Friday, March 11, 2011

Applicability of Securities Contracts (Regulation) Act, 1956 to Unlisted Public Companies

The object of the Securities Contracts (Regulation) Act, 1956 is stated as, “An Act to prevent undesirable transactions in securities by regulating the business of dealing therein, by providing for certain other matters connected therewith.”

Sub-clause (i) of Clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956 defines the term “Securities” as follows:

“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;”

In Sudhir Shantilal Mehta vs. Central Bureau of Investigation [2010]155CompCas339(SC), commenting on the scope of securities encompassed by the definition of the term in Section 2(h) of the Securities Contracts (Regulation) Act, 1956, the Hon’ble Supreme Court of India, at paragraphs 41 and 42, observed as follows:

"41. The definition of `securities' is an inclusive one. It is not exhaustive. It takes within its purview not only the matters specified therein but also all other types of securities as commonly understood. The term `securities', thus, should be given an expansive meaning.

42. In State of Bombay v. The Hospital Mazdoor Sabha AIR 1960 SC 610 this Court while interpreting the definition of "industry" as contained in Section 2(j) of the Industrial Disputes Act, 1947 held as under:

It is obvious that the words used in an inclusive definition denote extension and cannot be treated as restricted in any sense. (Vide : "Stroud's Judicial Dictionary", 5th Edition, Vol. 3 at 1263). Where we are dealing with an inclusive definition it would be inappropriate to put a restrictive interpretation upon terms of wider denotation.  (See also Regional Director, Employees' State Insurance Corporation v. High Land Coffee Works of P.F.X. Saldanha and Sons AIR 1992 SC 129."

The Hon'ble Supreme Court of India in  Naresh K. Aggarwala and Co. vs. Canbank Financial Services Limited AIR 2010 SC 2722, while referring to the definition of the term “securities” defined under the SCR Act and the applicability of a circular issued by the Delhi Stock Exchange Limited, observed the following:

“20. The contention that the circular did not apply to unlisted securities was duly considered and rejected by the Special Court. The Special Court thoroughly considered the term `securities' as defined in Section 2(h) of the Act.  It reads as under:- 

“2(h) Securities include –  

Perusal of the above quoted definition shows that it does not make any distinction between listed securities and  unlisted securities and therefore it is clear that the Circular will apply to the securities which are not listed on the Stock Exchange.”

In Dahiben Umedbhai Patel v. Norman James Hamilton (1985) 57 Comp Cas 700 (Bom), the Division Bench of Bombay High Court while interpreting the above definition of ‘Securities’ held as follows:

“Now, it is difficult for us to accept the argument of the appellants that the definition of "securities" must be so read that the words "other marketable securities of a like nature" were not intended to indicate an element of marketability in so far as the preceding categories were concerned. A reading of the inclusive part of the definition shows that the Legislature has enumerated different kinds of securities and by way of a residuary clause used the words "or other marketable securities of a like nature". The use of these words was clearly intended to mean that the earlier categories of securities had to be marketable and any other securities of "like nature", that is to say, like those which were categorized or enumerated earlier were also to be marketable before they could be held to fall within the definition of "securities".”

The Division Bench further held that, “the definition of "securities" will only take in shares of a public limited company notwithstanding the use of the words "any incorporated company or other body corporate" in the definition.”

In B.K. Holdings (P) Ltd. v. Prem Chand Jute Mills (1983) 53 Comp Cas 367 (Cal), the learned Single Judge while interpreting the expression “marketable securities” held as follows: “I see no warrant whatsoever for limiting the expression “marketable securities” only to those securities which are quoted in the stock exchange.”

In Mysore Fruit Products Ltd. v. The Custodian (2005) 107 BOMLR 955, the learned Single Judge observed and held as follows:

“If one goes through the provisions of the Act, the scheme of the Act makes it clear that no restrictive interpretation can be placed on the terms used in the Act. If the provisions of the Act are looked at, it is clear that it relates not merely to securities which are listed but it also relates to securities which may not be listed in any stock exchange. All that is required is that there must be “marketability”. In my view, it cannot be said that any security which is not listed on any recognized stock exchange is not “marketable”."

As laid down by the Single Judge and the Division Bench (in the judgments set out above) “marketability” implies ease of selling and includes any security which is capable of being sold in the market. This does not mean that it must be sold in the market. “ In view of the above decisions, the legal position as on date is that the provisions of the Securities Contracts (Regulation) Act, 1956 are applicable to the Unlisted Public Companies as well.
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