The power to transfer shares vests with the Board of Directors of a company. Hence, the Articles usually give the Board, the power to refuse registration of a transfer and particularly if the shares are not fully paid-up.
Nevertheless, Sec. 22A of the Securities Contracts (Regulation) Act, 1956 aims at ensuring higher degree of transferability of shares listed on recognized stock exchange(s). It restricts exhaustively the circumstances in which a company, whose shares are listed on any of the stock exchanges can refuse to register share transfers.
The provisions of Sec. 22A have a supervening effect and hence no company can take refuge under the provisions of the Companies Act or the company’s own Articles of Association. A private limited company can however, refuse registration of transfers in accordance with its Articles of Association. We shall therefore, study here under, under separate heads the circumstances in which listed companies and unlisted companies can refuse to register transfer of shares.
In terms of Sec. 22A (deleted by the Depositories Ordinance 1996 with effect from September 20, 1996) of the Securities Contracts (Regulation) Act, 1956 a company, whose shares are listed on a Stock Exchange can refuse share transfers only on one or more of the following grounds namely—
1. that the instrument of transfer is not proper or has not been duly stamped and executed or that the certificate relating to the security has not been delivered to the company or that any other requirement under the law relating to registration of such transfer has not been complied with. A list of cases where this provision is invoked is as under:
- Difference in signatures of transferor(s),
- Date of execution being prior to date of presentation of the deed before the prescribed authority,
- Incomplete/incorrect particulars relating to transferor / transferee,
- Absence of specimen signature of transferee,
- Shortfall in the value of share transfer stamp,
- The share certificates have not been delivered along with the share transfer deed, and
- Transferor’s signature not witnessed.
2. that the transfer of the security is in contravention of any law,
3. that the transfer of security is likely to result in such change in the composition of the Board of directors as would be prejudicial to the interests of the company or to the public interest, and
4. that the transfer of the security is prohibited by any order of any Court, Tribunal or other authority under any law for the time being in force.
The Board of Directors of a company whose shares are not listed on any stock exchange or a private limited company can refuse to register transfer of shares in favor of any person in terms of the provisions of Articles of Association of the company. However, while refusing to transfer shares the power must be exercised by the Board bona fide and in the best interests of the company.
Under the amended Sec. 111(1), where the directors refuse to transfer shares, the company shall within two months from the date on which the instrument of transfer was delivered to the company, send a notice of refusal to the transferor and transferee giving the reasons for such refusal. Therefore, now the directors cannot exercise their discretion to refuse transfer of shares without disclosing reasons for refusal even after they act bona fide in the interest of the company.
The following are the grounds on which Board may refuse registration of transfer:
1. If partly paid-up shares are being transferred and transferee is known to be financially incapable of paying balance calls.
2. If partly paid-up shares are being transferred to a minor incapable of entering into a contract.
3. In case due call money has not been paid by the transferor.
4. When the transferor is a debtor of the company and the company has a lien on such shares.
5. If instrument is incomplete, irregular and defective and not properly stamped.
6. On other reasons just and equitable and are in the general interest of the company.
Such refusal must be conveyed in writing to the transferor and the transferee within two months of the date on which the instrument was deposited with the company giving reasons for refusal.
Remedy against Refusal to Transfer
The transferor or transferee are entitled to appeal to the National Company Law Tribunal against any refusal of the company to register the transfer or against any failure on its part within the period of two months either to register the transfer or to send notices of its refusal to register the same. An appeal herein shall be made within two months of the receipt of the notice of such refusal or in case no notice has been sent by the company then within four months from the date on which the instrument of transfer or the intimation of transmission, as the case may be, was delivered to the company.
The National Company Law Tribunal while dealing with the cases of appeal preferred to it may after hearing the parties either dismiss the appeal or reject the application or by order direct that the transfer be registered by the company and the company shall be required to comply with such order within 10 days of its receipt. The National Company Law Tribunal may also direct the company to pay damages, if any, sustained by the aggrieved person.
The section empowers the National Company Law Tribunal at its discretion to make such interim orders including orders as to injunction or stay, as it may deem fit and just, such orders as to costs as it thinks fit and incidental or consequential orders regarding payment of dividend or the allotment of bonus or right shares. The National Company Law Tribunal may on any application under this section decide not only the question of title of any person but also any question which is necessary or expedient to be decided in connection with the application for rectification.
If default is made in giving effect to the orders of the National Company Law Tribunal under this section, the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs.10,000 and with a further fine which may extend to Rs.1,000 for every day after the first day if such default continues. In addition, where the default is made in complying with any provisions of Sec. 111, the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs.500 for every day during which the default continues.
In the matter of a private company, it may be stated that though by its very definition under section 3(1)(iii), a private company restricts transfer of its shares the right conferred is only to the extent of enforcing restrictions contained in the Articles of Association and not on any other grounds.