A private limited company is by the act, in terms ofsection 3 required among other things to restrict the right to transfer itsshares. But in a public limited company shares are freely transferable exceptwhere the company holds a lien on the said shares.
It is generally the practiceto include a provision in the articles reserving the right with the board ofdirectors, as its absolute and uncontrolled discretion, to decline to registerany transfer of shares without assigning any reason. Board to exercise its discretion bonafide There were several cases where it was held that theaction on the part of the directors to refuse registration of transfers was onwrong principles and was tainted with an oblique motive. Ajay Publishers LtdBangalore. The court held that though the articles may give the directors anabsolute and uncontrolled discretion to refuse registration of transfer, thisis a fiduciary power and must be exercised bona fide in the interest of thecompany. Section 22A of securities contracts (regulation)act, 1956 deleted With the enactment of the depositories act 1996,which was passed by the parliament during july 1996 and which was deemed tohave come into effect on 20-09-1995, section 22A of the securities contracts(regulation) act, 1956 has been deleted.
This said section 22A was speciallyintroduced in order to promote the free transferability of the shares in apublic limited company, particularly in a listed company and companies wereallowed to refuse registration of shares only on certain specified grounds andto seek the direction of the erstwhile company law board. Provision for free transferabilityre-introduced The above procedure under erstwhile section 22A ofSCRA, 1956 will no longer hold gold. Instead, along with the enactment of the depository’sact 1956, inter alia, a new section 111A has been added to the company’s act1956 which has amended by the depository’s related laws. Transfer procedure of section 108 notapplicable under the depositories system By amendment to section 108 of the act, it is nowprovided in sub-section (3) therein that the provisions of section 108 shallnot apply to transfer of securities under the depositories system. Accordingly,the instrument of transfer and the connected formalities in section 108 do notapply to the transfer of securities held under the system of depositories.
Existing section 111 made applicable onlyto private companiesIncidentally it may be noted that at the time of theenactment of the depositories act 1996, an amendment has been made to section111 by sub-section (14) so as to make it clear that the said provision wouldonly apply to a private limited company and erstwhile deemed public limitedcompany by virtue of section 43A. Automatic transferability of shares and debenturesunder depositories act 1996One of the significant advantages in thedepositories system is that once the securities of a company are held in adepository, the registration of transfer of a security is automatically carriedout by the depository and there is no possibility of the issuer company transferringwith the registration of transfer of a security.