Companies Act, 1961 A public limited company restricting

the transfer of shares by a shareholder WESTERN

MAHARASHTRA DEVELOPMENT CORPN. LTD. V. BAJAJ
AUTO LTD [2010 154 COMP CAS 593 (B OM)
CHANDRACHUD D. Y.DR.J [DECIDED ON 15.02.2010]
Issue at large: Facts of the case are complicated involving
arbitration and preemption rights. However, the crucial issue is
whether a public limited company restricting the transfer of
shares by a shareholder by way of providing pre emptive right
is valid examined and settled by the court.
Decision: Pre emptive rights with respect to transfer of shares
are illegal for a public company.
Reason: The Companies Act, 1956, makes a clear distinction
in regard to the transferability of shares relating to a private
and public companies. By definition, a private company is a
company which restricts the right to transfer its shares.
Consequently, upon a refusal of a private company to transfer
its shares, a remedy is provided in the Act. In the case of a
public company, the Act provides that the shares or
debentures and any interest therein of a company shall be
freely transferable. Free transferability of shares is the norm in
the case of shares in a public company. The provision
contained in the law for the free transferability of shares in a
public company is founded on the principle that members of
the public must have the freedom to purchase and, every
shareholder the freedom to transfer. The incorporation of a
company in the public, as distinguished from private realm
leads to specific consequences and the imposition of
obligations envisaged in law. Those who promote and manage
public companies assume those obligations. Corresponding to
those obligations are rights, which the law recognizes as
inherent in the members of the public who subscribe to
shares. The principle of free transferability must be given a
broad dimension in order to fulfill the object of the law.
Imposing restrictions on the principle of free transferability is a
legislative function, simply because the postulate of free
transferability was enunciated as a matter of legislative policy

when parliament introduced Section 111A into the Companies

Act, 1956. That is a binding precept which governs the
discourse on transferability of shares. The word transferable
is of the widest possible import and Parliament by using the
expression freely transferable has reinforced the legislative
intent of allowing transfers of shares of public companies in a
free and efficient domain. The effect of a clause of preemption is to impose a restriction on the free transferability of
the shares by subjecting the norms of transferability laid down
in Section111A to a pre emptive right created by the
agreement between the parties. This is impermissible. Section
9 of the Companies Act, 1956 gives overriding force and effect
to the provisions of the Act, notwithstanding anything to the
contrary contained in the memorandum or articles of a
company or in any agreement executed by it or for that matter
in any resolution of the company in general meeting or of its
board of directors. A provision contained in the memorandum,
articles, agreement or resolution is, to the extent to which it is
repugnant to the provisions of the Act, regarded as void. The
provisions of Section 111A cannot be read as being subject to
a contract to the contrary. A restriction to that effect cannot be
read into the provision of Section 111A : firstly because, such
a restriction is not mentioned in the statutory provision;
secondly, the word transferable is of the widest import; and
thirdly, the context in which the provision has been introduced,
is susceptible to the inference that it should be given a wide
meaning. Where the language of the statute is plain, neither
the consequence nor the conduct of the parties would be of
relevance.