How Free is ‘Free Transferability’ of Shares in Liberalized India! – An Analysis of the Judicial Response

Provisions of the Companies Act in India provide that any restriction on free transferability of shares, not contained in a company’s articles, will not be binding on the company. This article examines how the courts in India have attached an unnatural meaning to these provisions. As will be explained below, the courts have held that not only does such restrictions do not bind the company, but also does not bind private parties from imposing any such restrictions over the shares held by them. The effect of such an interpretation is that a person can enter into an agreement with another not to sell his share to a third person without offering to the other (otherwise known as the ‘right of first refusal’) and yet, can freely breach the agreement, as such an agreement is not enforceable if it has not been incorporated into the articles of the company. At a time when India is aggressively pursuing foreign investments, such an erroneous reading of the law will have serious repercussions in the business arena particularly in the growth of joint ventures in India. However in a welcome move the Bombay High Court has delivered a judgment that differs from the earlier stated position of the courts. The author explains why the judgment should be treated as stating the correct understanding of the law in this regard and urges the need for the Supreme Court and the legislature to bring more clarity in the law