Judgment:
1. This matter arises out of 320 references filed under Section 22A of the Securities Contracts (Regulation) 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 35,750 shares in favour of the Unit Trust of India on the ground that the transfer of securities is likely to result in such change in the composition of the board of directors as would be prejudicial to the interest of the company or to public interest. The particulars of these references relating to the reference number, the date on which it was filed, the number of shares involved, the name of transferor, the date of allotment of shares and the date of the board meeting at which the transfer was refused are contained in the statement annexed hereto at annexure 'A'.
2. At the beginning of the hearing on November 28, 1990, it was agreed by counsel representing both the parties that all the 320 references covering 35,750 shares may be heard together for the reasons that the circumstances and the issues involved are common and the ground for refusal and the prayer made therein, the counter-reply filed by the respondent are identical in all these references. The final hearing of this case was held on February 7, 1991, and all these references are being disposed of by this common order.
3. Shri Aspi Chinoy, counsel appearing on behalf of the applicant-company, stated that the decision to refuse transfer of shares in the name of the Unit Trust of India was taken by the board of directors of the company in its meeting held on different dates on November 28, 1989, January 15, 1990, March 5, 1990, April 23, 1990, May 26, 1990, and July 30, 1990. The common and the only ground for refusal of the transfer of these shares is as provided in Section 22A(3)(c) of the Act and the present references have been made to this Board 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 (CLB), in regard to its opinion on the question of registration of the transfer of shares in the name of the Unit Trust of India. Shri Chinoy referred to the provisions of Article 52 of the articles of association of the applicant-company under which the board has absolute and uncontrolled discretion to decline registration of transfer of shares. He further pointed out that as per the shareholding pattern of the applicant-company as on November 28, 1989, the shareholding of the directors and their relatives was 2.05%, foreign collaborators 25.15%, financial institutions 5.20%, the Bajaj group 21.65% and the balance 45.95% was held by others. It was also pointed out that, out of 3,43,500 shares held by the financial institutions, 73,700 shares are registered in the name of the Unit Trust of India. Shri Chinoy then referred to the order of the Company Law Board dated July 28, 1986, issued in Appeals Nos. 10 to 50 of 1983 (WR) and 1 to 21 of 1984 (WR) under Section 111 of the Companies Act, 1956, in which it was observed that the apprehension that getting interconnected with the Bajaj group constituted a valid reason and the refusal of transfer of shares by the board of directors of Bajaj Tempo Limited was upheld, inter alia, on the ground that any further acquisition of shares by the constituents of the Bajaj group may lead to interconnection between the undertakings belonging to the Bajaj group and the undertakings belonging to the applicant-company and such interconnection may be prejudicial to the interest of the applicant-company. Thereafter, Shri Chinoy referred to Explanation IV to Section 2(g) of the Monopolies and Restrictive Trade Practices Act, 1969, which defines the expression "interconnected undertakings". He pointed out that when the Unit Trust of India which is a financial institution as per the provisions of Section 2(da) of the Monopolies and Restrictive Trade Practices Act, 1969, lodged various lots of shares for transfer in its name, the board of directors decided to appoint a sub-committee to consider all aspects of further acquisition of shares by the financial institution, so as to ensure that, in terms of Explanation IV to Section 2(g), the applicant-company does not get interconnected with another body corporate. The sub-committee consisted of independent directors and submitted its report on November 23, 1989, in which it was observed that, in view of the interpretation of Explanation IV to Section 2(g) of the Monopolies and Restrictive Trade Practices Act, 1969, given by the legal adviser of the company, the financial institutions should not be allowed to increase their holding in the applicant-company. The board of directors considered this report and formed an opinion in good faith to refuse registration of shares lodged by the Unit Trust of India, on the ground that these transfers of shares are likely to result in change in the composition of the board of directors and would be prejudicial to the interest of the company and to public interest.
4. Shri Chinoy further argued that, according to the above interpretation of Explanation IV, the shares held by financial institutions in any body corporate shall have to be excluded from the total equity capital in order to ascertain whether such a body corporate is under the same management or not. If the number of shares held by the financial institutions increases, then the denominator for ascertaining the criteria of common shareholding or voting power of 25% gets reduced to that extent and two undertakings with less than 25% shareholding in both bodies corporate may become interconnected with each other. It was argued that, considering the present 5.20% shareholding of the financial institutions in the applicant-company, even if 23.69% of the total equity shares are held by the Bajaj group in the company, the company will become interconnected with that group.
Shri Chinoy pointed out that the present shareholding of the Bajaj group together with various transfers lodged by them would take their total holding up to 22.35% and', therefore, if the percentage of the shareholding of the financial institution increases further, then the company may get interconnected with the Bajaj group even though the Bajaj group does not acquire any further shares. As already held by the Company Law Board, interconnection with the Bajaj group would be detrimental to the progress of the applicant-company and hence the board of directors formed an opinion in good faith that it is likely to result in destabilisation of the management of the company, and, therefore, the board decided to reject the transfer of shares lodged by the Unit Trust of India. In support of the legal interpretation of Explanation IV, Shri Chinoy also referred to Mitra's Commentary on the MRTP Act, page 53, in which it is stated that, for the purpose of determining whether two bodies corporate were to be deemed to be under the same management, the shares held by the financial institutions in each of the two bodies corporate have to be excluded from total number of votes and the calculation for ascertaining the criteria of common shareholding for voting of 25% should be made on the basis of the reduced denominator. Shri Chinoy argued that even by interconnection with an MRTP company or MRTP group, the possibility of change in the composition of the board of directors is created, as some of the present directors may resign from the board in order to avoid interconnection between their family business and the business of the MRTP group via such an interconnection. He argued that even if there is only a possibility of change in the composition of the board of directors of the company, the board is justified in refusing the transfer of shares on the ground as mentioned in Section 22A(3)(c) of the Act. He stated that if such possibility of a change, in the opinion of the board of directors exists and if the said opinion is bona fide, then the same is not to be disturbed by any other authority even though the authority may come to a different conclusion.
5. Shri Chinoy denied the allegations made by the respondent in its counter-representation that the Firodia group which is in control and management of the company holds approximately 51% of the shares of the company and, therefore, the registration of the transfer of shares will not result in any change in the composition of the board of directors.
Shri Chinoy also referred to the Company Law Board's decision in Gammon India Ltd., In re [1990] 3 Comp LJ 89 (CLB) in which it was held that if an MRTP company is allowed to take over the company, it will increase concentration of economic power and, therefore, it is a relevant factor so far as public interest is concerned. Concluding his arguments, Shri Chinoy pleaded that, in view of the legal position regarding interconnection between the two undertakings, the board had rightly formed the opinion in good faith to refuse to register the transfer of shares, as such transfer is likely to result in a change in the composition of the board of directors which will be prejudicial to the interest of the company and to public interest and, therefore, the opinion formed by the board may be confirmed by the Company Law Board.
6. Shri K.S. Cooper, appearing on behalf of the Unit Trust of India, pointed out that Section 22A of the Act was brought into operation in January, 1986, and that it is an overriding provision. He pointed out that Section 22A has imposed restrictions on the powers of the board of directors to refuse registration of transfer of shares. The grounds mentioned in Section 22A are conditions precedent and it is not a question whether the board of directors had reached the opinion in bona fide belief. Referring to the arguments of learned counsel for the applicant-company regarding the legal interpretation of Explanation IV to Section 2(g) of the Monopolies and Restrictive Trade Practices Act, Shri Cooper stated that it is difficult to accept the contention of counsel for the applicant-company that a bona fide belief as to an interpretation of law is also enough for refusing to register transfer of shares and cannot be questioned by any authority. He then referred to the report of the sub-committee and pointed out that, in the entire report, there is no reference to the provisions of Section 22A of the Act. He also pointed out that the references to interconnection and absolute and uncontrolled discretion of the board of directors in the articles of association made in the sub-committee's report in sub-paras (i) and (o) have no relevance to Section 22A proceedings. He also pointed out that the committee was aware that even if all the disputed transfers of the Bajaj group are decided in favour of that group, the total holdings would have increased to 22.35% as mentioned in the sub committee's report and the cut-off point, even accepting the interpretation of the applicant-company about interconnection, was 23.69% of the total equity shares and, therefore, it was wrong on the part of the committee as well as on the part of the board of directors to come to an erroneous conclusion that the acquisition by the financial institutions would lead to interconnection. He also pointed out that there is no reference to change in the composition of the board of directors in the committee's report. It only talks about the difficulties that will arise because of the interconnection. Shri Cooper pointed out that the observations regarding likely interconnection between the Bajaj group and the company made in the order of the Company Law Board dated July 28, 1986, passed in the proceedings under Section 111 of the Companies Act are not relevant for the issues in the present proceedings under Section 22A of the Act. He then referred 'to the interpretation of Explanation IV to Section 2(g) of the Monopolies and Restrictive Trade Practices Act, 1969, and stated that a plain reading of the section makes it clear that the shareholding of financial institutions, which are often quite substantial in two bodies corporate, shall not be the basis of establishing interconnection of the two bodies corporate by way of being under the same management. He did not agree with the applicant-company's interpretation regarding reduction of the denominator for ascertaining the interconnection. In concluding his arguments, Shri Cooper pointed out that, considering the existing shareholding pattern as well as the shareholding pattern likely to emerge if the transfers are effected, there is no justification for refusal to register the transfer of shares even if either of the interpretations of Explanation IV is considered and, therefore, the applicant-company should be directed to register the transfer of shares in the name of the Unit Trust of India.
7. We have carefully considered the arguments made by counsel appearing on behalf of the applicant-company and the respondent. The main ground for refusal of registration of transfer of shares is the likely change in the board of directors arising out of likely interconnection between the applicant-company and the Bajaj group on account of increase in the shareholding of the financial institutions. The board of directors of the applicant-company has reached this opinion mainly on the basis of the legal interpretation given to Section 2(g) of the Monopolies and Restrictive Trade Practices Act which is concerned with interconnection between two or more undertakings. One of the tests laid down by that section is that, if the undertakings owned by the bodies corporate are "under the same management", they are to be regarded as "interconnected undertakings'. The expression "under the same management" was originally used in the Monopolies and Restrictive Trade Practices Act, with reference to the definition contained in Section 370 of the Companies Act, 1956. The concept of "same management" under the Monopolies and Restrictive Trade Practices Act was, however, divorced from that in the Companies Act by the 1974 Amendment Act, which introduced Explanations I to IV in Section 2(g) to define the undertakings "under the same management", for the exclusive purpose of the Monopolies and Restrictive Trade Practices Act. Explanation IV to Section 2(g), which is intended to be an aid to the determination of whether, two bodies corporate are or are not under the same management, reads as follows : "In determining whether or not two or more bodies corporate are under the same management, the shares held by financial institutions in such bodies corporate shall not be taken into account".
8. In this connection, one has also to take into consideration the definition of "total voting power" as defined in Section 2(48) of the Companies Act. The voting power is largely dependent on the shareholding in the company. However, the interconnection on the basis of holding of equity shares and the exercise of the voting powers has been treated separately under Clauses (vi) and (vii) of Explanation I.Explanation IV relates to the common holding of equity shares as postulated under Clause (vi). On a plain reading of Explanation IV, there are two interpretations which are possible. One interpretation can be that the shares held by financial institutions should be totally disregarded, but the denominator does not change as it also relates to the voting power. The second interpretation could be that the shareholding of the financial institutions is to be ignored, even for calculating percentage-holding and, therefore, the denominator should also be reduced by excluding the shareholding of the financial institutions. The first interpretation where fhe equity holding of a public financial institution in the other bodies corporate should be treated as not being relevant to provide the source of interconnection between the bodies corporate concerned is clear and evident. The second interpretation that the equity holding of public financial institutions will not be taken into account so that the actual total equity shares in other bodies corporate will fictionally be reduced with a consequential notional increase in the ratio/per centage of non-institutional equity holdings in the relative bodies corporate does not appear to be in consonance with the other provisions of the Companies Act as well as in consonance with statutory interpretation.
Such an interpretation would mean that a fiction is introduced whereby some of the existing shares would be treated as non-existent. The words "shall not be taken into account" appearing in Explanation IV cannot be stretched to such an extent as to validly introduce this fiction. The introduction of such a fiction would not be in consonance with the definition of "total voting power" as defined in Section 2(48) of the Companies Act, 1956. The total voting power must correspond to the total number of equity shares and the proportionate voting power held by the bodies corporate must correspond to the proportionate shares held. If such an interpretation is followed, a conflict may also arise with the substantive provision in Clause (vi) of Explanation I, Clause (vi) postulates 1/4th of the total equity shares held in two bodies corporate by the apex body corporate. There is no indication even otherwise in that clause that 1/4th of the equity holding of the apex bodies corporate in the other bodies corporate will vary or increase or reduce due to institutional holdings or the absence of it. An interpretation treating the percentage of non-institutional holdings as variable and dependent on the existence or the non-existence of institutional holdings will introduce manifest uncertainly in the determination of interconnection between bodies corporate and militate against giving a literal interpretation which should be normally given to the expression "holding not less than one-fourth of the equity shares in one body corporate" occurring in Clause (vi) of Explanation I to Section 2(g). The established rules of construction of statutes lean heavily against itieqbities and, as a regulatory enactment, Explanation IV should be construed in favour of the citizens. Therefore, Explanation IV to Section 2(g) should be interpreted as simply postulating that no two bodies corporate shall be deemed to be interconnected by reason of any share held by financial institutions and, therefore, interconnection cannot be established through the instrumentality of shareholding by financial institutions. In view of this, we hold that the board of directors based their opinion in the matter of registration of transfer of shares on an erroneous interpretation of law, and, therefore, they reached a conclusion not warranted by the facts. We have also noted that, even following the wrong interpretation, the shareholding of the Bajaj group would not have reached the level of shareholding to establish Interconnection between the two undertakings, if the impugned shares had been transferred in favour of the Unit Trust of India.
9. In view of the foregoing, the applicant-company is hereby directed that the transfer of securities (list at annexure 'A' and forming part of this order) shall fee registered by the company in favour of the Unit Trust of India and the company shall give effect to this direction within ten (10) days of the receipt of this order. There will, however, be no order as to costs.