard arguments on behalf of both the parties on this issue on January 9, 1991, and held that all the arguments were concluded in the hearing held on November 27, 1990, and only oral arguments regarding the factual information filed by the applicant-company at our specific direction would be considered at the final stage with a view to understanding the context of the alleged admissions in Appeal No. 1 of 1984 in order to ascertain the present shareholding structure and the shareholding structure that will emerge if the transfer of shares is given effect.
22. Referring to the alleged admissions in Appeal No. 1 of 1984 relating to the shareholding, Shri Anil Divan, appearing on behalf of the applicant-company, argued that these are being quoted by the respondents out of context and give a completely different meaning and connotation. He referred first to these two statements which are as follows : "18(o) Right from its inception, in the capital of Bajaj Tempo Pvt.
Ltd., Vidal and Sohn Tempo Works held shares to the extent of 26 per cent. Mr. R. Bacher 4.15 per cent. Jaya Hind Industries Ltd., their members and relatives held 28.17 per cent." "20. . . . Therefore, the Jaya Hind group together with the foreign collaborators held more than 50 per cent, of the shares of this company and, therefore, he was appointed in his own right as the managing director." 23. Shri Divan highlighted that as pointed out in the beginning of para 18 of the counter-representation of Bajaj Tempo Ltd. to the petition, the company had set out in their representation chronologically the events from 1923 till 19.84, narrating various developments in relationship between Firodia and Bajaj. The statement in para 18(o) was nothing but the factual position as existing in 1963 when Bajaj Tempo was a private limited company. Shri Divan further pointed out that the statement in para 20 was made in reply to references in para 17(2) of the appeal petition about the appointment of Mr. N. K. Firodia as the managing director in 1968 and para 20 describes nothing but the events relating to that issue and it will be incorrect to conclude on the basis of that statement that as on today also the Firodias along with the foreign collaborators and the Jaya Hind group form a group and control more than 50 per cent, of the shares of the applicant-company.
24. Shri Shanti Bhushan, appearing on behalf of the respondent-company, argued that from the statements filed by the applicant-company it appears that the shareholding of the foreign collaborators and the Bacher family has gone down from 30.1 per cent, in September, 1963, to 26.1 per cent in December, 1986, but no explanation is given how and in what manner it was reduced. It was further argued that the statements filed show a steep fall in the shareholding of the Jaya Hind group from 28.7 per cent in September, 1963, to 15.3 per cent, in December, 1986, without any explanation. According to him, the statement submitted by the applicant-company is incorrect, incomplete and misleading and does not reveal the true position of the shareholding of Jaya Hind Industries Ltd., their members and relatives. He also referred to the statement filed by the applicant-company about the top 10 shareholders which shows that Jaya Hind Investments Pvt. Ltd. holds 11,12,795 shares in September, 1990, as against 8,79,610 shares in December, 1986, when no right shares or bonus shares have been issued during this period.
Assuming that no other members have increased their shares likewise, Shri Shanti Bhushan argued, the total number of shares held by the Firodias/the Jaya Hind group along with the foreign collaborators would be more than 50 per cent, and, therefore, there is no substance in the argument that if the transfers of 38,600 shares constituting less than 1 per cent, of the share capital in favour of BAHL and BAL are approved, it is likely to result in change in management and, therefore, directions may be given to the company to register the shares.
25. We have carefully considered the legal arguments advanced by learned counsel for the applicant-company and the respondents. After the introduction of Section 22A in January, 1986, irrespective of the powers given in the articles of association, a company whose securities are listed on a recognised stock-exchange, has now powers to refuse registration of transfer of shares only on the grounds as stated in Sub-section (3) of Section 22A of the Act. There is a further duty cast on such companies that in cases where the board of directors form an opinion that registration of transfer should be refused on any of the grounds mentioned in Clauses (b), (c), (d) of Clause (3) of Section 22A, a reference should be made to the Company Law Board before the expiry of two months from the date on which the instrument of transfer was lodged for confirmation or otherwise of the opinion formed by the board of directors. We have also to take into consideration the provisions of Sub-section (5) of Section 22A of the Act which provides that "every reference shall be in the prescribed form and shall contain the prescribed particulars and shall be accompanied by the instrument of transfer of the securities to which it relates, the documentary evidence, if any, furnished to the company along with the instrument of transfer and evidence of such other nature and such fee as may be prescribed". This provision, read with Sub-section (3) of Section 22A, clearly establishes that the board of directors when it chooses to refuse registration of transfer of any security has to necessarily satisfy itself of all the requirements of the provisions of Section 22A, from the material before it and/or with the help of evidence that may be produced before it.
26. In all these references before us, the admitted facts that emerged during the hearing, based on affidavits, documents, replies, counter-replies filed by the two parties are as following : (i) Both the respondent-companies, i.e., BAHL and BAL are existing shareholders of the applicant-company, Messrs. Bajaj Tempo Ltd., and have a substantial stake in the company which is more than 22 per cent.
(ii) The management of the applicant-company right from the inception is with the Firodias and they have the support of the foreign collaborator who has got a substantial stake in the equity of the company which is more than 26 per cent.
(iii) The Jaya Hind Industries Ltd. was promoted by the Firodias and it has along with members and relatives a substantial stake in the applicant-company. This stake was 28.7 per cent, in 1963.
(iv) The applicant-company after registration of 7,600 shares as directed by the Company Law Board, vide its order dated July 26, 1986", has approved nine transfers of 22,700 shares in favour of BAHL.
(v) The financial institutions have also a stake in the company which is more than 5 per cent.
(vi) Since 1983, till date, poll was taken on two resolutions only in the extraordinary general meeting of the members of the applicant-company held on November 19, 1983, and votes in favour of the resolutions were about 65 per cent, of the total votes cast and more than 51 per cent, of the total votes relating to the then paid up capital of the applicant-company.
(vii) The number of shares involved in these 124 references is 38,600 which constitute less than 1 per cent, of the voting power as per the then paid up capital.
27. The case of the applicant-company refusing registration of transfer of 38,600 shares is stated in the relevant board resolutions and counter-representation filed on April 2, 1988. We agree with the contention of the applicant-company that it is not the requirement of law to state all the facts and circumstances on which the opinion is formed in the board resolution so long as in compliance with the provisions of Sub-section (6) of Section 22A of the Act all such material on which the opinion is formed is placed before the Company Law Board before the making of the final order. We, however, do not agree with the contention of the advocate for the applicant-company that the intention behind the amendment to the Act while introducing Section 22A was only to protect small investors. The main purpose of the new Section was to ensure free transferability of shares of listed companies and for that purpose the unlimited powers of companies to refuse registration of shares were restricted to only four grounds and the opinion formed to refuse registration of transfer was also made subject to confirmation of the Company Law Board. At the same time responsibility was cast on companies to take such a decision and make a reference to the Company Law Board within two months from the date of lodging of the transfer instrument. If the provisions of Section 22A are made applicable only to small investors, it will defeat the main objective of ensuring free transferability of shares of listed companies.
28. As stated in the board resolution, the board considered the matter taking into consideration the previous transfer applications lodged by the same transferee, the proceedings in respect of the same, the facts and events since then and formed an opinion that these transfers ought to be refused on the ground that the transfer of securities is likely to result in such change in the composition of the board of directors as will be prejudicial to the interest of the company and to public interest. After taking into consideration not only the number of shares proposed to be transferred but also the present holding of the proposed transferee as well as its supporters and their group and the resources at their command, their intention, particularly those borne out by their past conduct, the board has come to the conclusion that any further acquisition of shares by Bajaj group which is holding more than 22 per cent, of shares in BTL is likely to result in change in management which is detrimental to the interest of the company. The applicant-company has approved nine transfers covering 22,700 shares which were within the Bajaj group and did not give any additional voting power to the group.
29. In order to test the contention of the applicant on the first limb of Clause (c) of Sub-section (3) of Section 22A of the Act, i.e., that the impugned transfers are likely to result in a change in the composition of its board of directors, the information supplied by the applicant-company about its top ten shareholders, the shareholdings of the foreign collaborators and the Jaya Hind Group were considered. It is clear that right from the inception of the company the Firodias are supported by the foreign collaborators and the Jaya Hind Industries Ltd. and its members. There is no argument advanced on behalf of the applicant-company that this position has changed. Even based on the data given by the applicant-company, the Jaya Hind Industries Ltd. and their members and relations and the foreign collaborators together controlled more than 58.8 per cent, in 1963, 42.8 per cent, in 1984, and 41.4 per cent, in 1986. The data given on the shareholding of the Jaya Hind Industries Ltd. was challenged by the respondents as according to them it does not disclose the entire information and the applicant-company has not explained how the shareholding of this group which was 28.7 per cent, in 1963, has gone down to 15.3 per cent, in 1986, as given in their information. Jaya Hind Industries Ltd. was promoted by the Firodias and it is quite logical to presume that their shareholding will not be allowed to go down by the Firodias. As the applicant-company has not explained in the written statement or oral representation the reasons for reduction of this percentage of shareholding of Jaya Hind Industries Ltd., their directors and relatives nor explained how the shareholding which was 8,79,610 shares in December, 1986, has gone up to 11,31,795 shares in September, 1990, as indicated in the top ten shareholders' statement, we are inclined to come to the conclusion that the applicant-company has not disclosed the full details of shareholding of Jaya Hind Industries. Ltd., its directors and relatives. Even then, accepting the figures as given by the applicant-company, the total holdings of the Firodias, the Jaya Hind group and the foreign collaborators is more than 42 per cent, as against the holding of the Bajaj group which according to the applicant's case is slightly more than 22 per cent. We are not inclined to agree with the contention of the applicant-company that the shareholding of the foreign collaborator is irrelevant for these proceedings as it is an admitted fact that they have all along supported the present management and there is nothing on record to suggest any change in that position. Considering the fact that the financial institutions are holding more than 5 per cent, of the shareholding, the existing management group, even according to data supplied by them, is a dominant group and if these impugned shares are registered in the name of BAHL and BAL, there is no likelihood of any change in the management. As per the shareholding pattern, the foreign collaborator as a group have the maximum equity holding and so long as they have not withdrawn the support to the Firodias, which they have been extending right from the inception of the company for the last practically 30 years, we do not think there is any possibility, much less a probability, of a change in the composition of the board of directors, if the impugned shares which constitute less than 1 per cent, of the total shareholding are registered in the name of respondents. We have also taken note of the fact that the applicant-company has registered nine transfers involving 22,700 shares in favour of BAHL since July, 1956, taking into consideration that there will not be any additional voting rights accruing to the "Bajaj group". While arguments have been made to indicate that registration of transfer of shares will be prejudicial to the interest of the company as it may ultimately result in inter-connection with an MRTP group, we have not gone into this question as we have already held that the transfer of shares in this case is not likely to bring about any change in the composition of the board of directors of the applicant-company and, therefore, the following question whether such a change will be prejudicial to the interest of the company or to the public interest needs no further examination. In the result, the 124 references made by the applicant-company fail as it has not been able to establish the first limb of Clause (c) of Sub-section (3) of Section 22A of the Act and, therefore, we hereby direct the applicant-company to register the 38,600 shares, being the subject-matter of the references before us, within 10 days of the service of this order by the Bench officer.