This case is special leave which is a result of the order given by the Company
Law Board (respondent no. 1) which partly held the decision taken by Bajaj Tempo
Limited (respondent no.2).
The brief facts of the case of Bajaj Auto Ltd. v. Company Law Board and Ors
are as follows:
Appellants in the aforementioned case are Bajaj Auto Limited which is a holding
company of Bajaj Auto Holdings Limited, along with members of the same group who
were existing shareholders of Bajaj Tempo Limited which is registered as a
public limited company.
In year 1983, Bajaj Auto Limited purchased 50 shares and Bajaj Auto Holdings
Limited purchases 13150 shares of Bajaj Tempo Limited with the help of different
brokers and the shares were sent to M/s. Bajaj Tempo Limited for transferring in
the name of appellants. But the same were rejected by them through three
different resolutions which were dated 29/8/1983, 27/9/1983 and 19/11/1983. The
minutes of the meeting which was dated on 29/8/1983, stated as to why these
shares were rejected for transferring.
The same is stated below:
The directors of Bajaj Tempo Limited decided to not to approve the transfer of
the shares after due deliberation and considering all the aspects, and stated
the following grounds:
- First being that they were of the view that further acquisition of the
shares of their company by Bajaj group would lead to interconnection between
their company and the companies of the Bajaj group, which would be undesirable
and would not be in the interest of the company.
- Second being, they thought that Bajaj group is merely acquiring the shares
of the company in order to destabilize the management of the company and not
with the purpose of investment.
- Thirdly, they were of the opinion that Bajaj Auto Limited and Bajaj Tempo
Limited are the competitors or rivals in the business, and thus the purpose of
acquiring the company is to cause prejudice to the latter.
- And thus, after considering the aforementioned facts the Board decided
to not to transfer the shares and thus refused to register the shares in
order to save the interest of their company. Although absolute discretion is
conferred under Article of Association of the company.
- And thus, under Article No. 52 of Article of Association, the Board of
Directors of Bajaj Tempo Limited disproved the said transfer of the shares
against Bajaj Auto Limited.
And thus, the appeal was filed by the appellants before the Company Law Board
(respondent no. 1) under section 111 of the Companies Act, 1956.
The issues that were formulated by the Company Law Board on the basis of all the
pleadings and submissions that were made by both the counsels are:
Advanced Arguments presented vis a vis the judgment delivered by the Board:
- Whether the appellants and the respondents are rivals in the business?
- Whether the purchase of the said shares was bona fide investment?
- Whether the appellants can be considered as undesirable persons?
- Whether the reason that the transfer of shares will lead to inter
connection between the companies is reasonable for refusal of the same?
Talking about issues 1 and 3 the decision was given in the favor of the
appellants, as the appellants and the respondents were not the rivals in their
business and nor they were found to be undesirable persons, and thus refusing
the shares on the basis of these grounds was held wrong.
Talking about issue no. 4, the Company Law Board, found out that as on date
29/8/1983, the total holding that the appellants were holding was that of 23.2%
with respect to Bajaj Tempo Ltd. and at that time of the inter connection limit
under the Monopolies and Restrictive Trade Practices Act, was that of 33 1/3%
and the same was reduced to 25% with effect to the amendment that was passed in
1984 in the said act.
The Company Law Board was of the view that even though at
the time when the transfer of shares was in question the said amendment was not
passed, there was a sensation in the market world that the same would be passed
in future leading to reduction of the same to 25%. And therefore, it held that
the decision of up to what percentage the shares should be allotted should be at
the discretion of the Board of Directors, and under the said circumstances where
the company was touching the percentage of 23% already, which is not widely far
part from that of reduced one that is 25%, the decision of refusing the shares
to the appellants was held justifiable.
Talking about issue no. 2, the Board contented that the return in the form of
dividend on the shares was very low and thus was not desirable option to invest.
And as a result, the counsels for the appellants brought the contention that
power of the directors to refuse the transfer of the shares is an exception to
the general rule, as generally the transfer should be accepted by a listed
company with respect to issue no. 4. And against issue no. 2 they contended that
the factor that dividend in the form of income is very low and thus is not
suitable for investment is not a ground to hold that the purchase was not made
with the intention of investment.
The crucial question that arose was as to what the power and the scope of the
directors in the matter of is refusing the transfer of the shares of a public
To which the counsel stated that the same is conferred under
Article 52 of the Article of Association of the company which states that:
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 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
The registration of a transfer shall be conclusive evidence 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."
Upon which, the counsel for appellants stated that discretion does not mean that
mere declaration, it implies proper and fair consideration of the proposal with
respect to the facts and circumstances. And thus, the directors must act in the
paramount interest of the company after accessing all the facts and
circumstances involved. And thus, directors are required to act bona fide and
The court considered this point and found it to be justifiable and thus three
grounds upon which the reasons of the directors to act in such manner was
tested, which were laid in the case of M/s. Harinagar Sugar Mills Ltd. v. Shyam
Sunder Jhunjhunwala & Ors.
(1962) 2 SCR 339, and these were, whether the
directors acted in the interest of the company, secondly, whether they acted on
a wrong principle or thirdly whether they acted for their own collateral
The court tested the directors on the grounds laid above and thus found out that
they did not take the decision in the interest of the company, as they had
hostile feeling against the appellant company. And thus, the court refused the
reasons that were given by the directors for refusing the shares.
Against which the counsel for the respondents contended that there were no
personal reasons for the director to refuse the share as they allowed 42350
shares during September 1983 to the appellants and this time, they did fear the
inter connection and thus refused the shares.
The major issue before the court was that to identify that whether the directors
exercised their bona fide power while refusing the shares or not.
Now, the Company Law Board stood the directors decision on the grounds that
appellants were not seeming bona fide investors and there was genuine
apprehension that inter connection would occur.
Summary and analysis of the final judgment delivered:
The court held that the Company Law misunderstood the reason of the directors
related to bona fide investment, it held that the reason that the dividend would
be low was not convincing and nothing was found on record that could possibly
indicate the intention of the appellant to destabilize the management of the
respondent and thus refusing the shares on the basis of this was not justified.
And the fact that the appellants would not have 25% of the shares even if the
said transfer was allowed was defeating the whole argument of the respondent.
And the point of inter connection that respondent claimed should have to the
extent of shareholding at that particular time and should not have based on
The counsel for the appellants also put forward the contention that because of
the provisions of section 108A of the Companies Act, 1956, further
acquisitions could not have taken place to bring up to the mark of 25% without
getting the approval of the Central Government at the first place. And thus, the
court allowed the said appeal and held that refusal onto the transfer of the
shares by the respondent was not bona fide and was not correct and thus the
appellants would be entitled to cost.
This case signifies that the directors cannot refuse the transfer of the shares
at their own discretion without accessing all the facts and circumstances. They
have to be bona fide and have to think about the paramount intertest of the
company as a whole and not their own, otherwise legal action could be taken
against them and the company. This case defines as to what is the real meaning
of using powers to the discretion and no company could be suffering because of
the personal intentions of the directors.
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