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Can a Public Unlisted Company Refuse to Register a Physical Transfer of Shares?

Ahan Gadkari is a fifth-year law student at Jindal Global Law School.


On September 10, 2018, the Ministry of Corporate Affairs inserted a new Rule 9A via the Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018. Under this new rule, every public unlisted company must issue its securities exclusively in dematerialised form. Additionally, it requires the holder of such securities to ensure that they are transferred in dematerialised form.

These rules are not surprising, given that the Amendment to SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, as notified on August 10, 2018, also prohibits the physical transfer of shares (Clause 3). The Securities and Exchange Board of India (SEBI) has announced the cut-off date as December 5, 2018. The rules appear to be clear and have been discussed in numerous forums but one critical point remains unclear. Should a company be required to register if two entities engage in the physical transfer of shares? The absence of jurisprudence on this subject exacerbates the difficulty.

Most literature on this topic focuses on the transfer of shares and the new regulation over it, but practical considerations have been ignored. This piece seeks to address this consideration of whether a company is required to register such shares or not, via an analysis of Section 58(4) of the Companies Act, 2013 (CA) and its history.

Significance of Sufficient Cause

Section 58(4) of the CA has been reproduced below:

“If a public company without sufficient cause refuses to register the transfer of securities within a period of thirty days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, is delivered to the company, the transferee may, within a period of sixty days of such refusal or where no intimation has been received from the company, within ninety days of the delivery of the instrument of transfer or intimation of transmission, appeal to the Tribunal.”

The critical phrase to consider in this instance is “sufficient cause.” This phrase is crucial to this concept’s success or failure. If the physical transfer of shares provides a company with “sufficient cause,” the company is justified in refusing to register.

The majority of the literature on “sufficient cause” has concentrated on the question of whether a conflict of interest constitutes sufficient cause for refusing to register a share transfer. However, sufficient cause encompasses a broader scope that requires discussion. To define “sufficient cause,” this article will examine how courts and tribunals have previously applied this phrase.

Defining Sufficient Cause

To start at the beginning, it is crucial to examine the view taken by the judiciary towards “sufficient cause” from Section 111(A) of the Companies Act, 1956. It is important to note that, while Section 111A(2) used the term “sufficient cause” to justify registration refusal, Section 111A(3) provided a list of three instances in which register rectification could be undertaken. First, where the transfer violated any provision of the SEBI Act or regulations. Second, where the transfer would violate any provision of The Sick Industrial Companies Act. Third, where the transfer would violate any other law in force at the time of the transfer.

Tracing judicial precedent reveals that in Estate Investment Company Private Limited and Ors. vs. Siltap Chemicals Limited, the Company Law Board (CLB) with S. Balasubramanian and C. Mehta on the Bench established the basis for defining sufficient cause. The CLB held that only when a company refuses to register a transfer of shares because the transfer violates the SEBI Act or its regulations, the Sick Industrial Companies (Special Provisions) Act, or any other law in force at the time can such refusal be considered to be with sufficient cause. Any other reason for refusing to do business with a public firm cannot be regarded as an adequate reason for such rejection.

Next, in Karamsad Investments Limited and Ors. vs. Nile Limited and Ors., J. Chamleswar of the Andhra High Court clarified that the term “sufficient reason” as used in the proviso to Sub-section (2) of Section 111A of the Act encompasses not only the circumstances specified in Sub-section (3) and established in Estate Investment Company Private Limited and Ors., but, there may be situations and reasons other than those specified in Sub-section (3) that necessitate the corporation to refuse to register the transfer of shares, which in J. Chamleswar’s opinion would constitute a rejection for “sufficient cause.”

Further, in eFirst Technologies Private Ltd. and Ors. vs. Hiperworld Cybertech Limited and Ors., the CLB presided by S. Balasubramanian further crystallised the jurisprudence on the definition of “sufficient cause.” Relying on Estate Investment Company Private Limited and Ors., the CLB concluded that a company could refuse to register a transfer of shares if the act was in contravention to the law in force at that time.

Finally, the issue came up in front of the Supreme Court in Mackintosh Burn Limited vs. Sarkar and Chowdhury Enterprises Private Limited. A bench composed of M. M. Shantanagoudar and K Joseph held that refusal to register shares can be on the ground of violation of law or any other sufficient cause. The court even further stated that conflict of interest in a given situation could also be considered a sufficient cause.

Practice in Other Jurisdictions

The regulation appears to have been implemented as part of Prime Minister Narendra Modi’s Digital India initiative. However, it seems as though such a standard does not exist in other common law jurisdictions. For example, physical transfer of shares is permitted in the United Kingdom, the United States of America, Canada, and Australia. Thus, it appears as though this initiative is a forward-thinking move by India, one that other countries will undoubtedly emulate sooner or later.

Concluding Comments

Keeping in mind that the purpose of this article is not only to state the legal position on a subject but also to consider practical implications; what will a transferee do if shares are transferred in physical form? As illustrated by the precedent, the company whose shares have been transferred may refuse to register the physical transfer due to inconsistency with the relevant SEBI regulations. However, it is unclear as to what happens next. The law should not be like an unmoving rock, leaving no space for manoeuvring. Instead, it should be flexible like a stream, to consider varying circumstances. Fortunately, there is a solution to this problem. The Bombay High Court held in Sulphur Dyes Ltd. vs Hickson And Dadajee Ltd., that if rectification is not permitted, there will be no one to exercise rights on the shares, and thus rectification should be permitted. Using the same logic, the purchase transferee should have the option of dematerialising the shares and then registering them with the company. This approach satisfies the two principles of the intent behind the transaction: (i) The intent of the transferor and transferee to contract and (ii) The intent of the law to ensure all transfers of shares of unlisted public companies are being conducted in dematerialised form.

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