Supreme Court of India

BAJAJ AUTO LTD.versusCOMPANY LAW BOARD AND ORS.

Citation: 1998 INSC 270
Decided: 22 July 1998
Disposal: Appeal(s) allowed
Bench: B N KIRPAL

Holding

The Board's discretion to decline registration of share transfers is not absolute; it must be exercised bona‑fide and in the interest of the company, and the refusal in this case was not so exercised.

Summary

Bajaj Auto Ltd. and its subsidiary purchased 13,200 shares in Bajaj Tempo Ltd., a listed public company. The Board of Directors of Bajaj Tempo refused to register the transfer, citing four reasons: potential inter‑connection, lack of bona‑fide investment, competition, and the transferees being undesirable. The Company Law Board upheld two of these reasons but rejected the others. The Supreme Court examined the scope of the directors' power under Article 52 of the Articles of Association and Section 82 of the Companies Act, 1956, holding that such discretion must be exercised bona‑fide, in the interest of the company and its shareholders, and not arbitrarily. It found that the Board’s refusal was not bona‑fide, that the shareholding would not reach the 25% inter‑connection threshold, and that merely increasing shareholding is not a valid ground for refusal. Consequently, the Court set aside the CLB order and the Board’s resolutions, directed registration of the shares, and awarded costs.

Issues considered

The extent of the Board of Directors' power to refuse registration of share transfers in a listed public company under Article 52 of the Articles of Association.
Whether the Board's reasons (ulterior motives, apprehension of inter‑connection) constitute a bona‑fide exercise of that power.
Whether apprehension of inter‑connection under the MRTP Act can justify refusal when the shareholding does not reach the statutory limit.
Whether an increase in shareholding alone is a permissible ground for refusing transfer.
Whether the directors must act in the interest of the company and the general body of shareholders.

Legislation cited

Companies Act, 1956s. 108A, s. 82
Monopolies and Restrictive Trade Practices Act, 1969s. 25, s. 26, s. 2(9)

Subjects

Companies ActSection 82Transfer of sharesDirectors' discretionBona fideListed companyInter‑connectionMRTP ActShareholding limitCorporate governance

Judgment

BAJAJ AUTO LTD. A
v.
COMPANY LAW BOARD AND ORS.

JULY 22, 1998

[B.N. KIRPAL AND S.S.M. QUADRI, JJ.] B

Companies Act, 1956 : Section 82.

Transfer of shares-Public limited company-Listed with Stock
Exchange-Refusal of-By Board of Directors-Power and Scope-Transfer C
of shares refused for the reasons that the purpose of purchase of shares was
for ulterior motives with a view to destabilising the management of the
Company and apprehension that its company might get inter-connected
with the purchasing Company-Held : "Absolute and uncontrolled" power
conferred on Board of Directors by Articles of Association of the Company D
to decline to register transfer of shares-But the discretion has to be exercised
bona fide and not arbitrarily and for the benefit of the Company and the
general body of shareholders-Supreme Court in exercise of its power of
judicial review does not sit in appeal over question offacts but only has to
see whether there was bona fide exercise ofpower by the Board of Directors-
Merely because the purchasing Company wanted to increase its shareholding E
or get a controlling interest cannot by itself be a ground for refusing to
transfer of shares-Hence, the two reasons for refusing to the transfer the
shares neither made out on records nor warranted-It was not a bona fide
exercin of power by the Directors to take into account further acquisition
of shares which may take place, leading to inter-connection-Monopolies F
and Restrictive Trade Practices Act, 1969, Ss. 25, 26 and 2(9) Expln, JV.

The appellant-Bajaj Auto Ltd. was the holding company of Bajaj Auto
Holdings Ltd. while "Bajaj Group" had the control of the appellant it was
"Firodia Group" which controlled Bajaj Tempo Ltd. The said two appellant-
companies (Bajaj Auto Ltd. and Bajaj Auto Holdings Ltd.) along with other G
individuals who were members of their group (all of whom are appellants in
these appeals) were existing shareholders of Bajaj Tempo Ltd. which was a
public limited company. Bajaj Auto Limited purchase 50 shares of Bajaj
Tempo Limited and Bajaj Auto Holdings Limited purchased 13150 shares of
the said company. H
881
882 SUPREME COURT REPORTS [1998] 3 S.C.R.

A However, the transfer of shares was rejected by the respondent-Bajaj
Tempo Ltd. By resolutions of its Board of Directors. The Board of Directors
gave four reasons for rejecting the transfer of shares. The Company Law
Board rejected two of the four reasons, viz., that the appellants were
competitors of Bajaj Tempo Ltd. and that the transferees were not desirable
B persons from the larger point of view of interest of Bajaj Tempo Ltd. The
other two grounds were that the appellants were not bona fide investors and,
secondly there was a genuine apprehension about inter-connection of
respondent-company with the appellants.

As regards the first ground, the Company Law Board came to the
C conclusion that as Bajaj Auto Holdings Ltd. was an investment company, it
was not convincing that it would invest in the shares of Bajaj Tempo by way
of investment It further came to the conclusion that the proposed investment
in thr shares of the respondent-company by the appellants was to increase
its share holding and was motivated. It also noted that the return on the
shares of the company did not appear to be adequate enough warranting
D successive purchases of the share by the appellants.

As regards the second ground, the Company Law Board noticed that
on 29-8-1983, the total holding of the appellants' group was about 23.2%
in Bajaj Tempo Ltd. At that time the inter-connection limit under the
Monopolies and Restrictive Trade Practices Act, 1969 was 33 1/3% and the
E said limit has been reduced to 25% w.e.f. 1-9-1984 as a result of amendment
in M.R.T.P. Act The Company Law Board was of the opinion that even though
at the time of lodgment of shares the said amendment had not been made,
there was a feeling prevalent in trade and industry that the inter-connection
limit would be reduced to 25%. It then held that the limit up to which shares
F may be allowed to be acquired by any group, in the share holding of the
respondent-company in such circumstances, has to be the subjective opinion
of its Board of Directors and when the acquisition of the appellants "had
already reached critical limit of over 23%, which is not widely off the mark
of 25%, the apprehension existing in the mind of the Board of Directors of
the respondent-company cannot be assailed."
G
Being aggrieved by the aforesaid decision of the Company Law Board,
the appellants preferred the present appeal.

The crucial question that arose before this Court was as to what is the
scope of the power of Directors to refuse to register the transfer of shares
H in the case of a public limited company whose shares are listed on the Stock
BAJAJ AUTO LTD. v. CO. LAW BOARD . 883

exchange. In declining to register the transfer of shares, power is sought A
to be derived from Article 52 of the Articles of Association of the Company.

Allowing the appeal, this Court

HELD : 1.1. The exercise of discretion by the Board of Directors in
refusing to register the shares in the name of the appellants was not bona B
fide or in the interest of the company or general-body of shareholders.
Accordingly, its decision not to register the transfer of shares was not
correct. [896-H)

1.2. The power of the Board of Direr.tors to refuse registration of
transfer of shares must be in the interest of the company and the general C
body of shareholders. However, the Board has to act bona fide, and not
arbitrarily and for the benefit of the company as a whole. In the case of public
limited company, which is listed with Stock Exchange, an important right of
shareholder is to be able to sell his shares at a favourable price. It is seldom
in the interest of the general-body of shareholders that transfer of shares D
be refused because that will have an adverse impact on the market price of
the shares. Free transferability of shares will not artificially deprive its
market price. This does not mean that if there is a good reason then the
Board has no power to refuse to register the transfer of shares. This Court
while examining the action of the Board of Directors is not expected to
exercise original appellate jurisdiction and sit in appeal on question of fact. E
The judicial review while hearing in appeal from the decision of the Company
Law Board would be limited to see whether there was a bona fide exercise
of power by the Board of Directors while refusing to register the transfer
ofshares. [889-F-H)

2.1. This Court observed in Bajaj Auto Ltd v. N.K. Firodia, that where
F
the Directors give reasons, the Court would consider whether they were
legitimate and whether the Directors proceeded on a right or wrong principle.
In such a case, the reasons of the Directors have to be decided from three
points of view. Firstly, whether the Directors acted in the interest of the
Company; secondly, whether they acted on a wrong principle; and thirdly, G
whether they acted with an oblique motive or for a collateral purpose.

>-. Bajaj Auto Ltd v. N.K. Firodia, [1970) 2 SCC 550, relied on. [890-D)

Harinagar Sugar Mills Ltd v. Shyam Sunder Jhunjunwala, [19621 2
SCR 339, referred to. H
884 SUPREME COURT REPORTS (1998) 3 S.C.R.

A 2.2. Merely because the appellants wanted to increase the share-holdings ';
cannot by itself be a ground in law for refusing to transfer the shares. There "'
is nothing placed on record, which can possibly persuade anyone to come to
the conclusion that the intention of the purchase of shares by the appellants
was with a view to destabilise the management of the company or with an
ulterior/oblique motive. Prima facie it appears that even if it is assumed that
B the appellants were trying to purchase shares with a view to get a controlling
interest in the company that itself cannot be a ground for refusing to
transfer the shares unless and until it can be shown that the purchasers ...
were undesirable persons and after gaining control of the company they will )-

act against the company and the shareholders' interest. In the instant case
c the appellants would not even have 25% shares of the company even if the
transfer of share was registered and, therefore, the threat to the management,
assuming that could be a valid reason, could not be regarded as genuine.

2.3. If fear of the inter-connection was the real reason in refusing to
register the transfer then such a reason could not exist at that moment
D because even with the registration of the transfer the total mark of 25%
would not be reached. If the number of shares, which were purchased, had
been such that the total mark of 25% could be reached then the action of ..
the Board of Directors could not have been faulted. But with the registration
of the transfer of shares in question that danger mark would not have been
E reached. It is not possible to accept the appellants' contention that because
the total holding of the appellants' group would then become "dangerously
close" to 25%, it was a good enough reason to refuse transfer. There may
not have been anything to prevent the company if, after the shares in question
had been registered, any further purchase of shares was made which would
have the effect to push the holding of the appellants to the 25% mark, to
F reject those subsequent transfers. As the transfers in question would not
have resulted in reaching the 25% mark that cannot be regarded as a valid
reason or consideration for refusing the registration of transfer of shares.
The acquisition in question would not have led to the inter-connection between
the companies and it was a bona fide exercise of power by the Directors to
G take into account "further acquisition of shares" of Bajaj Tempo Limited
which may take place in future which may then lead to inter-connection. It
is the extent of share-holding at that point of time, which had to be taken into
consideration and not future acquisition, which may or may not take place. ,..._

3. The Company Law Board was, therefore, wrong in rejecting the
H contention of the appellants that the apprehension of the respondent-company
BAJAJ AUTO LTD. v. CO. LAW BOARD (KIRPAL, J.] 885
that is was likely to get inter-connected with the appellants in the event of A
the impugned transfer of shares being allowed was baseless and/or ill-
founded.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3480 of
1986 Etc.
B
From the Judgment and Order dated 28.7.86 of the Company Law Board,
New Delhi in A. No. 21 of 1984.

Harish N. Salve, Shanti Bhushan, Sudhir Chandra Aggrawal, R.F.
Nariman, Shailendra Swarup, Ms. Bindu Sexena, Ms. Leena George, K. Ram
Kumar, Ms. Asha, G. Nair, C. Balasubramanian, Y. Subba Rao, Ms. Santi C
Narayan, Dinesh Mathur, S. Ganesh, K.J. Deasi and E.M.S. Anam for the
appearing parties.

The Judgment of the Court was delivered by

KIRP AL, J. These appeals by special leave arise from the common D
order of the Company Law Board (respondent No. I ) which had partly upheld
the decision of Bajaj Tempo Limited (respondent No. 2) in declining to register
the transfer of it's shares in favour of Mis. Bajaj Auto Limited which had been
purchased by the appellants. These are essentially two groups of shareholders
which control these companies. While 'Bajaj Group' has the control of the E
appellant it is "Firodia Group" which controls Bajaj Tempo Ltd.

Bajaj Auto Limited (appellant in Civil Appeal No. 3480/86) is the holding
company of Bajaj Auto Holdings Limited (appellant in C.A. Nos. 3480/86 &
3420-79/86) and they, along with other individuals who were members of their
group (all of whom are appellants in these appeals, are existing share-holders
of Bajaj Tempo Limited which is a public Limited company. Bajaj Auto Limited F
purchased 50 shares of Bajaj Tempo Limited and Bajaj Auto Holdings Limited
purchased 13150 shares of the said company. These purchases were made in
the year 1983 through different brokers and they were sent to Mis. Bajaj
Tempo Limited for transfer of shares in the appellants' names. By three
different resolutions dated 29.8.1983, 27.9.1983 and 19.11.1983, the transfer of G
shares was rejected by Bajaj Tempo Limited. The minutes of the meeting dated
29.8.1983 contained the reasons for refusal to transfer and the resolution
passed thereto. The relevant portion of the said minutes is as under:

"The Directors, therefore, after due deliberation and considering all
aspects unanimously resolved not to approve the said transfers and H
886 SUPREME COURT REPORTS (1998] 3 S.C.R.

A declined to register the said transfers considering the facts briefly
stated above and grounds briefly summarised as under:

(1) Further acquisition of shares of this Company by Bajaj Group if
permitted will lead to interconnection between this Company and the
Companies of the Bajaj Group which is not desirable in the interest
B of this Company.

(2) The Bajaj Group is not acquiring the shares of this Company with
a view to or for the purpose of genuine investments but with ulterior
and oblique motives and purposes including with a view to destablise
the management of this company.
c
(3) Bajaj Auto Limited and this Company are competitors in business
in as much as both the manufacturing Light Commercial Vehicles. The
attempt of Bajaj Group to make inroads in this Company by acquiring
large block of shares is to cause detriment and prejudice to the
D company.

(4) In view of the facts stated above although absolute discretion is
conferred under Articles of Association of the Company, the Board
has carefully considered the matter and has decided to refuse to
register the transfers. The Transferees in the circumstances are also
E not desirable persons from the larger point of view of the interest of
Bajaj Tempo Limited, as a whole.

Therefore, the proposed transfers are not in the interest of the Company.

"RESOLVED that in pursuance of Article No. 52 of the Articles of
F Association of the Company, the transfer of shares submitted of this
meeting and herein below mentioned be and are hereby not approved
and the Board of Directors do decline to register the said transfers
and the Secretary to give to the parties notice of this decision refusing
the said transfers in the following terms:
G
"I have to advise that in the meeting of the Board of Directors
held on 29th August, 1983 the Board has decided that it will not give
its approval to the transfer of the following shares. The transfer forms ..._
and share certificates are being returned under a separate cover."

H It is for the same reason as above that the other transfers were declined
BAJAJ AUTO LTD. v. CO. LAW BOARD [KIRPAL, J.) 887

by the Resolutions dated 27.9.1983 and 19.11.1983. A
Appeals were the filed by the appellants under Section 111 of the
Companies Act, 1956 before the Company Law Board. On the basis of the
pleadings before it and the submissions of the counsels for the parties, the
Company Law Board formulated the following five issues for its consideration:
B
"!. Whether the appellants and the respondents are rivals in
business?

2. Whether the purchases of impugned shares were bona fide
investments ?

3. Whether the appellants can be termed as undesirable persons ? C
4. Whether apprehension of inter-connection of respondent
company with Bajaj Group .is well founded and whether it can
be a good ground for refusal to transfer shares ?

5. Whether transfer of 7 ,600 shares, sought to be transferred by
Smt. Suman Jain was intra-group transfer and if so, whether D
respondent company was justified in refusing transfer of these
shares ?"

By a reasoned order, issue Nos. 1,3 & 5 were decided in favour of the
appellants. It came to the conclusion that the appellants were not rival in
business .nor were they undesirable persons and by registering the transfer E
of 7600 shares, which transfers were intra-group, there would be no change
in the overall holding and, therefore, Bajaj Tempo was not justified in refusing
the said transfer. Issue Nos. 2 & 4 were, however, decided against the appellants
and the effect of this was that refusal to transfer 50 shares in favour of Bajaj
Auto Limited and 5550 shares in favour of Bajaj Auto Holdings Limited was F
upheld.

In deciding Issue No. 2, the Company Law Board came to the conclusion
that as Bajaj Auto Holdings Limited was an investment Company, it was not
convincing that it would invest in the shares of Bajaj Tempo by way of
investment. It further came to the conclusion that the proposed investment G
in the shares of the respondent company by the appellants was to increase
its share holding and was motivated. It also noted that the return on the
shares of the company did not appear to be adequate enough warranting
successive purchases of the shares by the appellants.

Dealing with Issue No. 4, the Company Law Board noticed that on H
SUPREME COURT REPORTS [J 998] 3 S.C.R.
888
A 29.8.1983, the total holding of the appellants group was about 23.2% in Bajaj
Tempo Ltd. At that time the inter-connection limit under the Monopolies and
Restrictive Trade PractiGesAct, 1969 (hereinafter referred to as 'M.R.T.P._Aci')
was 33 1/3% and the said limit has been reduced to 25% w.e.f. 1.8.1984 as a
result of amendment in the M.R.T.P. Act. The Company Law Board was of the
opinion that even though at the time of lodgment of shares the said amendment
B had not been made, there was a feeling prevalent in trade and industry that
the inter-connection limit would be reduced to 25%. It tien held that the limit
up to which shares may be allowed to be acquired by any group, in the share
holding of the respondent company in such circumstances, has to be the
, ..
subjective opinion of its Board of Directors and when the 'llcquisition of the
C appellants "had already reached critical limit of over 23% which is not widely
of the mark of 25%, the apprehension existing in the mind of the Board of
Directors of the respondent Company cannot be assailed." It, therefore,
concluded that the apprehension of Bajaj Tempo Ltd. that it was likely to get
inter-connected with the appellants, in the event of impugned transfer of
shares being allowed, was not baseless or ill-found.
D
Assailing the aforesaid decision of the Company Law Board, Shri Shanti
Bhushan and Shri Harish Salve, learned Counsels for the appellants submitted
that the power of the Directors to refuse transfer is by way of an exception
to the rule that the share transfer should generally be accepted by a listed
E company. Impugning the findings in connection with Issue Nos. 2 & 4 of the
Company Law Board, it was contended that the conclusion of the Broad that
the return by way of dividend on the shares was very low is not the only
relevant factor in order to determine whether the purchase of shares was by
way of investment. An important factor which has been ignored by the Board
was that the capital appreciation was more than ample to off-set the low
F dividend return. It was submitted that refusal to transfer was not in the
interest of the company and the non-transfer by the Firodia Group, which
controls Bajaj Tempo, was with a view to protect that group's personal
interest. It was also submitted that even if the transfers were allowed the
share-holding of the appellants would be below 25% limit. In this connection,
G it was submitted that it was in the hand of the Bajaj Tempo Ltd. to avoid inter-
connection if any more transfers of shares was sought for, if with the said
transfer the transferability would reach the limit of 25%. Our attention was
also drawn to the fact that at the relevant point of time, Bajaj Tempo was ...,
already a company to whom the provisions of Chapter 3 of M.R.T.P. Act
applied by virtue of the provisions of Section 20(a) of the said Act inasmuch
H as its assets exceeded 20 crores and, therefore, inter-connection would not
BAJAJ AUTO LTD. v. CO. LAW BOARD [KIRPAL, J.) 889
have made any difference. For the view, we are taking, it is not necessary to A
refer to or deal with the other contentions raised by the learned counsels for
the appellants.

The crucial question is as to what is the power and scope of Directors
to refuse to register the transfer of shares in the case of a public limited
company whose shares are listed on the Stock Exchange. In declining to B
register the transfer of shares, power is sought to be derived fwm Article 52
of the Articles of Association of the Company which reads as follows: "
•
"52. The Board may at its own absolute and uncontrolled discretion
decline to register or acknowledge any transfer of shares, and in
particular may so decline in any cases in which the Company has a C
lien upon the shares or any of them, or whilst any moneys in respect
of the shares desired to be transferred or any of them remain un-paid,
or unless the transferee is approved by the Board, and such refusal
shall not be affected by the fact that the refused transferee is already
a member. The registration of a transfer shall be conclusivt'; evidence D
of the approval of the transferee by the Board.

Provided that the registration of any transfer shall not be refused
on the ground of the transferor either alone or jointly with any other
person or persons indebted to the Company on any account
whatsoever except as stated above." E
The power of the Board of Directors to refuse registering the transfer
of shares is now settled when these two adversaries had on earlier round of
litigation culminated in the decision reported as Bajaj Tempo Limited v. N. K.
Firodia and another etc., [1970) 2 SCC 550. That was the case where Firodia
Group (who controls Bajaj Tempo Limited) had applied to Bajaj Auto Limited, F
one of the appellants in this appeal, for transfer of shares of Bajaj Auto
Limited whkh had been purchased by the Firodia Group. The Board of
Directors of Bajaj Auto Limited refused to register the transfers, inter alia,
stating that N .K. Firodia and his representatives had acted against the interest
of the company and that it was in the interest of Bajaj Auto to refuse the G
transfer. The Company Law Board directed Bajaj Auto to register the transfer
which led to the filing of the appeal in this Court. Bajaj Auto had placed
reliance on its Article 52 of the Articles of Association, which was identical
to Article 52 of Bajaj Tempo, and it contended that it gave the Directors
absolutes and uncontrolled discretion to decline to register any ·transfer of
shares. Dealing with the question relating to the discretion of the Directors, H
890 SUPREME COURT REPORTS [1998] 3 S.C.R.

A it was observed at page 554 as follows:
" Article 52 of the appellant company provided that the Director might
at their absolute and uncontrolled discretion decline to register any
transfer of shares. Discretion does not mean a bare affirmation or
negation of a proposal. Discretion implies just and proper consideration
B of the proposal in the facts and circumstances of the case. In the
exercise of that discretion the Directors will act for the paramount
interest of the company and for the general interest of the share-
holders because the Directors are in a fiduciary position both towards
the company and towards every share-holder. The Directors are
therefore required to act bona fide and nqt arbitrarily and not for any
c collateral motive."

This Court then observed that where the Directors give reasons, the Court
would consider whether they were legitimate and whether the Directors
proceeded on a right or wrong principle. In such a case, the reasons of the
D Directors have to be decided from three points of view. Firstly, whether the
Directors acted in the interest of the Company; secondly, whether they acted
.on a wrong principle; and thirdly, whether they acted with an oblique motive
or for a collateral purpose. In this connection reference was made to the
observations of this Court in Mis. Harinagar Sugar Mills Ltd. v. Shyam
Sunder Jhunjhunwa/a & Ors., [1962] 2 SCR 339 where it was observed that
E "the discretion of the Directors would be nullified if it were established that
the Directors acted oppressively, capriciously or corruptly or in some other
way ma/a fide." After referring to some English decisions, this Court in Bajaj
Tempo's case at page 557 observed thus:

"It follows that where the Directors have uncontrolled and absolute
F discretion in regard to declining registration of transfer of shares, the
Court will consider if the reasons are legitimate or the Directors have
acted on a wrong principle or from corrupt motive. If the Court found
that the Directors gave reasons which were legitimate, the Court
would not overrule that decision merely on the ground that the court
G would not have come to the same conclusion."

The Court then examined the facts of that case dealing with three reasons
given by the Bajaj Auto for refusing to transfer the shares it observed that
the Directors had a hostile feeling against Firodia and they had the dominant
desire to keep Firodia out of the company. They did not act in the interest
H of the company and their discretion was tainted by unfair conduct and
BAJAJ AUTO LTD. v. CO. LAW BOARD [KIRPAL, J.] 891
unjustifiable attitude against Firodia. The Court rejected the ostensible reasons A
which were given for refusing the transfer of shares and it observed that the
"the reason given by the Directors was a camouflage to cover their collateral
and corrupt motive of preserving the hegemony of the Bajaj Group. The
motive is corrupt because the Bajaj Group acted for their personal interest and
not in the bona fide general interest of the company". Dealing with the third
reason, it was observed as follows: B
"The third reason given by the appellant company was that the shares
' were being acquired by the Firodia group not with a view of bona fide
investment but with a mala fide purpose and evil design of obstructing
the business of the appellant company. Acquisition or transfer of C
shares under the Articles of the present case does not suffer from any
restrictive impediment like pre-emotion or personal objections to the
transferees. There is no evidence that the transferees belonged to a
rival concern. Equally, there is no evidence that the Firodia Group ever
obstructed in the Management of the Company. On the contrary, the
Firodia group advanced large sums of money. Firodia was largely D
responsible for the gradual growth of the appellant compimy and for
the prosperity of the compan/ It was therefore an abuse of the
fiduciary power of the Directors to refuse to register transfer of shares."

In the end, this Court noted that the refusal to register the shares was a
sequel to the termination of the appointment of Firodia as Chief Executive and E
it is manifest that the Directors acted for collateral reasons and in their own
interest.

The shoe now is on the other foot. Whereas in the aforesaid case, it
is Bajaj Auto which had refused to register the transfer of the shares in favour
.... in N.K. Firodia & Group, in the present case, it is the N.K. Firodia controlled F
company namely Bajaj Tempo which has refused to register the transfer of
shares in favour of Bajaj Auto and its subsidiary company. The stained
relationship between the groups, and the animosity among them, has been
clearly brought out in the aforesaid judgment of this Court.

Mr. R.F. Narirrlan, learned Counsel for respondent No. 2 however G
contended that there were no personal reasons for declining to register the
transfer of shares in favour of the appellants. In this connection, he submitted
that during the period September, 1982 to July 1983, the Directors of Bajaj
Tempo Limited had approved the registration of as many as 42350 shares in
favour of the appellants. It was contended that the Board of Directors of Bajaj H
892 SUPREME COURT REPORTS [1998) 3 S.C.R.

A Tempo Ltd. had acted in bona fide and reasonable manner even though the
share acquisitions by the appellants were part of a plan of action on its part
to acquire a large block of shares of Bajaj Tempo Limited. He submitted that
it is only when the said share acquisitions had crossed the limit of 24% and
a razor thin margin remained before the danger limit of 25% was reached that
the Board decided to draw a line and to put an end to any further share
B acquisition by the Bajaj Group, leaving an extremely slender margin of safety
of only about 0. 7%. He further submitted that the Board of Directors had
acted bona fide in rejecting the share transfer and the Court should not
interfere even though it may not agree with the decision of the Board. There
was a genuine apprehension, it was submitted, that if the appellants were
C directed to continue to acquire further shares in Bajaj Tempo Limited, it might
result in the company becoming inter-connected with the Bajaj Group which
would result in highly adverse consequences for the company.

We have to consider whether the said apprehension in the mind of the
Board of Directors of that company was genuine and was it the real reason
D for rejecting to register the transfer of shares. In other words, what has to be
determined, keeping in mind the principles enunciated by this Court in Bajaj
Tempo Ltd. case (supra) is whether the Board of Directors had acted in the
interest of the respondent company.

E As we see it the power of the Board of Directors to refuse registration
of transfer of shares must be in the interest of the company and the general
body of share holders. No doubt in the year, 1983, Section 82 of the Companies
Act provided that the shares or oth~r interest of any member in the company
shall be movable property, transferable in the manner provided by the Articles
of the company. Article 52 sought to give absolute and uncontrolled discretion
F to the Board of Directors to decline to register or acknowledge any transfer
of shares. Even then as already held in Bajaj Tempo Limited case (supra), the
Board has to act bona fide, and not arbitrarily and for the benefit of the
company as a whole. In the case of a public limited company which is listed
with Stock Exchange, an important right of share holder is to be able to sell
his shares at a favourable price. It is seldom in the interest of the general-
G body of share-holders that transfer of shares be refused because that will
have an adverse impact on the market price of the shares. Free transferability
of shares will not artificially deprive its market price. This does not mean that
if there is a good reason then the Board has no power to refuse to register
the transfer of shares. This Court while examining the action of the Board of
H Directors is not expected to exercise original appellate jurisdiction and sit in
BAJAJ AUTO LTD. v. CO. LAW BOARD [KIRPAL, J:) 893
appeal on question of fact. The judicial review while hearing in appeal from A
the decision of the Company Law Board would be limited to see whether there
wa-s a bona fide exercise of power by the Board of Directors while refusing
to register the transfer of shares.

The Company Law Board in the present case came to the conclusion
that at least two of the reasons stated by the Company while refusing to B
register the transfer of share were not correct. It held that the appellants and
Bajaj Tempo were not rivals in business and even though there was hostility
between the managements of the companies but that by itself could not mean
that the appellants were undesirable persons in the matter of transfer of
shares. The only two reasons of the Directors which found favour with the C
Company Law Board were that the appellants were not bona fide investors
and, secondly there was a genuine apprehension about inter-connection of
respondent company with the appellants.

- Reverting to issue No. 2, we find that in the Resolution of 29.8.1983
what had been stated was that the appellants were not acquiring the shares D
with a view to or for the purpose of genuine investment "but with ulterior
motives and purposes including with a view to destablise the management of
the company". The alleged reason, therefore, was that the shares were being
purchased with ulterior motives and purposes and with a view to destablise
the management of the company. The Company Law Board appears to have E
mis-understood this reason and framed the issue as "whether the purchases
of impugned shares were bona fide investments". It opined that being an
investment company, it was not convincing, that the appellants would prefer
to invest in the shares of the company other than the respondent company
and the purchases were made so as to increase its share-holding in the
respondent company and are, thus, motivated. It also observed that the return F
on the shares of respondent company did not appear to be adequate enough
warranting successive purchases of its shares and appeared to be lacking in
bona fide. In our opinion, this was not a correct approach. Merely because
the (!ppellants wanted to increase the share-holding cannot by itself be a
ground in law for refusing to transfer the shares. Realising this in the resolution G
of the Board of Directors it was alleged that the purchase was not by way
of genuine investment but was made with ulterior/oblique motives and with
a view to destablise the management of the company. There is nothing placed
on the record which can possibly persuade anyone to come to the conclusion
that the intention of the purchase of shares by the appellants was with a view
to destablise the management of the company or with an ulterior/oblique H
894 SUPREME COURT REPORTS [1998] 3 S.C.R.

A motive. Prima facie it appears to us that even if it is assumed that the
appellants were trying to purchase shares with a view to get a controlling
interest in the company that itself cannot be a ground for refusing to transfer
the shares unless and until it can be shown that the purchasers were
undesirable persons and after gaining control of the company they will act
B against the company and the shareholders interest. In the instant case the
appellants would not even have 25% shares of the company even if the
transfer of share was registered and, therefore, the threat to the management,
assuming that could be a valid reason, could not be regarded as genuine.

It was submitted on behalf of the appellants that the Company Law
C Board over-looked the fact that the return on the investment of such shares
is not only by reason of dividend which is obtained but the main income
which was expected to arise was from the appreciation in value of the shares.
It was submitted by the learned counsel for the appellants that at the time
when the purchases were made, the share price was around Rs. 145 per share
and presently it is around Rs. 210 per share. In our opinion there is merit in
D this contention. Price appreciation, which may in future lead to issuance of
bonus shares or right shares, in the event of increase in capital, is a very valid
and good reason for purchasing shares of reputable companies by an investor.
Therefore, the reason, which is given for refusing to transfer the share namely
inadequate return on shares, cannot be regarded as being bona fide.
E As regards the fear of being regarded a dominant undertaking, in the
event to their being inter-connection between the appellants and the respondent
company are concerned, it has been contended on behalf of appellant that
the sections .pertaining to concentration of economic power in Chapter III of
M.R.T.P. Act i.e. Sections 25 & 26 have been omitted w.e.f. 27.9.1991 and,
F therefore, as on today it would make no difference and the said reason cannot
be regarded as valid. While it is true that the fear of respondent company
being regarded as a dominant undertaking as on today may not arise but what
has to be seen is as to whether this could be a genuine apprehension in the
mind of Board of Directors when in 1983 they had declined to register the
G transfer of shares. The admitted fact is that as on that date, inter-connection
could have been established only if the appellants had acquired 33 113%
shares of the respondent company. But, it is contended that in view of Sachar
Committee's Report, the company apprehended that the Act would be amended
so that instead of 33 1/3% shares, it should be 25%. We would, therefore,
proceed on the assumption that the figure of 25% had to be avoided by the
H respondent company.
BAJAJ AUTO LTD. v. CO. LAW BOARD [KIRPAL, J.) 895
It is an admitted fact that even if the purchase of the shares was A
registered, the total percentage of the holdings of the appellants group would
be short of 25%. The existing share holding, at that time, was 23.232% had
the transfer of shares been registered then, according to the figures supplied
by Mr. Nariman at the time of hearing, the percentage of the holding of the
appellants group would have risen to only 23.408%. The learned counsels for
the appellants are right in contending that if fear of the inter-connection was B
the real reason in refusing to register the transfer then such a reason could
not exist at that moment because even with the registration of the transfer the
total mark of 25% would not be reached. We are in agreement with the
appellant's submission and are of the opinion that if the number of shares
which were purchased had been such that the total mark of 25% could be C
reached then the action of the Board of Directors could not have been faulted.
But with the registration of the transfer of shares in question that danger mark
would not have been reached. We are unable to accept as correct the appellants
contention that because the total holding of the appellants' group would then
become "dangerously close" to 25% it was a good enough reason to refuse
transfer. There may not have been anything to prevent the company if, after D
the shares in question had been registered, any further purchase of shares
was made which would have the effect to push the holding of the appellants
to 25% mark, to reject those subsequent transfers. As the transfers in question
would not have resulted in reaching the 25% mark that cannot be regarded
as a valid reason or consideration for refusing the registration of transfer of E
shares.

Faced with this, Mr. Nariman, learned counsel, however contended that
because of the provisions ofM.R.T.P. Act in determining the inter-connection,
the shares held by a financial institution are required to be excluded. He
submitted that even if the appellants did not purchase any further shares but F
further purchase by financial institutions of more shares could possibly lead
to the same result namely of the percentage of holding of the appellants
group going beyond 25%. While it is true that the shareholding of the
financial institutions is not to be taken into account in determining whether
or not two or more bodies corporate are under the same management because
of Explanation 'IV to Section 2(g) ofM.R.T.P. Act, we find that ifthe shares G.
in question had been registered, and existing share-holding of the financial
institutions excluded, then the total percentage of shares of the appellants
group would come to only 24.405%. For this percentage to push up to 25%,
the financial institutions would have to acquire approximately 27740 additional
shares of Bajaj Tempo Limited, which may not be very likely. In any case, if H
896 SUPREME COURT REPORTS [1998) 3 S.C.R.

A such a situation did arise namely financial Institutions purchasing more shares
which would result in danger mark of 25% to reach, there is nothing in law
which would then prevent the Board of Directors of Bajaj Tempo Limited to
refuse the registration of transfer in favour of Financial Institutions. In other
words just as the Directions can refuse to register transfer of shares in the
appellants name in order to avoid inter-connection similarly, and for the same
B reason, they could refuse to register transfer of such further purchases by
financial institutions if such purchase would have had the effect of making
the appellants inter-connected with Bajaj Tempo Limited. The Company Law
Board was, therefore, wrong in rejecting the contention of the appellants that
the apprehension of the respondent company that it was likely to get inter-
C connected with the appellants in the event of the impugned transfer of shares
being allowed was baseless and/or ill-founded.

In order to see whether the Board of Directors had acted in furtherance
of a personal interest or in the interest of company, the resolution dated
29.8.1983 should be read as a whole. It is apparent that being aware of the
D state of law, every possible reason was stated in this resolution which could
justify the Directors in refusing to register a transfer. Of the four reasons
given by the Board, two of them were rejected by the Company Law Board, T
namely that the appellants were competitors of Bajaj Ter.1po Limited and that
the transferees were not desirable persons from the larger point of view of
E interest of Bajaj Tempo Limited. There is also nothing on record to show that
the purchase of shares by the appellants was with ulterior/oblique motives
and purposes and with a view to destablise the management of the company.
Lastly, we find that the acquisition in question would not have led to the
interconnection between the companies and it was not a bona fide exercise
of power by the Directors to take into account "further acquisition of shares"
F of Bajaj Tempo Limited which may take place in future which may then lead
to inter-connection. It is the extent of share-holding at that point of time
which had to be taken into consideration and not future acquisition which
may or may not take place. It was submitted by the appellants counsel that
because of the provisions of Section I08A of the Companies Act as it stood
G at that time, further acquisitions could not take place so as to bring up the
share-holding to 25% without first getting central Government approval. We,
however, need not examine this aspect because, in our opinion, on the facts
which existed on the record, we are satisfied that the exercise of discretion
by the Board of Directors in refusing to register the shares in the name of -C
the appellants was not bona fide or in the interest of the company or general-
H body of share-holders. Accordingly, its decision not to register the transfer
BAJAJ AUTO LTD. v. CO. LAW BOARD [KIRPAL, J.] 897

of shares was not correct. A
For the aforesaid reasons, the appeals are allowed. The impugned order
dated 28.7.1986 of the Company Law Board is set aside and the Resolutions
dated 29.8.1983, 27.9.1983 and 19.11.1983 of Mis Bajaj Tempo Limited are set-
aside and as a consequence thereof, direction is given to respondent No. 2
to register the shares in question within four weeks from the date of this B
judgment. The appellants will be entitled to cost.

v.s.s. Appeals allowed .
•

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