The important question before the Supreme Court in Bhagwati Developers Pvt. Ltd. Vs. Peerless General Finance & Investment Company Ltd. was: Whether the provisions of Securities Contract Regulation Act will apply to the shares of a public limited company which are admittedly not listed on any stock exchange? And the top court held that: Shares of public limited company though not listed in the stock exchange come within the definition of securities and hence, the provisions of Regulation Act apply. For a proper appreciation of this reasoning it would be worthwhile to narrate the facts of the case.
Respondent no. 2, an Individual, approached the Appellant, Bhagwati Developers Private Limited, for a loan of Rs 38,83,000/- for purchasing 3,530 equity shares of Respondent no. 1, Peerless General Finance & Investment Company Limited. As requested, Appellant advanced a sum of Rs 38,83,000/- in 1986 to the Respondent no. 2. In lieu of the said loan a formal agreement was entered into between the parties to the transaction. Later Respondent no. 2 agreed to transfer 3530 shares of Respondent no. 1 to the Appellant by way of repayment of the aforesaid loan. And he handed over the original share scrips as also the transfer deeds for doing the needful by Appellant. Respondent no. 2 on 30th October, 1987, wrote that Appellant would be entitled to all the benefits i.e. dividend, bonus shares etc. In respect of all these shares. It seems that the transfer deeds were not properly filled in and executed and accordingly, Appellant on 28th December, 1987 wrote to Respondent no. 2 to put his signature in the fresh transfer deeds and return them to it. Appellant further requested Respondent no. 2 to send it shares and dividends received by him from Respondent no. 1. Meanwhile, Respondent no. 1 declared bonus shares in the ratio of 1:1 and Respondent no. 2 being the registered shareholder, received further 3530 bonus shares. Respondent no. 2, it appears, did not sign the fresh transfer deeds and retained the bonus shares. Appellant by its letter dated 6th of July,1988, asked Respondent no. 2 to furnish fresh transfer deeds in respect of the total shares i.e. 7060 shares. Respondent no. 1 declared further bonus shares in the year1991 in the ratio of 1:1 and Respondent no. 2 being the registered shareholder of 7060 shares was further allotted 7060 bonus shares. In this way Respondent no. 2 got 14120 shares.
When Respondent no. 2 did not accede to the request of Appellant for transferring the entire shares, It filed a suit in the Court of Civil Judge at Allahabad in 1991 and obtained an ad-interim order of injunction restraining the said Respondent from claiming any right, title or interest in respect of the aforesaid 14120 shares of Respondent no. 2. During the pendency of the suit, Respondent no. 2 and Appellant settled their dispute out of Court and executed an agreement dated 21st November, 1994, according to which Respondent no. 2 acknowledged to have sold 3530 equity shares to the Appellant on 30th October, 1987 which entitled it to the bonus shares declared in the years 1987 and 1991 totalling 14120 equity shares. In terms of the agreement, an application for recording the compromise was filed in the civil suit and for passing a decree in terms of the compromise. The trial court acceded to the prayer of Bhagwati and Tuhin and decreed the suit in terms of the compromise by judgment and decree dated 28th November, 1994. The compromise petition and the agreement between the parties formed the part of the decree. According to the compromise decree, it was agreed that:
Aggrieved by the approach and reasoning of the Respondent no. 1, Appellant approached Company Law Board, under Section 111 of the Companies Act, 1956. But CLB dismissed the said application, inter alia holding that transfer of shares in favour of Bhagwati was against the provisions of Sections 13 and 16 of the Regulation Act and as such, illegal on the basis of the reasoning that the shares of a public limited company which are not registered in the Stock Exchange also come under the purview of Regulation Act.
But when this reasoning was sought to countered with the reasoning the sales of shares in question was a spot delivery contract, the Company Law Board taking into account that consideration for sales of shares having been paid much after the date on which the sales of shares have taken place, observed that the transaction does not come within the expression, “spot delivery contract”.
Aggrieved by the approach and reasoning of the Respondent no. 1, Appellant approached Company Law Board, under Section 111 of the Companies Act, 1956. But CLB dismissed the said application, inter alia holding that transfer of shares in favour of Bhagwati was against the provisions of Sections 13 and 16 of the Regulation Act and as such, illegal on the basis of the reasoning that the shares of a public limited company which are not registered in the Stock Exchange also come under the purview of Regulation Act.
But when this reasoning was sought to countered with the reasoning the sales of shares in question was a spot delivery contract, the Company Law Board taking into account that consideration for sales of shares having been paid much after the date on which the sales of shares have taken place, observed that the transaction does not come within the expression, “spot delivery contract”.
The agreement in the compromise decree having been successively held to be in the teeth of Sections 13 and 16 of the Regulation Act by the CLB and HC, Appellant, perforce approached SC, and the court in order to address the controversy in the case it framed two questions:
Having seen the approach of the Tribunal and HC, that contract in relation to securities in notified areas is illegal if made otherwise than between the members of recognized stock exchange. In order to overcome this difficulty,it was argued on behalf of the appellant that the security in question is not marketable and therefore, does not come within the definition of securities” as defined under Section 2(h)(i) of the Regulation Act. According to Appellant, shares of a public limited company to come within the definition of securities under the Regulation Act has to be marketable and for that purpose has necessarily to be listed in Stock Exchange.
Court on the basis of reading of Section 2(h)(i) of the Regulation Act reasoned: for shares of a public limited company to come within the definition of securities they have to satisfy that they are marketable. The word, ‘marketable’ has not been defined in the Regulation Act and hence to understand it, it reverted to its dictionary meaning and found as per Black’s Law Dictionary (Sixth Edition) that the explanation for the word, ‘marketable’ as follows: “Marketable. Saleable. Such things as may be sold in the market; those for which a buyer may befound; merchantable.” The Court thus reasoned that since the expression “marketable” has been equated with the word saleable in various dictionaries. And held that whatever is capable of being bought and sold in a market is marketable. The size of the market is of no consequence. In other words, the number of persons willing to purchase such shares would not be decisive. One cannot lose sight of the fact that there may not be any purchaser even for the listed shares. In such a case can it be said that even listed shares are not marketable?
The court on the basis of this finding held that shares of public limited company though not listed in the stock exchange come within the definition of securities and hence, the provisions of Regulation Act apply. And it reasoned that: What is required is free transferability. Subject to certain limited statutory restrictions, the shareholders possess the right to transfer their shares, when and to whom they desire. It is this right which satisfies the requirement of free transferability. However, when the statute prohibits or limits transfer of shares to a specified category of people with onerous conditions or restrictions, right of shareholders to transfer or the free transferability is jeopardized and in that case those shares with these limitations cannot be said to be marketable.
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