Bank of Maharashtra permitted to hold shares in Sangli Bank, transfer rejection unjustified.

The appellant, Bank of Maharashtra, was found not prohibited under the Banking Regulation Act to hold 50 shares in the respondent-Sangli Bank, constituting less than 0.26% of the share capital. The board determined that the rejection of the transfer based on grounds from 1982 was unjustified for the 50 shares lodged in 1987. The respondent-Sangli Bank was directed to register the transfer within ten days, with no costs awarded.

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Issues Involved:
1. Whether the Bank of Maharashtra is prohibited under the provisions of the Banking Regulation Act from holding shares in the respondent-Sangli Bank.
2. Whether the facts and circumstances which resulted in the rejection of the transfer of 20,562 shares lodged in February/March, 1982, still hold good in respect of the 50 shares which were lodged in April, 1987, and registration of transfer of which was refused on the ground of the earlier refusal by the board of directors of the respondent-Sangli Bank.

Issue-Wise Detailed Analysis:

1. Prohibition under the Banking Regulation Act:
The relevant provisions of the Banking Regulation Act, 1949, are Sub-section (2) of Section 19 and Sub-section (2) of Section 12. According to Sub-section (2) of Section 19, no banking company shall hold shares in any company exceeding 30% of the paid-up share capital of that company or 30% of its own paid-up share capital and reserves, whichever is less. Sub-section (2) of Section 12 restricts any person holding shares in a banking company from exercising voting rights on poll in excess of 1% of the total voting rights of all the shareholders of the banking company.

In this case, the 50 shares in question constitute less than 0.26% of the paid-up share capital of the respondent-Sangli Bank. Therefore, there is no legal bar on the appellant holding these shares. The respondent-Sangli Bank contended that a specific direction was given by the Reserve Bank of India and the Ministry of Finance to the Government of Maharashtra and the Bank of Maharashtra not to acquire the shares of Sangli Bank. However, the respondent-Sangli Bank did not produce any documentary evidence to support this contention. In the absence of such evidence, the board concluded that there is no prohibition under the Banking Regulation Act for the appellant to hold the shares in question.

2. Validity of Grounds from 1982 for Rejection in 1987:
The board of directors of the respondent-Sangli Bank had earlier rejected the transfer of 20,562 shares in 1982 on the grounds that the acquisition was not legal and valid, as the Central Government had not issued the required notification under Section 19(2) read with Section 53 of the Banking Regulation Act, 1949. They also apprehended that the Bank of Maharashtra intended to acquire control over the Sangli Bank, which was against the spirit of the Banking Regulation Act.

However, the present case involves only 50 shares, which are less than 1% of the paid-up share capital of the respondent-Sangli Bank. Therefore, the board concluded that the grounds for rejection in 1982 do not hold good for the 50 shares lodged in 1987. The board also noted that companies engaged in similar businesses often hold nominal shares in each other, and there is no reason to believe that such holdings would undermine customer confidence or employee initiative.

The board found that the respondent-Sangli Bank had not given just and proper consideration to the proposal, given the changed circumstances. The refusal to register the transfer of shares was deemed unjustified.

Conclusion:
The board concluded that the refusal to register the transfer of shares by the respondent-Sangli Bank was unjustified. Consequently, the appeal was allowed, and the respondent-Sangli Bank was directed to register the transfer of the 50 shares within ten days of receipt of the order. There was no order as to costs.

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