Rectification of register of public companies 

Here, we are going to discuss about the rectification of register of public companies.  Public company is a one of the types of Companies. A company, which is allowed to sell its registered shares to the general public called Public Company. Public companies securities (equity and debt) are owned and traded by the general public through by the use of public capital market.  Section 111 A(3) of the 1956 Act corresponds to section 59(4) of the 2013 Act. By virtue of this provision, depository, company, depository participant, the holder of the securities or SEBI may apply to the CLB under the 1956 Act for rectification of the records or registers of the depository, where the transfer of securities is in contravention of any of the provisions of the Securities and Exchange Board of India Act, 1992 or SICA, 1985 or any other law for the time being in force. The ownership of public companies is shared by its shareholders with those Board management and public shareholders.

Under section 59 of the 2013 Act, such an application will lie before the Tribunal. Further, unlike section 111A(3) of the 1956 Act, s 59(4) of the 2013 Act additionally refers to contraventions made under SCRA and the Companies Act itself, while leaving out SICA from its ambit. Further, though the 2013 Act does not explicitly include contraventions of SEBI regulations (which finds a mention in the 1956 Act); yet such inclusion is implied, as regulations are framed by SEBI pursuant to powers contained under SCRA or the SEBI Act.

Power to order rectification of records of depository

 In terms of section 111A(3) of the records and when the name of the petitioner has been omitted from its records 1956 Act, the Company Law Board has the power to direct a depository to rectify its fraudulently, the depository can be directed to rectify its records to put back the name of the petitioner. Petitioner foreign company was entitled to get its shareholding in respondent Indian company restored when its name was fraudulently omitted with some mala fide motive.

Transfer in violation of SEBI (ICDR) Regulations, 2009

 The Company Law Board in its decision in SPS International Ltd., versus Vijay Remedies Ltd, explained the scope of the power of the Company Law Board in the matter of rectification of the Register of Members of a public company. The Board said: It is clear that the Company Law Board may on an application made by an investor order rectification in case the transfer of shares is in contravention of certain laws mentioned therein. In other words, an investor can apply to the Company Law Board in case a transfer has been already affected in contravention of any laws mentioned in sub-section (3). In other words, so long as there is no contravention of any of the laws mentioned therein, an application cannot lie……. Thus, any allegations of fraud, forgery, lack of authority, procedure adopted with regard to transfer etc., are grounds which are not available any more for a rectification petition.” The question in this case is that of violation of SEBI Regulations. On June 19, 1992, SEBI issued Guidelines under the heading “Promoters contribution and lock-in-period”, which provided that the promoters’ quota shall not be diluted for a lock-in period of five years from the date of commencement of production or date of allotment whichever is later. Subsequently by a Press Release on October 10, 1994 a clarification was issued to the effect that “transfer of shares amongst promoters specifically described as such in the prospectus is also permissible but the requirement relating to lock-in period would continue to apply to the extent initially prescribed.” It is patently clear that a conscious distinction has been made between “promoters” and “promoters group”. It is clear that the relaxation does not apply to the constituents of the promoters group, i.e., promoter’s relatives, friends, associates, etc. The relaxation covers transfers amongst promoters specifically described as such in the prospectus.” In this case, four promoters were named in the prospectus to which the restriction was not to apply. The petitioners, as original allottees in the promoters’ quota, were not among them. Transfers of their shares to other allottees in the promoters’ group were not exempt. They were in violation of SEBI Guidelines. The prayer of the petitioners for rectification of the register of members could not be allowed.

No violation of SEBI Regulations in case of unlisted companies

The CLB found no violation of SEBI Regulations because they were applicable only to listed companies whereas the transferee company was not a company in that category. The company registration was directed to register the transfer.

Violation of SEBI Takeover Regulations

Where the acquisition of shares exceeded 10% and the procedure as to public announcement of such acquisition as prescribed by the Takeover Regulations [SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, formerly, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997] was not followed, that was held to be a “sufficient cause” within the meaning of section 111-A of the 1956 Act for the company not to register the transfer. It was further held that in taking the count of 10%, [now 25%) share transfers which had not been lodged with the company because they were still under the lock-in-period would have to be taken into account because the acquirer had taken in respect of those shares irrevocable power of attorney and, therefore, became entitled to exercise voting rights.

Of the three grounds mentioned in s. 111A of the 1956 Act which empower the CLB to order rectification. The refusal by the company to register a transfer of shares in this case was on the ground of violation of SEBI Takeover Code. The company placed before the CLB inadequate material in support of the allegation and, therefore, a sufficient cause for refusal was not made out. Further, SEBI itself was in seisin of the matter of violation and it has power under Regulation 44 of the Takeover Regulations for giving directions for setting the matters right. In the meantime why the investors should suffer. The company was directed to register the transfers. Another similar case is Redwood Holdings Private Ltd., versus Sandesh Ltd. Here also the allegation of acquisition beyond 5% was not proved. The company’s refusal being not sustainable, it was directed to register the transfer. It was further held that the appropriate forum for taking case of violations of SEBI Regulations is SEBI itself and not the CLB. If some further inquiry or investigation is necessary, that would also have to be handled through SEBI authorities.

Two companies (holding and subsidiary) acting in concert, acquired substantial shareholding in another company. The other company refused to register the transfer. A petition was filed for a direction to the company to register the transfers of shares which were acquired before and after the public offer made by the company. It was held that in terms of regulation 7 of the SEBI Regulations, GMM (acquiring company) should have informed the company within four days of such acquisition. Such intimation was given only after a delay of more than a month. Therefore, there was a clear contravene provisions of regulation 7 of the SEBI Regulations. The public held 9.91 per cent of the shares at the time when K (another acquiring company) made the public offer to acquire 20 per cent of the shares in the company. Since the proposal to acquire 20 per cent of the shares together with the existing shares amounted to more than 25 per cent of the shares, the petitioner should have obtained the previous approval of the Central Government before making the offer. Since the petitioner had not done so, the acquisition of the shares during the period was in violation of the provisions of the Companies Act. Therefore, the refusal by the company to register the transfers was with “sufficient cause”. The petitioners, being the holding and subsidiary companies, respectively, were acting in  concert to acquire the shares of the respondent company and, therefore, the case fell within the meaning of the provisions of regulation 2(e) of the SEBI Regulations. Further, the holding of both the petitioners in the aggregate amounted to 5.287 per cent of the shares, thus exceeding the threshold limit of tive per cent, stipulated in regulation 7 of the SEBI Regulations.

Explaining the impact of the insertion of s. 1A to the 1956 Act, the CLB said: “Even before the provisions of section 111A were inserted in the Companies Act, the power of the Board of directors of a listed company to refuse company registration of transfers was restricted by the provisions of section 22A of the Securities Contracts (Regulation) Act, 1956, only on certain grounds, notwithstanding the provisions of section 111 of the Act. The Legislature has consciously differentiated the grounds for refusal for listed and unlisted companies (including private limited companies) even before insertion of section 111A. Section 111A was introduced simultaneously with repeal of the provisions of section 22A of the Securities Contract (Regulation) Act, 1956, and most of the grounds provided therein have been provided in section 111A(3), except the one relating to change in the composition of the Board of directors. While section 111A stipulates that the shares of public companies are freely transferable, section 3(1)(iii) authorizes a private company to make provisions in the articles to restrict the right to transfer shares. Thus, the shares in a public company are not similar to the shares in a private company. While all the grounds specified in that section are applicable to a listed company, an unlisted public company can refuse registration of transfer of shares if the same is in violation of the provisions of any Act or the SICA. Therefore, it was held that the term “sufficient cause” as appearing in the proviso to section 111A (2) would cover only the instances under which rectification of the register of members can be ordered, in terms of section 111A (3) If the company’s refusal to register the transfers falls within any of the grounds specified in section 111A(3) then company registration could not be ordered”.

The company applied for rectification of its register of members alleging that it happened to register the transfer not knowing that there was violation of SEBI Takeover Code and also Insider Trading Regulations. The matter was still sub-judice before SEBI for adjudication and that of the Central Government under s. 108 of the 1956 Act. It was held that the CLB was not competent to provide any relief till disposal by the relevant judicatory authorities. 

Companies concerned in the process of acquisition by individuals would also be regarded as acquirers and acting in concert with individuals. The words “who holds shares” in Regulations 9 and 10 of the SEBI Takeover Regulations would have to be taken to include, to give them some purposeful meanings namely, a person whose holding in the company may be nil or who holds shares with a right to get his name registered as a member, but not yet entered in the register. The object of the regulations is to bring about transparency in dealings in securities and also to enable existing shareholders to take informed decisions in accepting or refusing to accept a public offer. made by the acquirer. Persons acting in concert deliberately acquired shares of the target company with the oblique motive of gaining control of management of the company as a sole purpose of deliberately did not comply with SEBI Takeover Regulations within the stipulated period and thereby violated the Regulations. Company Law Board is empowered to pass order of rectification once it concludes that any of the grounds mentioned in section 111A (3) of the 1956 Act exist and the shares acquired are in contravention of SEBI Regulations. Merely for the reason that the respondents were penalized by fine for violation of SEBI (Prohibition of Insider Trading) Regulations and no further action was taken does not absolve them from the consequences as contemplated by section 111A of the 1956 Act.

Continuation of cause of action

The petition for rectification of the register was filed with the CLB. The petition had also approached the Civil Court and since the matter was still pending with the Civil Court, thereby constituting a continuous cause of action, CLB refused to dismiss the petition on ground of limitation. The respondent company had full knowledge of purchase of shares. The respondent company’s contention that the petition involves complicated question of law and facts and therefore Civil Court would be the correct forum was found untenable by the CLB. A listed company cannot neglect in attending the grievances of the investors thereby causing monetary loss in approaching various courts. Such a loss cannot be compensated by any means and therefore the petition for rectification of register was allowed along with costs.

Investigation by SEBI: Restraining transfer of shares

Transfer of shares cannot be restrained by invoking the provisions of section 111-A or section 247 of the 1956 Act. It was a listed company. An investigation into the fact whether there was violation of the Substantial Acquisition code could be ordered only by SEBI and share transfer can also be restrained by it. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 [now, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011]. It may be noted here that SEBI has the power to investigate into matters of violation of the SEBI Act or any of the rules or regulations made thereunder by any intermediary or any person associated with the securities market [section 111 C of the SEBI Act, 1992]. Further section 24 of the 2013 Act stipulates that SEBI shall exercise the powers conferred under sub-sections (1), (2A), (3) and (4) of section 11, sections 11 A, 11 B and 11 D of the SEBI Act in respect of issue and transfer of securities and non-payment of dividend.

Company’s application for rectification because of violation of SEBI Rules and Regulations

 SEBI violations can be taken care of by SEBI itself. But when a company’s shares have been acquired in violation of SEBI Takeover Regulations and the acquisition has also been entered in the register of members, the company can itself apply to the CLB for rectification of the register of members. The CLB can look into the petition and pass appropriate orders notwithstanding the power of the SEBI to rectify matters under its own powers.

Mandatory to order rectification when ground made out

Whenever a ground for rectification of register of members has been made out under s. 111-A(3) of the 1956 Act, it becomes mandatory for the CLB to order rectification of the register of members. One of those grounds is that there has been a contravention of any of the provisions of the SEBI Act, 1992, or Regulations made under it. The shares acquired in contravention of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, have necessarily to be declared void followed by rectification of register of members.

Contravention of any other law

The expression “or any other law for the time being in force” in section 111A(3) of the 1956 Act [s. 59(4) of the 2013 Act] has to be read in the context of the other words used in the sub-section and would be confined to statute law. A public company in this case was refusing to register the transfer of shares to a business rival. This was held to be not a permissible ground of refusal under section 111A of the 1956 Act.

Scope of the powers of CLB under Companies Act, 1956

The discussion below pertains to scope of the powers of CLB and jurisdiction thereof. To note that, while the CLB is replaced by other authorities, primarily the Tribunal in the scheme of the 2013 Act, this discussion below, is relevant for both pending cases- as well as to analyze the scope of the Tribunal’s powers. The Company Law Board has held that any petition filed after the enforcement of the amendment brought in by the Depositories Ordinance, 1995 (which later became Depositories Act, 1996) would be affected by it even if the cause of action arose earlier to the effective date of the amendment. Accordingly CLB refused to provide any relief under a cause of action which arose in 1994 but for which a petition was filed after the effective date. The CLB said that the jurisdiction is applicable as on the date of the filing and not as on the date of cause of action. The Bombay High Court in Finolex Industries Ltd case (supra) overruled the CLB’s order, laying down inter alia, that remedies under the proviso to s. 111A(2) and under s. 111A(3) of the 1956 Act are available to transfer as well as transmission matters.

No jurisdiction to order duplicate shares

There is no jurisdiction under section 111A 1956 Act for ordering the issue of duplicate share certificates. The CLB has jurisdiction to adjudicate only where there is refusal to accept a transfer of shares or to pass an order where rectification of the share register has become necessary. Provisions for issue of duplicate share certificates have been made in Rule 4(3) of the Companies (Issue of Shares Certificates), Rules, 1960.

“Any right to move the CLB in respect of a public company could only be under the provisions of the section 111A. As far as transfer matters are concerned, now provision exist under the proviso to sub-section 111A(2) as well as 111A(3). However, rectification in respect of non-transfer matters cannot be sought before the CLB as no jurisdiction in these matters has been conferred on the CLB under that section. Therefore, under the existing provisions, the only remedy available is that, one has to move the Civil Court.” It was also stated that: “one has to move a forum which has the jurisdiction to entertain the matter on the day of filing a petition, and not a forum which had the jurisdiction when the cause of action arose but does not have the jurisdiction when a petition is filed.”

Jurisdiction over public companies

 In Canara Bank Ltd versus Mahanagar Telephone Nigam Ltd,  a writ petition was filed in a High Court for an order ol rectification of the register of members of a public company. The writ was dismissed in limine as not maintainable. Subsequently a petition was filed before the Company Law Board. It was held that the jurisdiction of CLB was to be considered as on the date of the petition to the CLB and not on the date of the petition to the High Court. No forum can confer jurisdiction on itself by the application of equitable considerations nor can the parties do so by agreement. There has to be a specific legal provision for conferring jurisdiction. The High Court had not remanded the matter to the Company Law Board. It had dismissed the petition as not maintainable. The proceeding before the CLB was de novo and not a continuation of the proceedings before the High Court.

The Company Law Board is no longer in a position to look into disputes between the parties to a transfer to which the company is not a party. Since a public company is bound to accept a transfer for which appropriate papers have been filed, the Company Law Board cannot go into matters like whether there had been a sale of the shares or not or whether the documents were genuine or forged. All such matters have to be the subject matter of a civil suit.

In a suit by a shareholder in respect of his shares, there was an order of the Civil Court restraining the transfer to A. The company by mistake showed A’s name on the certificates as a shareholder. Bonus and rights shares were given to the subsequent transferees and holders. The mistake was discovered after three years. An application was made to the Company Law Board for rectification. The company had no objection. Rectification was accordingly ordered but no order was possible in respect of bonus and rights shares which had already gone out.  A company petition under section 111 A of the 1956 Act is not maintainable before the Company Law Board challenging allotment of shares by a public company as the scope of section 111A of the 1956 Act is limited to only transfer of shares.

The Company Law Board cannot look into the validity of an allotment of shares by a  public company. The powers which it could have exercised under section 111(4) of the 1956 Act cannot be exercised by reason of insertion of section 111-A of the 1956 Act in respect of public companies.

Where a petition in respect of a public company happened to be filed under section 111 of the 1956 Act, it was held that it would automatically be treated as filed under section 111-A of that Act.

Allotment of shares by public company

An allotment of shares by a public company cannot be challenged in an appeal under s 111-A of the 1956 Act. This was upheld by CLB. The dismissal of the application by CLB was held to be proper.

Public company’s right to apply for rectification

The remedies of appeal and rectification are available for all kinds of shares of public companies. The proviso to section 111A(2) and sub-section (3) read with sub-section (7) of section 111A of the 1956 Act make applicable the provisions of section 111(1), sub-sections (2) and (4) of section 111 of the 1956 Act. This is by virtue of section 111(5). A public limited company can file a petition for rectification of register of members of other companies under sections111 and 111A of the 1956 Act.  In the case of a refusal by a company to accept transfer of shares, the locus standi for appeal under s. 111-A of the 1956 Act lies with the transferee. The transferor of shares cannot file an appeal under the section. For more clarification about Company Registration in Madurai, kindly visit our website and feel free to contact us. We are assisting in a right way. Thanks for reading!!!