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On 15 July, 2013, a single judge bench of the Supreme Court of India delivered its judgment in the case of Bhagwati Developers Private Limited (“Bhagwati“) versus Peerless General Finance & Investment Company Limited (“Peerless“)[1]. The judgment deals with the applicability of the Securities Contract Regulation Act, 1956 (“SCRA“) to unlisted public companies and whether payment of an amount pursuant to a settlement agreement in relation to a previous agreement to transfer shares constitutes a spot delivery contract.

Brief background

In 1986, Bhagwati advanced a loan to Mr. Tuhin Ghosh (”Tuhin”) to purchase 3,530 equity shares of Peerless. In 1987, in lieu of repayment of the loan, Tuhin agreed to transfer the shares of Peerless acquired by him to Bhagwati. However, as the transfer deeds were not executed properly, the shares were not transferred to Bhagwati. Subsequently, Peerless declared two rounds of bonus shares. Pursuant to the bonus issues, Tuhin became the shareholder of 14,120 shares of Peerless. Tuhin declined to transfer any of the shares to Bhagwati and consequently in 1991, Bhagwati instituted a suit against Tuhin. In 1994, during the pendency of the suit, Tuhin and Bhagwati entered into a settlement agreement (”Settlement Agreement”), in terms of which, (i) Tuhin agreed to transfer the 14,120 shares of Peerless to Bhagwati and (ii) Bhagwati agreed to pay Rs.10 lakh to Tuhin, allowed Tuhin to retain the dividend on the shares of Peerless upto 1989-1990. Additionally, a compromise decree was passed by the trial court incorporating the terms of the Settlement Agreement. Subsequently, Bhagwati approached Peerless to transfer the shares to it. However, Peerless refused to transfer the shares to Bhagwati on the ground that the transfer did not constitute a ‘spot delivery contract’. Aggrieved, Bhagwati approached the Company Law Board and the Calcutta High Court. Since the Company Law Board and the High Court rejected Bhagwati’s plea, it filed an appeal before the Supreme Court.

Applicability of SCRA to an unlisted public company

As mentioned above, Peerless refused to transfer the shares on the ground that such transfer is in violation of SCRA. The argument raised by Bhagwati was that since Peerless is an   unlisted public company, SCRA would not be applicable to it.

The SCRA regulates the business of dealing in securities. Therefore in order to test the applicability of SCRA, it is important to establish that shares of Peerless fall within the scope of the definition of “securities” under SCRA. Securities include- “(i) shares, scrips stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate.”[2]

From the definition above, it is clear that in order to be covered within the purview of “securities” under SCRA, shares of Peerless must be marketable. In this regard in the instant case, the Supreme Court has equated the word “marketable” with “saleable”. Further, it has elucidated that marketable means something which is capable of being bought and sold in a market. In determining marketability, the size of the market and the number of willing purchasers is irrelevant.

With regards to the interpretation of “securities” and the applicability of SCRA, a conflicting viewpoint was taken by the Bombay and Calcutta High Courts. According to the Bombay High Court, in Dahiben Umedhbhai Patel case[3] and Brooke Bond India case[4], shares of a public company are covered within the definition of “securities” if they are marketable and in order to be marketable they must be listed on the stock exchange. However, a contrary view was held by the Calcutta High Court in B.K Holdings case[5] and East Indian Produce case[6]. Finally, the conflict in the viewpoint of the High Courts was resolved by the apex court judgment in Naresh K. Aggarwala and Co. v. Canbank Financial Services Limited[7]. In this judgment, while determining the applicability of a circular issued by the Delhi Stock Exchange, the Supreme Court interpreted the definition of “securities” under SCRA. The Hon’ble court observed that SCRA does not create a distinction between listed and unlisted securities. Therefore, the Supreme Court placed reliance on its precedent in Bhagwati v. Peerless.

Additionally, in the Sahara v. SEBI[8] case it has been held that the definition of “securities” under SCRA is inclusive and covers all “marketable securities”, whether listed or not. Clearly, the Supreme Court’s judgment in Bhagwati v. Peerless reiterates the settled position of law on the applicability of SCRA to unlisted public companies.

Spot delivery contracts

Pursuant to the Securities and Exchange Board of India (“the Board“) Notification numbered SO 184(E) dated 1 March, 2000, transfer of securities other than by way of a spot delivery contract is prohibited except with the permission of the Board. A ‘spot delivery contract’[9] means a contract which provides for actual delivery of securities and the payment of price either on the same day as the contract or on the subsequent day.

In the instant case, Peerless refused to transfer the shares to Bhagwati on the ground that such a transfer does not constitute a spot delivery contract.

The Supreme Court held that the sum of Rs. 10 lakhs paid to Tuhin in 1994 as consideration for settling the suit was, in fact, part of consideration for the shares transferred by Tuhin to Bhagwati in 1987. The court reasoned that since there was a gap of 7 years between the share transfer and the payment of part consideration, the transaction was not a spot delivery contract. Hence, the transfer of shares to Bhagwati was in violation of SCRA.

The reasoning given by the Supreme Court, with respect to the second issue, appears to be flawed. Under the Indian law of contracts, an act done by a person at another person’s request, without any contemporaneous promise from the latter, may be a consideration for a subsequent promise from the latter.[10] For example, a power of attorney given by a company to a bank enabling it to sell off its properties with the bank was held to be good consideration relatable to the loan advanced earlier by the bank.[11] Similarly in Bhagwati v. Peerless, the loan given by Bhagwati in 1986 was consideration for the subsequent transfer of 3,530 shares by Tuhin in 1987. With the share transfer done by Tuhin in 1987 for the discharge of the loan, the agreement of 1986-1987 had concluded. Further, Bhagwati paid Rs. 10 lakhs to Tuhin in 1994 to settle the dispute. Clearly, the payment of Rs. 10 lakhs to Tuhin cannot be deemed to be part of consideration for the share transfer done by Tuhin in 1987. It is evident that Rs. 10 lakhs was consideration for the transfer of 14,120 shares to Bhagwati in terms of the Settlement Agreement. The Settlement Agreement and the agreement of 1986-1987 are two separate agreements and cannot be linked to each other to determine whether the present case involves a spot delivery contract or not. Therefore the reasoning adopted by the Court, in determining whether the transfer of securities in the instant case constitutes a spot delivery contract, seems distorted.

To conclude, the judgment is in line with its precedent pertaining to the conclusion that SCRA is applicable to the listed as well as the unlisted public companies. However it is the reasoning, with regards to the spot delivery contract issue, that appears to be erroneous.

Saumya Sharma & Roshni Chaddha

[2] Sub-clause (i) of clause (h) of section 2 of SCRA.

[3] Dahiben Umedhbhai Patel and Ors. v. Norman James Hamilton & Ors. (1985) 57 Com. Cases 700 (BHC).

[4] Brooke Bond India Ltd. v. U.B Ltd. & Ors, (1994) 79 Com. Cases 346 (BHC).

[5] BK Holdings (P) Ltd. v. Prem Chand Jute Mills & Ors. (!983) 53 Com. Cases 367 (Cal.)

[6] East Indian Produce Ltd. v. Naresh Acharya Bhaduri & Ors, 1998 64 Com. Cases 259 (Cal)

[7] AIR 2010 SC 2722.

[8] Sahara India Real Estate Corporation Ltd. and Ors. v. Securities and Exchange Board of India and  Anr., (2012) 8 SCALE 101.

[9] Defined under section 2 (i) of SCRA.

[10] Fazaladdin Mandai v. Panchanan Das,  AIR 1957 Cal 92.

[11] Board of Revenue Madras v. Annamalai & Company , AIR 1968 Mad 50 (FB).


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