Prepared by Ruby Panchal (Lecturer, JGLS)

Company Law Case Summaries

Transfer of Shares in Public and Private Company

Statutes:
Section 56 of the Companies Act 2013

Case Law:
• V.B. Rangaraj vs V.B. Gopalakrishnan & Ors., AIR 1992 SC 453, 1992
• Messer Holdings Limited v. Shyam Madanmohan Ruia, [2010] 159 Comp. Cas. 29
(Bombay3 High Court)
• Bajaj Auto Ltd vs Western Maharashtra Development, (MANU/MH/0820/2015,
Bombay HC)
• World Phone India Pvt. Ltd v. WPI Group Inc USA, [2013] 178 Comp Cas 173 (Del)

• Securities and Exchange Board of India (Substantial Acquisition of Shares and

Takeovers) Regulations, 2011
• Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009

Provisions

44. Nature of shares or debentures.—The shares or debentures or other interest of any

member in a company shall be movable property transferable in the manner provided by
the articles of the company.

Share is a ‘movable property’

Sale of Goods Act, 1930 - S2(7): “goods” means every kind of moveable property other than
actionable claims and money; and includes stock and shares, growing crops, grass, and things
attached to or forming part of the land which are agreed to be severed before sale or under the
contract of sale;

Share is ‘transferable’
Transfer of shares is voluntary conveyance of rights, which can be effected by sale, gift or
exchange. Shares are transferable according to Articles of company.

Restrictions on Articles of Association

Public Company – No restriction 58(2) -
Private Company – Mandatory restriction 2(68) – A private company is statutorily under
obligation to place certain restrictions on the rights of its members to transfer shares.

Process of Transfer of Shares:

Why is dematerialised important?

1
Prepared by Ruby Panchal (Lecturer, JGLS)

Dematerialisation is the process converting physical shares into an electronic form. Shares once
converted into dematerialised form are held in demat form.
Actual stock certificates are slowly being removed and retired from circulation in exchange for
electronic recording.

System
Demat accounts can be opened with any depository participant (DP) in India.
A DP is a financial services firm that ties up with a depository and becomes a participant.
Shares dematerialised with a particular DP are held in demat account of the client and allotted
Unique Client IDs.

DPs – ICICI; UBI; SBI etc.

Under depository scheme, shares are dematerialised and indeed there is no ‘share certificate’.
The share transfer is recorded by depository in his accounts. In case of shares in depository
scheme, the company comes into picture only when physical shares are submitted to company
for dematerialising them. At that time, name of shareholder is removed and shares are
transferred in name of depository. In the records of depository, the shareholders will be
recorded as ‘beneficial owner’. Subsequently, all share transfers are recorded through
participant and depository. The company does not come into the picture at all. No stamp duty.
No transfer deed is executed.

Listed Public Companies:

After March 31, listed companies' physical shares will need to be 'dematerialised' to be sold
or transferred. Consequently, after March 31, unless dematerialised, these shares would
become technically 'illiquid'.

The reason for this may be the fact that a lot of people still own equity shares in physical
form, especially senior citizens. As on December 31, 2018, almost 4 percent of the total
number of shares of the 30 Sensex companies were still held in physical form. That is 418
crore shares still in non-demat form.

Sample this: a company like ITC has 375 crore shares in physical form in total, which is a
whopping 30 percent of its total equity shares. Others are better off, Bajaj Auto l has 6.18
percent in physical form, Tata Steel has 1.9 percent, and HUL 1.7 percent.

How to change:
1. Get a DEMAT Account
2. Get Dematerialization Request Form

2
Prepared by Ruby Panchal (Lecturer, JGLS)

Unlisted Public Companies:

Effective from 2nd October, 2018 (This deadline was then extended to 1 April 2019) which
mandated unlisted public companies to dematerialise its existing securities and ensure that
further issue of securities and transfers are made only in dematerialised form.

Rule 9A, Companies (Prospectus and Allotment of Securities) Rules, 2014

Private Companies:
Private Companies are not covered within the ambit of Rule 9A of the Amendment Rules.
However, voluntarily they can follow the Amendment Rules

Pre-emption Clause – States that intending transferor must offer his shares to the existing
members of the company, before offering them to non-members, so long as a member can be
found to purchase them at fair price to be determined in accordance with the Articles.

3
Prepared by Ruby Panchal (Lecturer, JGLS)

Transfer and Transmission of Shares

Section 56
Transfer and transmission of securities.—(1) A company shall not register a transfer of
securities of the company, or the interest of a member in the company in the case of a company
having no share capital, other than the transfer between persons both of whose names are
entered as holders of beneficial interest in the records of a depository, unless a proper
instrument of transfer, in such form as may be prescribed, duly stamped, dated and executed
by or on behalf of the transferor and the transferee and specifying the name, address and
occupation, if any, of the transferee has been delivered to the company by the transferor or the
transferee within a period of sixty days from the date of execution, along with the certificate
relating to the securities, or if no such certificate is in existence, along with the letter of
allotment of securities:

Provided that where the instrument of transfer has been lost or the instrument of transfer has
not been delivered within the prescribed period, the company may register the transfer on such
terms as to indemnity as the Board may think fit.

Transfer of shares – sale, exchange or gift

Transmission of shares – operation of law – death, legal incapacity etc.
Instrument of transfer – Transfer deed
• A company shall not register transfer of securities
• Unless there is a proper instrument of transfer
• It should specify name, address, occupation of the transferee
• Transfer deed and share certificate/letter of allotment should be delivered to company
within 60 days of transfer deed execution
• If the instrument of transfer has been lost or has not been delivered within prescribed
period, company can register on basis of indemnity bond as decided by BoD. As a
precaution, company should send a registered letter to transferor, inviting objection, if
any. If no reply is received within a reasonable period as prescribed in the notice,
transfer may be effected on obtaining indemnity bond.
• Instrument of transfer should be executed by or on behalf of transferor and transferee.
(Model Articles)
(2) Nothing in sub-section (1) shall prejudice the power of the company to register, on receipt
of an intimation of transmission of any right to securities by operation of law from any person
to whom such right has been transmitted.

Transmission of shares means passing of property in shares, other than by way of transfer, by
operation of law consequent to the death or insolvency of the member. – death (nomination,
will, succession), insolvency, lunacy, company restructuring, minor, court order, arbitral award

No instrument of transfer with share certificate is required.

4
Prepared by Ruby Panchal (Lecturer, JGLS)

(3) Where an application is made by the transferor alone and relates to partly paid shares, the
transfer shall not be registered, unless the company gives the notice of the application, in
such manner as may be prescribed, to the transferee and the transferee gives no objection
to the transfer within two weeks from the receipt of notice.

• Application is made by transferor alone

• Related to partly paid shares
• Notice to transferee – NOC – within 2 weeks

(4) Every company shall, unless prohibited by any provision of law or any order of Court,
Tribunal or other authority, deliver the certificates of all securities allotted, transferred or
transmitted—

(a) within a period of two months from the date of incorporation, in the case of
subscribers to the memorandum;
(b) within a period of two months from the date of allotment, in the case of any
allotment of any of its shares;
(c) within a period of one month from the date of receipt by the company of the
instrument of transfer under sub-section (1) or, as the case may be, of the intimation
of transmission under sub-section (2), in the case of a transfer or transmission of
securities;
(d) within a period of six months from the date of allotment in the case of any allotment
of debenture:
Provided that where the securities are dealt with in a depository, the company shall intimate
the details of allotment of securities to depository immediately on allotment of such
securities.

(5) The transfer of any security or other interest of a deceased person in a company made
by his legal representative shall, even if the legal representative is not a holder thereof, be valid
as if he had been the holder at the time of the execution of the instrument of transfer.

(6) Where any default is made in complying with the provisions of sub-sections (1) to (5), the
company shall be punishable with fine which shall not be less than twenty-five thousand
rupees but which may extend to five lakh rupees and every officer of the company who is in
default shall be punishable with fine which shall not be less than ten thousand rupees but
which may extend to one lakh rupees.

(7) Without prejudice to any liability under the Depositories Act, 1996 (22 of 1996), where
any depository or depository participant, with an intention to defraud a person, has
transferred shares, it shall be liable under section 447.

5
Prepared by Ruby Panchal (Lecturer, JGLS)

Refusal of Registration of Transfer

Section 58
Refusal of registration and appeal against refusal.—(1) If a private company limited by
shares refuses, whether in pursuance of any power of the company under its articles or
otherwise, to register the transfer of, or the transmission by operation of law of the right to,
any securities or interest of a member in the company, it shall within a period of thirty days
from the date on which the instrument of transfer, or the intimation of such transmission, as
the case may be, was delivered to the company, send notice of the refusal to the transfer or and
the transferee or to the person giving intimation of such transmission, as the case may be,
giving reasons for such refusal.

1. Private company can refuse to register transfer or transmission of shares

2. Such refusal can be pursuant to AOA or otherwise
3. It will send Refusal Notice giving reasons for such refusal
4. Within 30 days of date of instrument of transfer or date of intimation of transmission

(2) Without prejudice to sub-section (1), the securities or other interest of any member in a
public company shall be freely transferable:

Provided that any contract or arrangement between two or more persons in respect of
transfer of securities shall be enforceable as a contract.

Corresponds to Section 111A of Companies Act, 1956 except the proviso

It is also important to analyze the expression 'freely transferable', which has not been defined
under CA 2013.

The expression 'freely transferable' is a mandate against the board of directors to register the
transfer of the specified shares and such expression should be given wider interpretation.

Any consensual arrangement / contract providing restriction on transfer of shares or providing

pre-emptive rights pertaining to transfer of shares should not be construed as violation of the
expression 'freely transferable'.

As per section 58(2), the securities or other interest of any member in a public company shall
be freely transferable. The Board of directors of a Company or the concerned depository has
no discretion to refuse or withhold transfer of any security. The transfer has to be e ected by
the company/depository automatically and immediately.

However, proviso to section 58(2) provides that any contract or arrangement between two or
more persons in respect of transfer of securities shall be enforceable as a contract. It is now
possible to contractually agree on terms such as right of rst refusal, right of rst o er, tag along,
call option, put option, etc. in the shareholder agreements/ investment agreements, in the case

6
Prepared by Ruby Panchal (Lecturer, JGLS)

of a public company as well. These terms would now be binding on the investors. Therefore,
private arrangements or contracts between two or more persons would be enforceable
contracts.

Had that not been the intention of the legislature, the proviso to Section 58(2) of the CA 2013
would not have been specifically inserted and appropriate restriction would have been placed
in CA 2013 in relation to transfer of shares in terms of consensual arrangement. However, such
expression does not in any way restrict the power of the board of directors of a public company
to refuse the registration of transfer of such shares on 'sufficient cause'.

(3) The transferee may appeal to the Tribunal against the refusal within a period of thirty
days from the date of receipt of the notice or in case no notice has been sent by the company,
within a period of sixty days from the date on which the instrument of transfer or the intimation
of transmission, as the case may be, was delivered to the company.

1. Transferee may appeal to Tribunal

2. Again refusal by company
3. Within 30 days of receipt of refusal notice – transfer
4. Within 60 days of instrument of transfer but with no notice
5. Within 60 days of intimation of transmission

(4) 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.

Public company to refuse registration of share transfers pursuant to section 58(4) of the CA
2013
However, the statute does not provide any guidance on what would constitute ‘sufficient cause’
and leaves it open to the company itself to ascertain the same.

It is pertinent to note that while section 111A(2) of CA 1956 used the term ‘sufficient cause’
as a reason for refusal for registration, section 111A(3) set out an exhaustive list of three
instances where rectification of register could be undertaken, namely
(i) where the transfer was in violation of any provision of SEBI Act or regulations;
(ii) where the transfer would violate any of the provisions of The Sick Industrial
Companies Act (SICA), or
(iii) where the transfer would violate any other law in force.

7
Prepared by Ruby Panchal (Lecturer, JGLS)

Mackintosh Burn Limited v. Sarkar and Chowdhury Enterprises Private Limited, (2018) 5 SCC
575 (Mackintosh Case). In this case the Supreme Court held that the registration of a share
transfer may not only be refused on the ground of it resulting in a violation of any law but also
for any other sufficient cause.

The board of directors, upon 'sufficient cause' being seen, may refuse to register the transfer
of shares. The words 'sufficient cause' in Section 58(4) takes within its ambit not only those
contingencies contemplated under sub-section (3) but also circumstances and reasons other
than which might require the company to refuse to register the transfer of shares. Thus, there
can be various reasons, though it is not possible to enumerate all of them and may depend on
the facts of each case, which would constitute 'sufficient cause' for a company to refuse the
registration of transfer of shares.

(5) The Tribunal, while dealing with an appeal made under sub-section (3) or sub-section (4),
may, after hearing the parties, either dismiss the appeal, or by order—
(a) direct that the transfer or transmission shall be registered by the company and
the company shall comply with such order within a period of ten days of the receipt
of the order; or
(b) direct rectification of the register and also direct the company to pay damages,
if any, sustained by any party aggrieved.
NCLT herein cannot decide question of title of securities u/s 58 of the companies act.

(6) If a person contravenes the order of the Tribunal under this section, he shall be
punishable with imprisonment for a term which shall not be less than one year but which may
extend to three years and with fine which shall not be less than one lakh rupees but which
may extend to five lakh rupees.

8
Prepared by Ruby Panchal (Lecturer, JGLS)

Right of Pre-emption in Transfer of Shares

Right of First Refusal (ROFR)

ROFR is a contractual right that obliges that selling shareholder not to sell its shares in a
company to a third party without offering his shares to another non-selling shareholder.
A ROFR provides the non-selling shareholders with a right to either accept or refuse an offer
from a selling shareholder after the selling shareholder has received a third party offer for its
shares.

The selling shareholder then sells it to third party with a stipulation that terms of such sale
especially sale price should not be more favourable than those offered to non-selling
shareholder.

Right of First Offer (ROFO)

A ROFO provides the non-selling shareholders with the right to make an offer for the selling
shareholder's shares before the selling shareholder can solicit for third party offers for its
shares.

This right to pre-emption is seen as a hindrance to ‘free

transferability’ in the public company as stipulated by Section
111A of Companies Act, 1956.

Private Company Cases

Facts
Decision

Rangaraj

Facts
The defendant in that case was a private limited company, and in time, its sole shareholder
came to be a family that consisted of two branches. The principals of each branch orally
agreed in 1951 that the proportion of shareholding of their respective branches would not
change, and provided, for this purpose, that any member of a branch who wished to sell his
shares must first offer the shares to his own branch.

Decision

9
Prepared by Ruby Panchal (Lecturer, JGLS)

After referring to the decision of the Supreme Court in Kalinga Tubes, common law decisions
and scholarly opinion, Sawant J. held that shares are “freely transferable” and that “a private
agreement that imposes … restrictions not stipulated in the articles of association…” is “not
binding either on the shareholders or on the company”. The latter part of his decision – that it
does not bind the company – is not new, and is an accepted rule of English law.

However, that it does not bind the shareholders is a requirement peculiar to Indian law, and
the only possible statutory provision that supports it is s. 82, which Sawant J. cites. However,
s. 82, which provides that shares in a company constitute movable property “transferable in
the manner provided by the articles of association”, is widely thought to in fact refer to
the procedure of transfer.

Thus, the court had held that any restriction on the transfer of shares of a private company is
not valid if it is not incorporated in the articles of association of that company.

Madhusudhan
Facts
In 2002, the Supreme Court decided Madhusoodhanan. The case arose out of a complex family
dispute in Kerala, and specifically out of a karar (agreement) that provided in Clause 2 that
“there would be no change in the existing share structure” (among the family) of a private
company. Clause 2 also provided that the shares of two members would pass to
Madhusoodhanan in a certain percentage on their death.

Ruma Pal J. distinguished Rangaraj and Kalinga Tubes on the basis that this restriction was
not on a share as a class, but on specific, identified shares between specific, identified
members, to which the company need not be a party. Whether the decision is consistent in its
entirety with Rangaraj is a matter of disagreement, especially as to the clause that there would
be no change in the existing share structure – a provision similar to the requirement
in Rangaraj that the shareholding pattern of the two branches would remain constant.
However, it is clear that it is not authority for the general proposition that a private arrangement
is legal under existing Indian law, but at best for the proposition that a transaction
between identified members imposing a restriction on identified shares is legal.

M.S. Madhusoodhanan v Kerala Kamudi Pvt Ltd. [5] : there was an agreement between a few
members of the family that provided that “there would be no change in the existing share
structure” (among the family) of a private company. It also provided that the shares of two
members would pass on to Madhusoodhanan in a certain percentage on their death.

The court distinguished this case from the Rangaraj’s case on the basis that this restriction was
not on a share as a class, but on specific, identified shares between specific, identified
members, to which the company need not be a party and distinguished Rangaraj’s case on the
grounds that there was a blanket restriction.

10
Prepared by Ruby Panchal (Lecturer, JGLS)

The issue of transferability of shares arose once again for consideration before the Supreme
Court in MS Madhusoodhanan v Kerala Kaumudi Pvt Ltd. The Kerala Kaumudi case involved
a dispute between four brothers of a family who held shares in a private limited company
promoted by their parents. At the root of the dispute lay an agreement dated 16 January 1986
(the Karar) executed by the four brothers and their mother. The Karar provided that after the
death of the mother, the shares in the company would be transferred to divide the effective
control of the various family concerns among the four brothers.
The Karar provided that Madhu-soodhanan would be entitled to 50% of the total shares of the
company including the shares owned by one of the brothers and the remaining two brothers
were to receive 25% each. On the death of the mother, Madhusoodhan an filed a suit for specific
performance of the Karar and transfer of shares in accordance with the terms of the Karar.
When the case came up in appeal to the Supreme Court, the respondent sought to argue, on the
basis of Rangaraj’s case that since the terms of the Karar were not included in the articles of
association of the company, it would be unenforceable. Rejecting the argument, the court, after
discussing the decision in Rangaraj’s case, held that the decision does not in any way state that
the transfer of shares agreed to between shareholders did not bind them or cannot be enforced
like any other agreement.
The Supreme Court reinforced the law laid down in Rangaraj’s case and so has only made a
distinction between an agreement to transfer shares between particular shareholders (as in the
Kerala Kaumudi case) on the one hand, and on the other, an agreement imposing blanket
restrictions on the ability to transfer shares on all the shareholders, present and future, contrary
to the company’s articles of association, as in Rangaraj’s case.

Private Company arrangement

In Rangaraj, the right to pre-emption in SHA was held to be void as they were inconsistent
with AOA. It was therefore held that such a restriction was not binding on the company or
its shareholders.

In Rangaraj's case, relied upon by the respondents, an agreement was entered into between
the members of the family who were the only share holders of a private company. The
agreement was that for all times to come each of the branches of the family would always
continue to hold equal number of shares and that if any member in either of the branches
wished to sell his share/shares, he would give the first option of purchase to the members
of that branch and only if the offer so made was not accepted, the shares would be sold to
others. This was a blanket restriction on all the shareholders, present and future. Contrary
to the agreement, one of the shareholders of one branch sold his shares to members of the
second branch. Such sale was challenged in a suit as being void and not binding on the
other shareholders.

This is distinguishable from Madhussodhan’s facts.

There is no such restriction on the transferability of shares in the Karar. It was an agreement
between particular shareholders relating to the transfer of specified shares, namely those

11
Prepared by Ruby Panchal (Lecturer, JGLS)

inherited from the late Sukumaran and Madhavi, inter se. It was unnecessary for the
company or the other shareholders to be a party to the agreement. As provided in clause 10
of the Karar, Exhibits R-59 and R-60 did not obviate compliance with the Karar. Both Ex.
R-59 and R-60 were executed on 15.7.85 several months prior to the Karar. The parties
who had consciously entered into the agreement regarding the transfer of their parents
shares are therefore obliged to act in terms of the Karar. The defence of Ravi and Srinivasan
based on Ex.R-59 and R-60 should not, in the circumstances, have been accepted by the
Division Bench. Having regard to the nature of the shareholding, on the basis of the law as
enunciated by the Federal Court and Privy Council in the decisions noted above, it must be
held that the Karar was specifically performable.

Public Company Cases

Pushpa Katoch
Decision
ruled that even if a restrictive clause such as the right of first refusal was incorporated in the
articles of association, a shareholder cannot be restricted from transferring his or her shares as
section 3A of the Companies Act states that “the shares or debentures and any interest therein
of a company shall be freely transferable” in a public listed company.

Further, section 9 of the Companies Act says that any provision in a company’s articles of
association that contradicts the Companies Act shall be held to be invalid.

Messer Holdings Limited v. Shyam Madanmohan Ruia

Facts
➢ Agreement I : Share Purchase and Cooperation Agreement (1995)
Messer Griesham GmBH (MGG), a subsidiary of a German Company, is engaged in the
business of providing industrial gases worldwide. MGG bought 30% equity shares of Goyal
Gases Ltd (‘GGL’). Later they increased their shareholding to 49%. Agreement contained non-
competition clause.

➢ Agreement II : Share Purchase Agreement (1997)

Bombay Oxygen Ltd. (BOCL), whose majority shareholders is the Ruia Family, is also
engaged in the business of providing industrial gases. MGG is trying to tap the Indian industrial
gases market. Pursuant to this agreement – (1) the Ruia family will transfer 45,000 shares of
BOCL to MGG, (2) since BOCL is a public listed company, the Ruia family will allow MGG
to purchase 30,000 shares of BOCL from the public, (3) the Ruia family shall have a right-of-
first-refusal (ROFR, Clause 6.1), in case MGG decided to sell the shares it held in BOCL.

Ruia family was under an impression that pursuant to this transaction, MGG will control
BOCL.

➢ Agreement III : MGG and GGL (2000)

When MGG made public announcement about acquiring BOCL’s shares, GGL protested
against this transaction. They agreed that 50,000 shares will be kept by GGL and 25001 shares

12
Prepared by Ruby Panchal (Lecturer, JGLS)

will be in name of MGG. When this Agreement III came in knowledge of RUIAS, they
proceeded to terminate their agreement with MGG. MGG, in turn, terminated Agreement III
with GGL and proceeded to acquire share in its own name.

• SUIT I: GGL filed suit against MGG for violation of non-compete clause in
Agreement I. After rounds of litigation, both parties obtained consent award
pursuant to which they incorporated Messers Holding Limited (MHL) and decided
to transfer shares in its favour. MGG handed over share certificates to BOCL. The
suit was ultimately withdrawn by GGL.
• SUIT II: RUIAS filed suit against MGG and GGL seeking permanent injunction
against transfer of shares in favour of MGG and GGL and declaration that
Agreement II is voidable. (RUIAS did not know about GGL)
• SUIT III: RUIAS filed suit against MGG, GGL and BOCL seeking prohibition
against transfer of shares or acting as a beneficial owner of shares. Furthermore,
seeking recession of Agreement II.
• SUIT IV: MHL filed against BOCL, RUIAS and HDIL seeking declaration of
ownership of 75001 shares in its favour.
(granting development rights in respect of three pieces of immovable properties
admeasuring allegedly owned by BOCL)

Issues
Whether transfer of shares by MGG in favour of GGL or MHL is violative of Clause 6.1 of
Agreement with RUIAS?

Messer Holdings Limited v. Shyam Madanmohan Ruia

High Court
2010 159 CompCas 29 (Bom)
1. We looked at the legislative history of Sec 22A of Securities Contracts (Regulation) Act,
1956 and introduction of Section 111A in Companies Act 1956 via Depositories Act,
1996. The setting in which Section 111A is placed in part IV of the Act under heading
"transfer of shares and debentures", it is not a provision to curtail the rights of the
shareholders to enter into consensual arrangement with the purchaser of their specific
shares. The right to enter into consensual arrangement must prevail so long as it is in
conformity with the terms of Articles of Association and other provisions of the Act and
the Rules.
2. The expression "freely transferable" therein is in the context of the mandate against the
Board of Directors to register the transfer of specified shares of the members in the name
of the transferee, unless there is sufficient cause for not doing so. The said provision cannot
be construed to mean that it also intends to take away the right of the shareholder to enter
into consensual arrangement/agreement with the purchaser of their specific shares. The fact
that shares of public company can be subscribed and there is no prohibition for invitation
to the public to subscribe to shares, unlike in the case of private company, does not whittle
down the right of the shareholder of a public company to arrive at consensual agreement
which is otherwise in conformity with the extant regulations and the governing laws.

13
Prepared by Ruby Panchal (Lecturer, JGLS)

3. In the case of Madhusoodhanan, no doubt the Apex Court was dealing with the case of a
private company. However, at the same time, it has considered the general question
regarding the right of shareholder (not limited to shareholder of a private company) to enter
into such consensual arrangement which is not in violation of Articles of Association or
the provisions of Act or Rule.
4. Insofar as Section 9 of the Companies Act is concerned, it contemplates that provisions of
the Act shall have effect notwithstanding anything to the contrary contained in the
Memorandum or Articles of Association or in any agreement executed by it or in any
resolution passed by the company in General Meeting or by its Board of Directors, whether
the same be registered, executed or passed as the case may be, before or announcement of
the Act. Clause (a) thereof, which refers to any agreement executed, is in respect of an
agreement executed by the company; and not by the shareholder with third party-
which is a private consensual arrangement/agreement to which the company is not a
party.
5. As aforesaid, Section 111A is not a law dealing with the right of the shareholders to enter
into consensual arrangement/agreement by way of pledge, pre-emption/sale or otherwise.
6. That right of RUIAS have been clearly breached by the MGG by directly transferring the
shares in favour of MHL by Agreement dated 17th February, 2000. As a result, the said
transfer will not be binding on the plaintiffs and in fact in violation of the Agreement
between plaintiffs and defendant no.1 which was in force during the relevant period.

Messer Holdings Limited v. Shyam Madanmohan Ruia

Supreme court

[2016] 1355 SCL 253 (SC)

19.04.2016
1. Pursuant to settlement agreement dated 05.12.2002 between RUIAS and MGG, SUIT II
and III were liable to be dismissed.
2. The Court made it clear it was not deciding by this order, the existence or otherwise of any
right or its enforceability in the 75001 shares of BOCL in favour of either MHL of GGL.
It is open to them to establish their right in SUIT IV.
3. In light of long running round of litigations, the Court, therefore, deemed it appropriate to
impose exemplary costs quantified as Rs. 25,00,000/- to be paid by each parties GGL,
RUIAS and MGG. The said amount is to be paid to National Legal Services Authority as
compensation for the loss of judicial time of this country and the same ma be utilized by
the National Legal Services Authority to fund poor litigants to pursue their claims before
this Court in Deserving cases.

14
Prepared by Ruby Panchal (Lecturer, JGLS)

Bajaj Auto Ltd. vs. Western Maharashtra Development

Facts
1. Bajaj Auto Ltd. (Bajaj) and Western Maharashtra Development Company (Government
Undertaking) (WMDC) entered into Protocol Agreement pursuant to which Maharashtra
Scooters Ltd. (MSL) was incorporated. According to this Agreement, WMDC was interest
in availing experience and know-how of Bajaj in the manufacture of two wheeler scooters,
for the installation of plant and machinery and establishment of Scooter Project.
2. MSL is a public listed company with shares listed on BSE and NSE. Initial Authorized
Share Capital was Rs. 200 lakhs
a) Western – 27%
b) Bajaj – 24%
c) Public – 49%
3. Protocol Agreement was incorporated as part of Articles of Association of MSL.
4. Clause 7 of the Protocol Agreement
If either party desires to part with or transfer its shareholding or any part thereof in
the equity share capital of Maharashtra Scooters Limited, such party shall give first option
to the other party for the purchase of such shares at such rates as may be agreed to
between the parties or decided upon by arbitration. The party desiring to part with or
transfer its shares or any part thereof shall give to the other party a written notice of such
intention specifying the number of shares and the rate at which it is willing to sell the
same and if the other party within 30 days of the receipt of such notice, agrees, to such
proposal for purchase of such shares, the party giving the notice shall be bound to sell
and transfer such shares to the other party at the rate specified in such notice. If the
other party is willing to purchase the shares but considers the rate proposed to be too high
or unacceptable, it shall, within 30 days from the receipt of the notice, give written
intimation to the party giving notice of its intention to purchase the shares and the
question of rate shall be referred to arbitration of a sole arbitrator if agreed to by both
the parties or two arbitrators one to be appointed by each party in accordance with the
provisions of the Indian Arbitration act. If the party receiving a notice within 30 days of its
receipt, fails to accept the proposal for purchase of the shares, the party giving the notice
will be free to sell the shares to any other party but only at a rate not less than the rate
specified in such notice.
5. From 1986-2003, Bajaj repeatedly requested WMDC to divest its 27% shareholding in
favour of Bajaj.
6. Finally, on 09.04.2003, WMDC offered its shareholding to Bajaj at the rate of Rs. 232.20/-
share. wanted to buy-out WMDC in MSL. Vide letter dated 03.05.2003, Bajaj confirmed
its interest in buying the shares while rejected the offer price. After a round of
communications, on 06.06.2003, Bajaj placed counter offer of Rs. 75/- share/. Vide letter
dated 31.07.2003, WMDC rejected the counter offer and initiated arbitration.
7. Bajaj, in this case, primarily had an issue with the method of calculation adopted by
the Arbitral Tribunal. WMDC challenged jurisdiction of tribunal arguing that ROFR in
the Protocol Agreement was violative of Sec 111A r/w Sec 9 of Companies act 1956.
Hence, it rendered agreement null and void.
8. The Arbitrator rejected the challenge against jurisdiction and passed an award is
favour of the Bajaj directing Western to transfer 27% shares held in MSL and valued
shares at Rs. 151.63 per share (rate as on date 03.05.2003).

15
Prepared by Ruby Panchal (Lecturer, JGLS)

Issues
1. What should be the method for calculating or determining the price of shares?
2. Whether ROFR provision in the Protocol Agreement is violative of Sec 111A(2) r/w Sec 9
of Companies Act, 1956?

Decision

WMDCL v. Bajaj
High Court
Single Judge Bench
Appeal No. 153 of 2010,
15.02.2010
1. The Companies' Act, 1956 makes a clear distinction in its regard to the transferability
of shares. 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 by 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.
2. 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 the private, realm leads to specific
consequences and the imposition of obligations envisaged in law.
3. The consequence of Clause 7 of the Protocol Agreement, which has been incorporated in
the Articles of Association, is to preclude sale to or purchase by the members of the
public of the shares, which are offered for sale if the offer is accepted by the Petitioner,
or as the case may be, by the Respondent within thirty days of the receipt of the notice.
The effect of a clause of pre-emption is to impose a restriction on the free transferability of
the shares by subjecting the norms of transferability laid down in Section 111A to a pre-
emptive right created by the agreement between the parties. This is impermissible.
4. Relied on Pushpa Katoch v. Manu Maharani Hotels Ltd. 121 (2005) DLT 333 wherein
court noted that parties should have realized consequences of a public company. The
submission that Section 111A would not interdict "an agreement between
5. The submission that Sec 111A would not interdict ‘an agreement between particular
shareholders relating to the transfer of specified shares" is based on the judgment of the
Supreme Court in Madhusoodhanan (supra). In that case, as already noted earlier, the
Supreme Court noted that the Karar was an agreement between "particular
shareholders relating to the transfer of the specified shares". What is significant is
that the Company in that case was a private Company. The Supreme Court noted with
some emphasis that in the case of a private Company, the Articles of Association would
restrict the right of shareholders to transfer shares and prohibit invitation to the public to
subscribe for shares or debentures of the Company. The position in law of a Public
Company is materially different.
6. In essence, the submission of the Respondent is that the provisions of Section 111A
should 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.

16
Prepared by Ruby Panchal (Lecturer, JGLS)

7. The arbitral award on this aspect of the matter, is completely contrary to the
governing principles of law. The award is contrary to substantive provisions of law
and is patently illegal. The Arbitrator has ignored the express and specific provisions
of the Companies' Act, 1956; lost sight of the very concept of free transferability of the
shares of a Public Limited Company and failed to apply the provisions of Section 9 under
which overriding force is given to the Act notwithstanding anything to the contrary
contained in the Memorandum, Articles or agreement.

Bajaj v. WMDC
Division Bench
[2010] 102 SCL 239 (Bom)
15.02.2010
1. Bajaj argued that Sec 111A is not directed against and did not restrict shareholder’s
right to deal with his own shares and enter into consensual arrangements in relation
thereto by way of sale, pledge or pre-emption. It also placed heavy reliance of DB
decision in Messers Holdings.
2. WMDC argued that ROFR is the most common type of restriction found in private
companies, thus, qualifies as a restriction on free transferability. Clause 7 of Protocol
Agreement places (a) restriction on free transfer to any other person; (b) provision that
shares have to be offered to other party and price to be determined by arbitrator, in case of
no consensus.
3. The concept of free transferability would mean that a shareholder has the freedom to
transfer his shares on terms defined by him, provided the terms are consistent with the
Articles of Association as well as the Companies Act and Rules and other governing laws.
The fact that the shares of a public company can be subscribed to by the public, unlike in
the case of a private company, does not in any way whittle down the right of a shareholder
of a public company to arrive at a consensual agreement/arrangement (either by way of
sale, pledge, pre-emption etc.) with a third party or another shareholder, which is otherwise
in conformity with the Articles of Association, the Companies Act and Rules, and any other
governing laws.
4. The court relied on findings of Division Bench in Messers Holdings Ltd.
5. The counsel for Bajaj tried to distinguish facts from Messers as present case required
rate to determined by arbitration. The Court rejected this argument. The fact that the
price of the shares is to be determined by the process of arbitration is also a term of
the very same consensual arrangement which is not violative of the provisions of section
111A(2).
6. Clause 7 of the Protocol Agreement and which finds place in the Articles of MSL by
virtue of incorporation of the Protocol Agreement in its Articles, only sets out how the
Respondent and the Appellant are to deal with their respective shareholdings. It is
not a blanket pre-emption clause which binds all the shareholders of MSL to sell their
shares only to other members of MSL, which clauses are incorporated in the Articles
of Association of a private company.
7. We must also mention here that agreements like the one contained in clause 7 of the
Protocol Agreement before us, have now been expressly made a part of section 58 of the
Companies Act, 2013.

58. Refusal of registration and appeal against refusal.

…

17
Prepared by Ruby Panchal (Lecturer, JGLS)

(2) Without prejudice to sub-section (1), the securities or other interest of any member
in a public company shall be freely transferable:
Provided that any contract or arrangement between two or more persons in respect
of transfer of securities shall be enforceable as a contract.
…
8. In other words, what was implicit in the provisions of section 111A of the Companies Act,
1956 has now been made explicit in section 58 of the Companies Act, 2013.
9. The Appellant, for the purchase of the 30,85,712 equity shares of MSL, shall pay to the
Respondent a sum of Rs. 46,78,86,510.56/- together with simple interest @ 18% per annum
from 14th January, 2006 till payment.

WMDC v. Bajaj
Supreme Court SLP(C) Nos. 27194-27195/2015
09/01/2019
1. WMDC appealed against Division Bench decision by filing SLP before Supreme
Court. WMDC argued non-conclusion of contract as ‘rate’ and ‘date’ was not decided.
2. The Supreme Court acknowledged the long on-going litigation between the parties and
decided not to dwell intro question of method of calculating rates for the shares. The court
on 09.01.2017 directed WMDC to transfer the shares at original offer price of Rs. 232/-
per share along with interest rate of 18% per annum from the date of award. After
payment, the shares shall be transferred to Bajaj.

18
Prepared by Ruby Panchal (Lecturer, JGLS)

SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS)

REGULATIONS, 2020
1. SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 2020

• A Takeover is the purchase of one company (the Target) by another (the acquirer or
bidder). When an acquirer takes over the control of the target company, it is termed as
Takeover.
• A takeover is a situation in which, a company gets control of another company by
buying enough of its shares. When an acquirer acquires ‘substantial quantity of shares
or voting rights’ of the target company, it results into substantial acquisition of shares.
• Mergers and acquisitions provisions – 231-234
• SEBI Regulation – only on listed public companies

1.1. KEY TERMS

Applicability

Regulation 1(3)
(3) These regulations shall apply to direct and indirect acquisition of shares or voting rights
in, or control over target company[:]

[Provided that these regulations shall not apply to direct and indirect acquisition of shares or
voting rights in, or control over a company listed without making a public
issue, on the institutional trading platform of a recognised stock exchange.]

SEBI has allowed SMEs to list their specified securities on the new Institutional Trading
Platform ("ITP") of a recognised stock exchange without an IPO.

The existing regulations already allowed SMEs to list themselves on ITP without a public
issue.

Pursuant to the listing on the ITP, fund raising by SMEs allowed through private placement
or rights issue.

SEBI Takeover Code not applicable to direct and indirect acquisition of shares or voting
rights in, or control over, a company listed on the ITP.

The SME (Small and Medium Enterprise) platform of the Exchange is intended for small and
medium sized companies with high growth potential. The SME platform of
the Exchange shall be open for SMEs whose post issue paid up capital shall be less than or
equal to Rs. 25 crores.

19
Prepared by Ruby Panchal (Lecturer, JGLS)

NSE (Emerge)
BSE SME

Such SME’s can get listed on main board after some requirements.

1.1.1. Acquisition – Regulation 2(1)(b) of the Takeover Code – means, directly or indirectly,
acquiring or agreeing to acquire shares or voting rights in, or control over, a target company.

Regulation 2(1)(a) of the Takeover Code – Acquirer – means any person who, directly or
indirectly, acquires or agrees to acquire whether by himself, or through, or with persons acting
in concert with him, shares or voting rights in, or control over a target company.

• An acquirer can be a natural person, a corporate entity or any other legal entity.
• The definitions of ‘acquisition’ and ‘acquirer’ clarify that an agreement to acquire and an
actual acquisition are treated alike for the purposes of the Takeover Code. Accordingly,
all the obligations triggered by an acquisition are triggered from the date of agreement to
acquire.

• Direct Acquisition – is an acquirer directly acquiring shares / voting rights or control of the
target company.

• Indirect Acquisition – Regulation 5(1) of the Takeover Code – acquisition of shares or

voting rights in, or control over, any company or other entity, that would enable any
person and persons acting in concert with him to exercise or direct the exercise of such
percentage of voting rights in, or control over, a target company, the acquisition of
which would otherwise attract the obligation to make a public announcement of an open
offer for acquiring shares under these regulations, shall be considered as an indirect
acquisition of shares or voting rights in, or control over the target company.

o Indirect Acquisition deemed to be a Direct Acquisition – if the proportionate net asset

value or sales turnover or market capitalization of the indirectly acquired target
company, represented as a percentage respectively of the consolidated net asset value
or sales turnover or enterprise value of the directly acquired entity is in excess of 80%,
on the basis of the most recent audited annual financial statements.

‘Market Capitalization’ is the value of a company that is traded on the stock market,
calculated by multiplying the total number of shares by the present share price.

• In the informal guidance dated August 28, 2012 issued to Arch Pharmalabs Ltd., SEBI
has suggested that for the purposes of determination of indirect acquisition, the actual
control / shareholding that the acquirer is able to exercise in the indirectly acquired
company through the intermediary company will be considered. Mathematical calculation
of the proportionate shareholding that the acquirer may hold in the indirectly acquired
company through the intermediary company shall not be relevant for determination of
indirect acquisition. (only gives idea, not conclusive) – change in acquisitional ownership
is only resultant not a necessity.

1.1.2. Shares – Regulation 2(1)(v) of the Takeover Code – means shares in the equity share capital of
a target company carrying voting rights, and includes any security which entitles the holder
thereof to exercise voting rights;

20
Prepared by Ruby Panchal (Lecturer, JGLS)

Explanation – For the purpose of this clause shares will include all depository receipts (ADR,
GDR) carrying an entitlement to exercise voting rights in the target company;

The emphasis of the Takeover Code is on the acquisition of ‘voting rights’ attached with the
shares. Consequently, the acquisition of ‘preference shares’ may not attract the same
obligations as that of the acquisition of shares under the Takeover Code

Since the definition of shares under the 1997 Code also included ‘convertible securities’ it was
not clear whether the open offer and disclosure obligations would be triggered at the time of
acquisition of convertible instruments or at the time of conversion of such instruments into
equity shares. SEBI and SAT had dealt with this question in many cases and had held that
the disclosure obligation shall be triggered at the time of acquisition of convertible
instruments and the open offer obligation shall be triggered on conversion of the
convertible instruments into equity shares.

Accordingly, under Regulation 28(2) of the Takeover Code it is stated that ‘For the
purposes of this Chapter [Chapter 5], the acquisition and holding of any convertible
security shall also be regarded as shares, and disclosures of such acquisitions and holdings
shall be made accordingly.’

However, this clarification applies only to disclosure obligation and the open offer obligation
shall be triggered only upon conversion of the convertible securities into shares with voting
rights. A stricter standard is applicable to disclosure obligation when compared to open offer
obligation because it is critical to ensure transparency in the interests held by each of the
stakeholders in the target company.

SO acquirer and PAC is required to make disclosure when acquiring these convertible securities
and they are required to make open offer at the time of conversion.

1.1.3. Persons acting in concert (PAC) – Regulation 2(1)(q)(1) of the Takeover Code – persons who,
with a common objective or purpose of acquisition of shares or voting rights in, or
exercising control over a target company, pursuant to an agreement or understanding,
formal or informal, directly or indirectly co-operate for acquisition of shares or voting
rights in, or exercise of control over the target company.

Thus, the prerequisites for constituting PACs are as follows:

(i) Two or more persons must share a common objective or purpose;

(ii) That common objective or purpose must be for acquisition of shares or voting rights in,
or exercising control over the target company;

(iii) The persons must co-operate with each other for acquisition of shares or voting rights in,
or exercise of control over the target company; and

(iv) Such cooperation must be pursuant to an agreement or understanding, formal or informal.

Regulation 2(1)(q)(2) of the Takeover Code prescribes certain categories of persons / entities
that are presumed to be PACs unless the contrary is established.

It is a well-settled legal principle that the question of whether or not two persons are PACs is
a question of fact, to be answered after evaluating the facts and circumstances of each case.

21
Prepared by Ruby Panchal (Lecturer, JGLS)

All the PACs shall be jointly and severally liable for the fulfilment of all the obligations under
the Takeover Code inter alia including the disclosure and open offer obligations. Even though
the primary liability for fulfilment of the obligations rest with the acquirer, the regulators can
proceed against the PAC independently or jointly with acquirer in case of any violation or non-
compliance.

1.1.4. Control – Regulation 2(1)(e) of the Takeover Code – includes the right to appoint majority
of the directors or to control the management or policy decisions exercisable by a person or
persons acting individually or in concert, directly or indirectly, including by virtue of their
shareholding or management rights or shareholders agreements or voting agreements or
in any other manner:

Provided that a director or officer of a target company shall not be considered to be in control
over such target company, merely by virtue of holding such position

The debate on whether SAT has narrowed down the definition of “control” order in the matter
of Subhkam Ventures India Private Limited v. SEBI (Appeal No. 8 of 2009 decided on
15.01.2010) by clarifying that veto rights (right to veto certain actions proposed to be
undertaken by the company) do not constitute ‘control’ under the 1997 Code is still very
much alive. Pursuant to the controversial SAT ruling, SEBI had appealed to the Supreme Court
of India against this SAT order and the matter was sub judice when the Takeover Code was
being finalized by SEBI.

1.1.5. Promoters – The Takeover Code has put an end to this ambiguity in cross referencing the
definition of ‘promoter’ to that as defined under the SEBI (Issue of Capital and Disclosure
Requirements) Regulations 2009 (Same as ICDR)

1.2. DISCLOSURE OBLIGATION

1.2.1. The guiding principle of the Takeover Code is the protection of the interests of the public
shareholders of a company. The public stakeholders do not generally participate in the affairs
of the company and therefore, rely on the promoters or controlling shareholders to manage
the company in, their best interests and the highest standards of corporate governance.

To that extent, the change in shareholding, voting rights or control of the target company
will have a bearing on the interests of the public shareholders. It is important that the target
company and the shareholders are not taken by surprise by the shareholding / voting rights
of an acquirer and its PAC. Further, the acquisition of shares / voting rights and the price of
such acquisition are relevant for determining the minimum offer price for an open offer.

22
Prepared by Ruby Panchal (Lecturer, JGLS)

1.2.2. Acquisition based disclosures

REGULATION MADE TRIGGER TIMING MADE TO

BY
29(1) Acquirer Acquirer + PAC acquiring 5% or 2 working days of Stock exchange
more shares of the target the receipt of where the shares
company intimation of are listed and the
allotment of target company.
29(2) Acquisition or disposal of shares shares, or the
or voting rights, if such change
acquisition of
results in shareholding falling shares or voting
below 5%, if there has been rights
change in shareholding since last
disclosure and such change
exceeds 2% of total shareholding
or voting rights in the target
company by the Acquirer + PAC
holding 5% or more shares of the
target company.

1.2.3. Continual disclosure

REGULATION MADE TRIGGER TIMING MADE TO

BY
30(1) Acquirer Any Person + PAC holding more Within 7 working Stock exchange
than 25% shares or voting rights days from the where the shares
in the target to disclose their financial year are listed and the
aggregate shareholding and ending 31st target company.
voting rights March every year
30(2) Promoter Promoters + PAC to disclose
their aggregate shareholding and
voting rights

1.2.4. Disclosure of encumbered shares

REGULATION MADE TRIGGER TIMING MADE TO

BY
31(1) Promoter Promoter + PAC pledging or Within 7 working Stock exchange
creating encumbrance on the days from where the shares
shares of the target company creation, are listed and the
invocation or target company.
31(2) Invocation or release of the release of pledge
pledge or encumbrance on the
shares of the target company

1.3. OPEN OFFER TRIGGERS

1.3.1. Here, Takeover means acquisitions of shares or voting rights in a listed company for the
objective to have control over such company. The person who acquires shares or voting rights
is known as acquirer and the listed company whose shares are being acquired is known as Target
Company. As per the Takeover Code, 2011, an acquirer is required to give mandatory/voluntary
open offer to the shareholders of the Target Company before increasing its shareholding of the

23
Prepared by Ruby Panchal (Lecturer, JGLS)

Target Company before increasing its shareholding more than triggering point (i.e. equal to
or more than 25% of shares or voting rights).

The process of such open offer is more or less like a buyback but herein the acquirer acquires
shares and makes payment to the existing shareholders of the Target Company.

1.3.2. It is only fair and equitable that the public stakeholders who have invested in the company,
relying on the management or the promoters of the company are given an opportunity to
withdraw their investments when there is a change in the management or promoter
shareholding.

To protect the economic interests of the exiting shareholders, it is mandated that the mandatory
open offer should be at the best possible terms for the shareholders. To that extent, the terms of
the mandatory offer inter alia including timing, price discovery mechanism, minimum offer size
etc. are prescribed under the Takeover Code. While the mandatory open offer is a critical legal
obligation, the Takeover Code also permits voluntary open offers, at the absolute option of the
acquirer.

• What is an Open Offer? An open offer is an offer made by the acquirer to the
shareholders of the target company inviting them to tender their shares in the
target company at a particular price. The primary purpose of an open offer is
to provide an exit option to the shareholders of the target company on account
of the change in control or substantial acquisition of shares, occurring in the
target company.
• Under which situations is an open offer required to be made by an
acquirer?
If an acquirer has agreed to acquire or acquired control over a target company
or shares or voting rights in a target company which would be in excess of the
threshold limits, then the acquirer is required to make an open offer to
shareholders of the target company.
• How is the maximum permissible non-public shareholding in a listed
company defined?
Maximum permissible non-public shareholding is derived based on the
minimum public shareholding requirement under the Securities Contracts
(Regulations) Rules 1957 (“SCRR”). Rule 19A of SCRR requires all listed
companies (other than public sector companies) to maintain public
shareholding of at least 25% of share capital of the company. Thus by
deduction, the maximum number of shares which can be held by promoters i.e.
Maximum permissible non-public shareholding) in a listed companies

S. MANDATORY VOLUNTARY COMPETING

NO. OFFER OFFER OFFER
Not in syllabus Not in syllabus
1 Eligibility of the Compulsory offer to be Shareholder in the target Voluntary offer by any
offeror made by any person company holding shares person other than a
triggering the trigger / voting rights in excess shareholder holding
events mentioned below. of 25% but not more more than 25% shares /
Can be triggered by than the maximum voting rights in the
direct or indirect public shareholding. target company.
acquisitions.

24
Prepared by Ruby Panchal (Lecturer, JGLS)

S. MANDATORY VOLUNTARY COMPETING

NO. OFFER OFFER OFFER
Not in syllabus Not in syllabus
2 Trigger events Acquisition of shares or No trigger event. No trigger event.
voting rights entitling
the acquirer and PAC to
As the name suggests, As the name suggests,
exercise 25% or more of
the offer is made at the the offer is made at the
voting rights in the
absolute discretion of absolute discretion of
target company;
the shareholder. the acquirer.
(Regulation 3(1) of the
Takeover Code) or

Acquisition of additional
shares or voting rights
entitling the acquirer and
PAC to exercise more
than 5% of voting rights
in a financial year by an
acquirer who together
with PAC already holds
25% or more but less
than 75% of the capital
in the target company;
(Regulation 3(2) of the
Takeover Code) or

Acquisition of control
over the target company.
(Regulation 4 of the
Takeover Code)
3 Size of offer Minimum: 26% of the Minimum: 10% of the Minimum: 26% of the
total shares of the target total shares of the target total shares of the target
company. company.
Maximum: Entire share
Maximum: The Maximum: The capital of the target
maximum offer size is maximum offer size is company.
linked to maximum linked to maximum
permissible non-public permissible non-public
shareholding permitted shareholding permitted
under Securities under Securities
Contracts (Regulations) Contracts (Regulations)
Rules, 1957. Rules, 1957.
Regulation 7 of the Takeover Code – Offer Size – (4) In the event the shares accepted in the open offer were
such that the shareholding of the acquirer taken together with persons acting in concert with him pursuant to
completion of the open offer results in their shareholding exceeding the maximum permissible non-public
shareholding, the acquirer shall be required to bring down the non-public shareholding to the level
specified and within the time permitted under Securities Contract (Regulation) Rules, 1957.

(5) The acquirer whose shareholding exceeds the maximum permissible non-public shareholding, pursuant to
an open offer under these regulations, shall not be eligible to make a voluntary delisting offer under the
Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009, unless a period of
twelve months has elapsed from the date of the completion of the offer period.
4 Revision of offer An acquirer may make Acquirer is permitted to Though specific
upward revisions to the increase the offer size if clarification has not

25
Prepared by Ruby Panchal (Lecturer, JGLS)

S. MANDATORY VOLUNTARY COMPETING

NO. OFFER OFFER OFFER
Not in syllabus Not in syllabus
size number of shares sought there is a competing been provided by SEBI,
to be acquired under the offer, within a period of this should be same as
open offer, at any time fifteen working days in case of mandatory
prior to the from the public offer.
commencement of the announcement of a
last 3 working days competing offer.
before the (Regulation 7(2) of the
commencement of the Takeover Code)
tendering period.
(Regulation 18(4) of the
If there is no competing
Takeover Code)
offer acquirer is
permitted to increase the
offer size at any time
prior to the
commencement of the
last 3 working days
before the
commencement of the
tendering period.
(Regulation 18(4) of
the Takeover Code)

If the offer size of a

voluntary offer is
increased on account of
a competing offer then
the voluntary offer post
such increase shall be
deemed to be a
mandatory offer under
56 Regulation 3(2).
(Regulation 7(3) of the
Takeover Code)

Can a person holding less than 25% of the voting rights/ shares in a target company, make an offer?
Yes, any person holding less than 25% of shares/ voting rights in a target company can make an open offer provided the open offer is for a minimum of 26% of

the share capital of the company.

Voluntary offer by a person holding less than 25% Voluntary offer by a person holding more than 25%
Minimum offer size of 26%. Minimum offer size of 10%.

What is the role of the target company in the open offer process?

• Once a PA is made, the board of directors of the Target Company is expected to ensure
that the business of the target company is conducted in the ordinary course. Alienation of

26
Prepared by Ruby Panchal (Lecturer, JGLS)

material assets, material borrowings, issue of any authorized securities,

announcement of a buy- back offer etc. is not permitted, unless authorized by
shareholders by way of a special resolution by postal ballot.
• The target company shall furnish to the acquirer within two working days from the
identified date, a list of shareholders and a list of persons whose applications, if any, for
registration of transfer of shares, in case of physical shares, are pending with the target
company.
• After closure of the open offer, the target company is required to provide assistance to the
acquirer in verification of the shares tendered for acceptance under the open offer, in case
of physical shares.
• Upon receipt of the detailed public statement, the board of directors of the target company
shall constitute a committee of independent directors to provide reasoned recommendations
on such open offer, and the target company shall publish such recommendations and such
committee shall be entitled to seek external professional advice at the expense of the target
company. The recommendations of the Independent Directors are published in the same
newspaper where the Detailed Public Statement is published by the acquirer and are
published at least 2 working days before opening of the offer. The recommendation will
also be sent to SEBI, Stock Exchanges and the Manager to the offer.

Can an acquirer withdraw the open offer once made?

An open offer once made cannot be withdrawn except in the following circumstances:
• Statutory approvals required for the open offer or for effecting the acquisitions attracting the
obligation to make an open offer have been refused subject to such requirement for approvals
having been specifically disclosed in the DPS and the letter of offer;
• Any condition stipulated in the SPA attracting the obligation to make the open offer is not met for
reasons outside the reasonable control of the acquirer, subject to such conditions having been
specifically disclosed in the DPS and the letter of offer;
• Such circumstances which in the opinion of SEBI merit withdrawal of open offer.
• Sole acquirer being a natural person has died;

27