Free transfer of shares: Approach under 2013 act

Joint ventures, particularly between a foreign party and an Indian party, are ordinarily founded on the understanding that if one party wants to exit, it will offer its share in the joint venture to the other party before selling to a third party. This could be embodied in a lock-in period, right of first offer/refusal, or options of various kinds.

While many foreign parties consider such pre-emption rights as a given, Indian law until recently did not expressly permit such pre-emption rights in the case of public companies, listed or unlisted. The Companies Act, 2013 (2013 act), has brought some respite regarding validity of pre-emption rights in relation to public companies, but certain issues remain.

Background

Section 111A of the Companies Act, 1956 (1956 act), provides that shares of a public company must be freely transferable. Courts have interpreted section 111A in different ways with conflicting outcomes. A Bombay High Court division bench, in Messer Holdings v Shyam Madanmohan Ruia (2010), seems to have settled the position that certain contractual restrictions do not impinge the free transferability requirement, after overruling an earlier decision in Western Maharashtra Development Corporation Ltd v Bajaj Auto Limited (2010). However, a subsequent decision in Jer Rutton Kavasmaneck v Gharda Chemicals Limited (2012) muddled the position by differentiating between restrictions incorporated in articles of association and those not so incorporated. Additionally, some of these decisions have been appealed in the Supreme Court of India.

In summary, while most joint ventures through public companies in India have transfer restrictions, the permissibility of such restrictions still was not free from all doubt.

Amit Kumar is a partner and Ambarish is a senior associate at Amarchand & Mangaldas & Suresh A Shroff & Co. The views expressed in this article are those of the authors and do not reflect the position of the firm.