TaxTMI 
TaxTMI 
1998 (7) TMI 505
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....j Tempo Ltd. 2. Bajaj Auto Ltd. (appellant in Civil Appeal No. 3480 of 1986) is the holding company of Bajaj Auto Holdings Ltd. (appellant in C.A. Nos. 3480 of 1986 & 3420-79 of 1986) and they, along with other individuals who were members of their group (all of whom are appellants in these appeals) are existing shareholders of Bajaj Tempo Ltd. which is a public Ltd. Co. Bajaj Auto Ltd. purchased 50 shares of Bajaj Tempo Ltd. and Bajaj Auto Holdings Ltd. purchased 13150 shares of the said company. These pur-chases were made in the year 1983 through different brokers and they were sent to Bajaj Tempo Ltd. 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 shares was rejected by Bajaj Tempo Ltd. 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 declined to register the said transfers considering the facts briefly stated above a....
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....siness? 2.Whether the purchases of impugned shares were bona fide invest-ments? 3.Whether the appellants can be termed as undesirable persons? 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 respondent-company was justified in refusing transfer of these shares?" 5. 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 trans- fer 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 Ltd. and 5550 shares in favour of Bajaj Auto Holdings Ltd. was upheld. 6. In deciding Issue No. 2, the CLB came to the conclus....
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.... of shares was by way of investment. An important factor which has been ignored by the Board was that capital appreciation was more than ample to offset the low 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 shareholding of the appellants would be below 2596 limit. In this con-nection, 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 per cent. 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 MRTP Act applied by virtue of the provisions of section 20(a) of the said Act inasmuch as its assets exceeded 20 crores and, therefore, inter-connection would not have made any difference. For the view, we are taking, it is not necessary to refer to or deal with the other contentions rais....
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....etion of the directors, 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 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 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." 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 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 ac....
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....nce 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 responsible for the gradual growth of the appellant company and for the prosperity of the company. 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 it is manifest that the directors acted for collateral reasons and in their own interest. 11. The shoe now is on the other foot. Whereas in the aforesaid case, it is Bajaj Auto which had refused to register the transfer the shares in favour of N.K. Firodia & Group, in the present case, it is the N.K. Firodia controlled company namely Bajaj Tempo which has refused to register the transfer of shares in favour of Bajaj Auto and its subsidiary company. The strained relationship between the groups, and the animosity among them, has been clearly brought out in the aforesaid judgment of this Court. 12. Mr. R.F. Nariman, the learned Counsel for respondent No. 2 howev....
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....y transfer of shares. Even then as already held in Bajaj Tempo Ltd's 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 Ltd. 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 be refused because that will have an adverse impact on the market price of the shares. Free transferability of shares will not artificial- ly 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. The judicial review while hearing in appeal from the decision of the CLB 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 of shares. 15. The CLB in the present case came to the conclusion that at least two of the r....
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.... it appears to us that even if it is assuming 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 against the company and the shareholders interest. In the instant case the appellants would not even have 25 per cent 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 regard- ed as genuine. 17. It was submitted on behalf of the appellants that the CLB overlooked 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 this contention. Price app....
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....hed. We are in agreement with the appellants' submission and are of the opinion that if the number of shares which were purchased had been such that the total mark of 25 per cent 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 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 per cent 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 25 per cent mark, to reject those subsequent transfers. As the transfers in question would not have resulted in reaching the 25 per cent mark that cannot be regarded as a valid reason or consideration for refusing the registration of transfer of shares. 20. Faced with this, Mr. Nariman, the learned counsel, however, contend- ed that because of the provisions of MRTP Act....