Restriction on Transfer of Shares not listed in the Stock Exchange

The Apex Court in the matter of Bhagwati Developers Private Limited settled a controversy regarding application of Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as Regulation Act) to the transfer of shares of a public limited company.

The Apex Court in the matter of Bhagwati Developers Private Limited settled a controversy regarding application of Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as Regulation Act) to the transfer of shares of a public limited company. The question before the Apex Court was whether the Regulation Act would be applicable to the transfer of shares of a public limited company, which are admittedly not listed on any stock exchange.

It was held that the shares of public limited company though not listed in the stock exchange come within the definition of securities and hence the provisions of Regulation Act would apply. A share would be considered a security under the Regulation Act if the share is saleable – in other words is capable of being bought and sold. The size of the market is of no consequence. The number of persons willing to purchase such shares would not be decisive. One cannot lose sight of the fact that there may not be any purchaser even for the listed shares. What is required is free transferability.

The Regulation Act was enacted to prevent “undesirable transaction in securities by regulating business of dealing therein” and from that one can infer that it was to apply only to the transfer of shares on the stock exchange. This Judgment overruled the view of the Bombay High Court in Broke Bond India Limited case that Regulation Act was intended to govern transactions in the stock exchange.
Thus no person can enter into any contract for the sale or purchase of the shares of a public limited company EXCEPT if it falls within the definition of a “spot delivery contract”. Though not clearly stated in the Judgment, it is clear that these restrictions do not apply to shares of a private limited company.

A transaction to qualify to be a “spot delivery contract”, the contract must contain clause for actual delivery of securities and the payment of price thereof either on the same day as the date of contract or on the next day.