Section 82 of Companies Act, 1956

As discussed earlier there is a difference between the terms negotiable and transferable and shares and debentures are not negotiable instruments, but transferable of the shareholder. Shares or debentures are movable property as made explicit under section 82 of the 1956 Act, and now by section 44 of the 2013 Act.

Shareholder’s rights

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The rights of shareholders are:

  • to elect directors and thus to participate in the management through them;
  • to vote on resolutions at meetings of the company;
  • to enjoy the profits of the company in the shape of dividend;
  • to apply to the, CLB (under the 2013 Act, once the Tribunal is notified, application will be made before the Tribunal) for relief in the case of oppression;
  • to apply to the, CLB (under the 2013 Act, once the Tribunal is notified, before the Tribunal)in the case of mismanagement
  • to apply to the Court (under the 2013 Act, once the Tribunal is notified, application will be made before the Tribunal) for the winding-up of the company;
  • to share in the surplus on winding-up.

It is by virtue of these enforceable rights that in English law a share is regarded as a chose-in-action. But in India a share is not merely a chose-in- action; it is also by virtue of the definition of share (or debentures) in section 82 of the Companies Act, 1956 as “movable property”, section 2 of the Sale of Goods Act, 1930 “in Company law ‘allotment’ means the appropriation out of the previously capital of a company, of a certain number of shares to a person. Till such allotment the shares do not exist as such. It is on allotment in this sense that the shares come into existence.” Sri Gopal Jalan and Co. versus Calcutta Stock Exchange Association, where the Supreme Court stated that shares pending allotment could not be said to be goods. In this context, a distinction must be made between ‘allotment’ and ‘purchase- there is a difference between issue of a share to a subscriber and the purchase of a share from an existing shareholder. The first case is that of creation whereas the second case is that of transfer of chose in action. A share is not a sum of money; it represents an interest measured by a sum of money and made up of diverse rights contained in the contract evidenced by the articles of association of the Company. Therefore, it is afier allotment, rights may arise as per the contract (articles of association of company), but certainly not before allotment. At that stage, he is only a prospective investor in future goods.

, of a certain number of shares to a person. Till such allotment the shares do not exist as such. It is on allotment in this sense that the shares come into existence.” Sri Gopal Jalan and Co. versus Calcutta Stock Exchange Association, where the Supreme Court stated that shares pending allotment could not be said to be goods. In this context, a distinction must be made between ‘allotment’ and ‘purchase- there is a difference between issue of a share to a subscriber and the purchase of a share from an existing shareholder. The first case is that of creation whereas the second case is that of transfer of chose in action. A share is not a sum of money; it represents an interest measured by a sum of money and made up of diverse rights contained in the contract evidenced by the articles of association of the Company. Therefore, it is afier allotment, rights may arise as per the contract (articles of association of company), but certainly not before allotment. At that stage, he is only a prospective investor in future goods.

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A share” is a right to a specified amount of the share capital of a company, carrying with it certain rights and liabilities, while the company is a going concern and in the winding-up. It represents the interest of the holder measured for purposes of liability and dividend by a sum of money. The court said: “It is well established that shares are simply bundles of intangible rights against the company which had issued them. Share certificates are not valuable property in themselves-they are just evidence of the true property, which are the proportionate interests of the shareholders in the ownership of the company. One pari passu share is exactly the same as another. This was recognized in Solloway versus McLaughlin, where the Privy Council held that the broker should have retained an equivalent quantity of stock in its possession. Therefore, each share certificate with the depositary evidences the same bundle of rights, and each bundle of rights can satisfy the client’s proprietary interest as any other.”

As regards debentures; the Sale of Goods Act, 1930 does not include the same under the definition of “goods”. Debentures, as ordinarily understood, would not come within the purview of definition of goods (under the MRTP Act) as it is simply an instrument of acknowledgement of debt by the company whereby it undertakes to pay the amount covered by it and till then it undertakes further to pay interest thereon to the debenture-holders. Therefore, ordinarily, debentures may not qualify as “goods”, yet section 44 of the 2013 Act renders them the nature of ‘movable property’ under the Act. The intent of the law is clear – not any acknowledgment is a “debt”. It must be an instrument and the instrument must be transferable.

Transferable in the manner provided by articles

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The 1956 Act (through s. 88) and the 2013 Act (through s. 44) says that the shares or debentures or other interest of any member shall be “transferable in the manner provided by the articles of a company”. Therefore, a company cannot issue non-transferable debentures. Though the transferability of shares and debentures has been ensured under the section, it is necessary to provide by the articles the manner in which transfers are to be affected. Where a company has no articles of its own, the regulations contained in model articles will apply. Articles cannot, however, prohibit in toto the right of transfer, as the right is given by the statute. Nor can the articles impose such onerous terms as affect the substance of the right to transfer so as to render it illusory.

The articles of association of almost all public companies vest in the Board of Directors absolute and uncontrolled discretion to decline to register any transfer of shares (or debentures). The adoption of such an article does not mean that there is a restriction on the free transfer of shares (or debentures) as in the case of a private company. This is so because a fiduciary power of this nature can only be exercised bona fide in the interest of the company and also within the legal framework and if it is misused, certainly the Company Law Board has the widest power to interfere with such abuse.

Where the articles do not provide for the transfer of shares (or debentures), and also expressly exclude the application of the model articles to the company, the general law relating transfer of movable property will govern. But though for purposes of transfer, share (or debenture) is to be treated as movable property, it is not, in fact, just so much a chattel as a garment or a piece of furniture. It is bound inextricably with the company of whose share capital it is a share and carries certain rights and obligations inseparable from the company.

A company cannot refuse to accept transfer of shares (or debentures) except as provided by its articles. It is well settled that unless the articles otherwise provide, a shareholder has a free right to transfer his shares to whom he chooses. It is not necessary to look to the Articles for a power to transfer, since that power is given by the Act. It is only necessary to look to the Articles to ascertain the mode of transfer and the restriction upon it. Thus, a clause in the articles providing an absolute restriction on transfer is void. There are contracts of pre-emption that confer “first in the line” rights to the right holder. Under a right to first refusal clause, a party cannot sell its shares in any company held or acquired by it without first offering the shares to the other party. Here, the latter has the right to first refuse the offer. If the party in exercise of the rights conferred, refuses to purchase the shares so offered the former party shall be free to sell the shares to other persons. Validity of such pre-emption contracts entered into between shareholders has been discussed in several judicial rulings. Where the articles of a company regulated the manner of transfer of shares (or debentures) by  providing that it could be done with the consent of directors it was held that when only two directors were in office and the sale was by one to the other an implied consent could be presumed. Whether under the Companies Act or the Transfer of Property Act, the shares are transferable like any other movable property. Restrictions on transferability are valid only if contained in the company’s articles. A private agreement between some shareholders which contains additional restrictions on transferability is not binding either on the company or on its shareholders. The Supreme Court said: “Dealing with “restrictions on transfer of shares” in PENNINGTON’S COMPANY LAW, 6th edition, at page 753, it is stated that shares are presumed to be freely transferable and restrictions on their transfer are construed strictly and so when a restriction is capable of two meanings, the less restrictive interpretation will be adopted by the court. It is also made clear that these restrictions have to be embodied in the articles of association.”  Accordingly the court held that an agreement between two members outside the articles restricting the right of transfer within family fold was held to be not binding on the company and its members. The Supreme Court in the above-referred case referred with approval to the relevant passages from the well-known works on Company Law by GORE BORWNE, PALMER and PENNINGTON as also to HALSBURY which stated that a shareholder has the right to transfer his shares when and to whom he pleases, that any restriction in that right must be contained in the company’s articles, and that such restrictions must be construed strictly.

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Restrictions emanating from any other source than articles would neither cripple the company from accepting a transfer nor deprive the shareholder of his right of transfer. This conclusion was arrived at by the Supreme Court in Gujarat Bottling Co. Ltd versus Coca-Cola Co.,. There was a franchise agreement between a soft drink manufacturer and a bottling company. One of the stipulations in the grant of the franchise was that the manufacturing company would have the right to stop supply of the concentrate if the bottling company’s shares were so transferred as to result in a transfer of control. This stipulation was held to be not binding on the company’s shareholders. It was not a restraint on the shareholders’ right to transfer. The company’s articles did not reflect any such restriction. The stipulation was supposed to govern only the relations between the parties, namely, the two companies involved, and the shareholders were not the parties to the agreement.

As between buyer (transferee) and seller (transferor) of shares, the buyer is entitled to all dividend declared after the contract of sale, unless otherwise agreed. Whatever may be the agreement, a transfer of shares after declaration of dividend, does not, as against the company, carry the dividend, even though the transfer may be cum-dividend.

Whether rights inherent in a share can be severed and transferred

A share evidences a bundle of rights; as such the question arises whether each of these rights (say, right to vote or right to dividend) can be severed and transferred as a distinct property. Right to vote has no connection with the personality of the shareholder. Though it can be argued that the company has a right that the shareholder shall exercise his own personal judgment on matters considered at meetings, yet it is not so. The company cannot inquire into a shareholder’s motives or invalidate his vote on the ground that he has a private interest; A shareholder may bind himself by contract not to vote or to vote in a particular way. If he can be so bound by contract, it follows he can be bound by the directions of his beneficiary. The truth is that the right to vote is a right of property annexed to the shares and transferable or assignable with the share. 

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A pledge may act as a mode of transfer of voting rights without transfer of shares. A pledgee or the lender may contractually enjoy voting rights over such shares in spite of the fact that there is no actual transfer of shares by execution of transfer deed. All the rights and benefits attached to the shares otherwise remain with the pledger or borrower. In case the pledgee gets voting rights or has the right to cause the shareholder to vote as per the instructions of the pledgee, the transaction would well amount to acquisition of control and hence, would trigger the requirement of making a public announcement under SEBI (SAST) Regulations, 2011. The Securities Appellate Tribunal, in Shri Ch. Kiron Margadarsi Financiers versus Adjudicating Officer, Securities and Exchange Board of India, Appeal No. 21/2001, observed that voting right is vested in members and a person can be considered as a member only if he falls in the definition of member under the Companies Act: however, it is open to a member to become bound by contract to exercise voting power as directed by another person. Therefore, if the name of the pledgee is entered in the members register maintained by the company, the pledgee is in the legal position to exercise voting rights. Hence, for the purpose of SEBI Regulations, the shares standing in the name of the pledgee, though acquired by way of security need be taken into account. The situation is not the same if the shares though held by the pledge are not registered in the pledgee’s name or the loan agreement do not authorize the pledgee to exercise voting rights in respect of the shares so pledged. Hence, it cannot be contended that the voting rights cannot be transferred exclusively without transfer of shares. If not explicit, such a concept does exist as in case of pledge.

As regards right to receive dividend, the holder of shares has the right to assign such receivables. In such assignment, the right to receive dividend is severed from the shares and transferred to another person.

“Other interest of member”

Apart from shares, s. 88 of the 1956 Act and by extension s. 44 of the 2013 Act enables members to transfer their “any other interest” in the company by complying with the requirements of the company’s articles. In the absence of any specific provision in the company’s articles, a member can transfer his interest in the company to a third person. A guarantee company can have in its articles of association special provisions for transfer of membership interest. Acceptance by the company apart, a member may transfer his interest and that would not violate either section 82 or 108 (of the 1956 Act). There can be special provisions in the articles of a guarantee company about suspension of membership, resignation, nomination and assignment of interest. Their consistency with provisions of Table C of Schedule I (to the 1956 Act) is not necessary. Such provisions would be valid and no transfer would be possible without complying with them. The same is applicable in the context of 2013  Act as well.

Whether a member has an -interest” in the assets of the company

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 There is nothing be Indian law so warrant the assumption that a shareholder who buys shares buys any interest in the property of the company which is a juristic person entirely distinct from the shareholders. The true position of a shareholder is that on buying shares an investor becomes entitled to participate in the profits of the company in which he holds the shares if and when the company declares, subject to the articles of association, that the profits or any portion thereof should be distributed by way of dividends among the shareholders. He has undoubtedly a further right to participate in the assets of the company which would be left over after winding up, but not in the assets as a whole. A shareholder has no interest in the assets of the company while the company is an existence. It is only at the stage of liquidation of the company that the shareholders become interested in the assets of the company. So, where there is no such interest, there is no question of its transfer by a shareholder.

Locality or situs of shares

Shares (or debentures) are for most purposes to be regarded as situate in the country in which the register upon which they are registered is kept. The dispute as to the ownership of shares (or debentures) should be determined by the lex situs, which will normally be the law of the place where the company, whose shares (or debentures) are the subject of the dispute, was incorporated. Where a company has more than one transfer office and it is necessary to decide by reference to which of such offices the situs of any of the company’s shares (or debentures) must be ascertained, that office must be selected where having regard to the circumstances those shares (or debentures) can, in a business sense, be effectively dealt with. ‘Effectively dealt with’ here means, not as between transferor and transferee but as between the holder and the company, so that the transferee will become legally entitled to all the rights of a member. As the transfer of shares (or debentures) in a company can be effected only by a change in the register of members, the place where the register is required to be kept determines the situs of the shares (or debentures). Two views have been maintained

  • the place of ‘residence’ of the company in which the shares (or debentures) are held determining the sinus of the shares; and
  •  the situs of the shares (or debentures) is where the share register of the company is kept.
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Situs of shares situates at the place where the company is incorporated and/or the place where the share can be dealt with by way of transfer. Therefore, the situs of shares of a foreign company holding controlling interest in Indian company cannot be said to be in India where the transfer also took place outside India.  Where the shares of a member became an evacuee property and the registered office of the company was at Calcutta and the factory at Champaran in Bihar, it was held that situs of the shares was at Calcutta and the custodian of Bihar had no jurisdiction to take proceedings for a declaration that the shares had become evacuee property. For more details about Company Registration in Bangalore, kindly visit our website and feel free to contact us. We are here to help you.. Thanks for reading!!!

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