1. There are three appeals under Section 111 of the Companies Act, 1956, in the matter of refusal by M/s. Deccan Paper Mills Co. Ltd. (hereinafter referred to as "the company") (respondent No. 1) to register transfer of 16,440 fully paid-up equity shares of Rs. 25 each of the company made up of 3 lots, namely, 11,464/2,221/2,755 by respondents Nos. 2 to 4 to the appellant. Briefly the facts of the case, as mentioned in the application, are as under :
(i) Respondent No. 2 by himself and through his wife and son, respondents Nos. 3 and 4, was holding the said 16,440 shares as absolute owner thereof in three lots, namely, 11,464 shares in his own name and 2,221 and 2,755 shares in the names of respondents Nos. 3 and 4.
(ii) To the knowledge of respondent No. 1, respondent No. 2 was negotiating with the appellant for financial assistance/loan. Shri F. M. Pochkhanwala, chairman of the company (respondent No. 1), vide letter dated April 28, 1986, addressed to the appellant, for and on behalf of the board of directors of the company, stated as follows :
"We have no objection to your extending financial assistance to him and in the event of his not repaying the full amount with interest of financial assistance within one month from your demand we will transfer the shares deposited with you in your favour.
There is no time limit to this letter."
Annexures to the said letter contained details of 16,440 shares (11,464 in the name of respondent No. 2 , 2,221 in the name of respondent No. 3 and 2,755 in the name of respondent No. 4).
(iii) On or about July 2, 1986, the appellant advanced a sum of Rs. 1.50 lakhs to respondent No. 2 at the rate of interest of 18% per annum for the purpose of trade and business. In consideration thereof, respondent No. 2 deposited the said 16,440 shares with the appellant. He also executed an "on demand promissory note" dated July 2, 1986, in favour of the appellant and the same was accepted by respondent No. 2 also as a director of respondent No. 1 by counter-signing the same on the understanding/agreement that if the said loan with interest was not repaid within eleven months from July 2, 1986, the said three lots of shares so deposited would stand sold to the appellant as on transfer.
(iv) As on June 2, 1987, respondent No. 2 had not refunded the said loan of Rs. 1.50 lakhs or interest thereon and by letter dated June 2, 1987, addressed to respondent No. 2, the appellant called upon him to repay the said sum with interest. However, respondent No. 2 failed to repay the same. As on July 20, 1987, a sum of Rs. 1,77,000 (inclusive of interest) was due and payable by respondent No. 2.
(v) On September 16, 1987, the solicitors of the appellant served a legal notice on the chairman and board of directors of the company (respondent No. 1) stating that the said three lots of shares stand validly sold to the appellant, who is the lawful owner thereof and he is entitled to have the said shares transferred in his favour as confirmed, vide your letter dated April 28, 1986. The solicitors forwarded the transfer deed, along with the shares certificates in question, duly executed, requesting the company to return the same duly transferred.
(vi) On September 28, 1987, the solicitors of respondent No. 2 informed the solicitors of the appellant that the loan carried interest at the rate of 9% (and not at the rate of 18% per annum as alleged) ; that there was no understanding/agreement that if the said loan with interest was not repaid within 11 months from July 2, 1986, the said shares so deposited would stand sold to the appellant. It was also stated that respondent No. 2 is willing to repay the entire amount of the said loan together with interest at the rate of 9% per annum provided the promissory note, duly discharged and cancelled, is returned.
(vii) On November 16, 1987, the company informed the appellant that in the board's meeting held on November 14, 1987, the share transfer deed lodged by the appellant were considered and the board has rejected the same. No reasons for rejection were, however, given.
2. In the face of these facts, the appellant has prayed that the decision of the board of directors of the company conveyed, vide letter dated November 16, 1987, be set aside and respondent No. 1 be ordered and directed to register the transfer of 16,440 shares in favour of the appellant by deleting the names of respondents Nos. 2 to 4 from the register of members of respondent No. 1 and by substituting the name of the appellant in their place.
3. The company (respondent No. 1), in its reply, has stated that in the board's meeting held on November 14, 1987, the board did not approve of the transfer. The relevant extracts from the minutes of the board's meeting are reproduced below :
"The said Jagdishchandra Parekh has embarked upon a spate of litigation against the said Champaklal K. Parekh in view of certain disputes he has with and/or against the said C.K. Parekh. The chairman further stated that there have been disputes also in the family of Mr. K.P. Mehta and it is significant that all the said three forms are attested by Mr. B.D. Mehta, who is the nephew of the said K.P. Mehta and who is also party to the said disputes among the family members of the said K.P. Mehta,
The chairman further stated that prior to the commencement of this meeting he had inquired from Shri K.P. Mehta whether the transfer forms were attested by the said B.D. Mehta, at the time when they were handed over to the said Jagdishchandra C. Parekh. The chairman further stated that Mr. K.P. Mehta had informed him that at the time when the said transfer forms were handed over to the said J.C. Parekh by way of security, the same were absolutely blank and were neither attested by any person nor signed by Jagdischandra C. Parekh. The chairman further stated that it was clear from the said correspondence that the said share certificates and blank transfer forms were handed over by Mr. K.P. Mehta to the said J.C. Parekh merely by way of security for the repayment of the loan of Rs. 1,50,000 advanced by the said J.C. Parekh to Mr. K.P. Mehta and that Mr. K.P. Mehta had expressed his willingness to pay off the entire loan together with interest to the said J.C. Parekh, vide M/s. Dhru and Co.'s letter dated September 28, 1987. The chairman further stated that he had been informed by Mr. K.P. Mehta prior to the meeting that M/s. Dhru and Co. have not received any letter in reply to their said letter dated September 28, 1987, addressed to M/s. Dikshit Maneklal and Co. The chairman further stated that prior to the commencement of the meeting, he had also enquired of Mr. K.P. Mehta whether he had received Rs. 3,86,600 from the said Mr. J.C. Parekh, whether his son, Nainesh K. Mehta, had received Rs. 68,875 and whether his wife, Smt. Girija K. Mehta, had received Rs. 55,525, from the said J.C. Parekh as per solicitor letter No. 183, dated September 16, 1987, as mentioned in the said transfer form. He further stated that Mr. K.P. Mehta had informed him that apart from Rs. 1,50,000 which was lent to him by the said J.C. Parekh neither Mr. K. P. Mehta nor his son, Nainesh K. Mehta, nor Smt. Girija K. Mehta has received any other or further amount as stated in the said transfer forms. The chairman further stated that the said letter dated September 16, 1987, also refers only to Rs. 1,50,000 and not to any other or further amount as are mentioned in the said transfer forms. The chairman further stated that in view of what is stated hereinabove, it is clear beyond any doubt that the said J.C. Parekh is taking advantage of the said blank transfer forms lodged with him by way of security only, with a view to settle his personal scores against his father, Mr. C.K. Parekh (who is the chairman and director of the company), in collusion and conspiracy with the said B.D. Mehta who is on inimical terms with Mr. K.P. Mehta. The share certificates so lodged with the company constitute more than 30% of the paid-up share capital of the company and there is reasonable apprehension that if the said shares are transferred in favour of the said J.C. Parekh in spite of the above correspondence such transfer would be prejudicial to the interest of the company. He further stated that in the circumstances aforesaid the proposed transferee is an undesirable person and if the shares are transferred in his favour, he is bound to create difficulties and problems for the company. The chairman further stated that article 48 of the articles of association of the company provides, inter alia, to the effect that the directors may at their absolute and uncontrolled discretion decline to register or acknowledge any transfer of shares and shall not be bound to give any reasons for such refusal and in particular may so decline unless the transferee is approved by the directors. He, therefore, stated that it was not in the interest of the company to approve such transfers."
4. The company (respondent No. 1), in its rejoinder has raised the following additional objections :
(i) No notice has been given by the appellant to respondents Nos. 2 and 3 as required under Section 176 of the Indian Contract Act and, accordingly, the purported sale of the said shares is void. In any event, the appellant was merely a pledgee of the said shares and the appellant was bound to hand over the said shares to the respondents against payment, which had been offered.
(ii) The purported sale of shares is in violation of the provisions of Section 13 of the Securities Contracts (Regulation) Act, 1956 (Securities Act), in so far as the deposit of shares cannot be treated as "spot delivery" of the shares.
(iii) Shri P.M. Pochkhanwala was neither the chairman of the company at the relevant time nor had he any authority to issue the letter dated April 28, 1986, on behalf of the company.
5. The matter came up for final hearing on January 9, 1991. Shri S.H. Doctor, advocate, appearing on behalf of the appellant, while reiterating the submissions made in the appeals stated that the decision of the board of directors of the company not to register the transfer of shares is bad in law as the company had given prior consent by its letter dated April 28, 1986, for transfer of shares and, therefore, waived its rights for rejecting the transfer irrespective of the provisions of the articles of association of the company. The company cannot deny the binding nature of its letter dated April 28, 1986. He referred to the judgment of the Calcutta High Court in Kanhaiyalal Jhanwar v. Pandit Shirali and Co.  23 Comp Cas 399, in which it was held that the deposit of the share scrips themselves is sufficient to create a pledge thereon. He further argued that a blank transfer, if in order, has the effect of transferring the title in the shares to the pledgor, simple delivery of possession being enough. He also referred to the case of Bengal Silk Mills Co. Ltd., In re  12 Comp Cas 206 (Cal), where it was held that in the case of a transfer of shares of a company in blank, the transferee is entitled to fill in the necessary particulars including his own name as transferee and the date of the transfer even after the death of the original transferor and the transfer so made will be a valid one. He also referred to the decision of the Karnataka High Court in M.M. Anandaram v. Mysore Lachia Setty and Sons Pvt. Ltd.  58 Comp Cas 162 wherein it was observed by the court that (at page 168) "under Sections 108 and 110 of the Companies Act, both the transferor and the transferee could seek the registration of transfer subject to the conditions and restraints imposed in those sections. Therefore, the rights of the transferee of a share did not depend on the conduct of the transferor, who might seek to register the transfer or might not. Once the transferor had signed the instrument of transfer and it was duly stamped, the title in the share or shares passed on to the transferee". Dealing with the right of the transferor in challenging such a transfer, Shri Doctor relied upon the decision of the Nagpur Bench of the Bombay High Court in Sadashiv Shanhar Dandig v. Gandhi Sewa Samaj Ltd.  28 Comp Cas 137 wherein it was held that the transferee of shares can make an application under Section 155 (of the Companies Act) for an order of rectification of the register of members and the transferor is not a necessary party.
6. While referring to the allegation made by the respondents that no notice of default of payment of the pledge amount was given to the respondent, Shri Doctor pointed out that the respondents had signed the transfer forms on July 20, 1987, and if they had no notice, as alleged, they would not have signed such transfer forms. Shri Doctor also referred to the decision in Deverges v. Sandeman, Clark and Co.  1 Ch 70 in which it was held that (at page 74) : "If stock is itself made the security for money, and the day appointed for payment is passed, the mortgagee may at once proceed to sell the stock, and repay himself principal and interest, without any authority from the mortgagor, and without commencing an action of foreclosure".
7. Shri Doctor then referred to the judgment in Bajaj Auto Limited v. N.K. Firodia  41 Comp Cas 1 (SC), wherein it was held that the board of directors will have to act in the paramount interest of the company and the general interest of the shareholders and that if the directors do not disclose the reasons, presumption can be drawn against them, as to whether they acted on wrong principles and whether they acted with a oblique motive or for a collateral purpose. Shri Doctor argued that the grounds given in the resolution of the board of directors refusing transfer of shares, refer to disputes between the transferee and chairman of the company, Shri C.K. Parekh, and disputes between Shri K.P. Mehta, director of the company, and Shri B.D. Mehta who has attested the transfer forms and refusal of share transfer on these grounds cannot be justified as it fails to satisfy the tests laid down by the Supreme Court in Bajaj Auto's case  41 Comp Cas 1 (SC). He argued that the directors have not acted in good faith and in the interest of the company and the appeal should, therefore, be allowed directing the company to register forthwith the impugned shares.
8. Shri R.A. Kapadia, advocate, appearing on behalf of the respondents, while reiterating the submissions made in the counter-reply, stated that respondent No. 2 had informed the company by its letter dated September 28, 1987, challenging the said transfers and the company was right in rejecting the registration of the transfer of shares. He pointed out that the appellant has given different versions about the transaction which are full of contradictions. Firstly, he argued that the shares were given on July 2, 1986, as spot delivery and then contrary to this the appellant states that the transfer was effected on July 20, 1987. In this context, Shri Kapadia referred to the provisions of Sections 13 and 18 of the Securities Contracts (Regulation) Act, 1956. Section 13 states that "if the Central Government is satisfied, having regard to the nature or the volume of transactions in securities in any State or area, that it is necessary so to do, it may, by notification in the Official Gazette, declare this section to apply to such State or area, and thereupon every contract in such State or area which is entered into after the date of the notification otherwise than between members of a recognised stock exchange in such State or area or through or with such member shall be illegal". He pointed out that the sale had taken place in Bombay and neither party is a member of the stock exchange. By notification dated November 29, 1957, Section 13 has been made applicable to Greater Bombay and as a result, the present contract is in contravention of the provisions of Section 13 of the Act and is illegal. Section 18 states that the provisions of Section 13 are not applicable to spot delivery contracts. Shri Kapadia challenged the contention of the appellant that the transfer of shares is covered under spot delivery contracts as delivery of the security and payment of consideration therefor is not effected on the same day as the date of the contract or on the next inasmuch as the delivery of shares was given on July 2, 1986, and the transfer was effected on July 20, 1987, the date on which the loan was converted into price. In support of this argument, he referred to the Calcutta High Court decision in B. K. Holdings (P.) Ltd. v. Prem Chand Jute Mills  53 Comp Cas 367. He also referred to the decision in Dahiben Umedbhai Patel v. Norman James Hamilton  57 Comp Cas 700 (Bom) and pointed out that the two-member Bench of the Bombay High Court held that the definition of "securities" in Section 2(h)(i) of the Securities Contracts (Regulation) Act, 1956, 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.
9. In reply to the above arguments, Shri H.S. Doctor, advocate, appearing on behalf of the appellant, pointed out that the decision of the Bombay High Court in Dahiben Umedbhai Patel v. Norman James Hamilton  57 Comp Cas 700, does not apply in this case as the matter before the court was not regarding the transfer of shares, but regarding contract for sale of shares.
10. We have carefully considered the submissions made by both the parties, orally as well as in writing. The following admitted facts emerge in this case : --
(1) The Deccan Paper Mills Co. Ltd. is a public limited company having its registered office in Pune, Maharashtra, and its shares are not listed on any stock exchange.
(2) The three lots of shares involving 16,440 shares constituting 34% of the paid-up share capital of the company were handed over on or about July 2, 1986, by Shri K.P. Mehta, who is a director of the company, when he raised a loan of Rs. 1,50,000 from Shri J.C. Parekh, appellant in all the three appeals. A demand promissory note was also executed by Shri K.P. Mehta. All the three transferors/respondents are related and belong to the same family.
(3) The share certificates along with transfer forms were lodged for registration by the appellant on September 16, 1987, and the request for transfer was rejected by a decision taken in the board meeting held on November 14, 1987, and the appeals were filed on January 15, 1988.
(4) Shri F.M. Pochkhanwala who was a director of the company in 1986 and 1987 has acted as chairman at the time of the board of directors meeting held on March 7, 1986, and November 14, 1987, and Shri K.P. Mehta, respondent in this case, was present at both these meetings as director.
(5) The decision of rejection of the transfer request was conveyed to the appellant by a letter dated November 16, 1987, but no grounds were given. As stated in the board of directors' resolution dated November 14, 1987, the following are the grounds of rejection of the request for transfer of the impugned shares :
(i) There are disputes between the transferee and Mr. C.K. Parekh, chairman of the company.
(ii) There are disputes between Shri K.P. Mehta, director of the company, and Shri B.D. Mehta, who has attested the transfer forms.
(iii) When the transfer forms were handed over by the transferor to the transferee, they were blank transfer forms.
(iv) Consideration as mentioned in the transfer forms was not received by the transferors.
(v) The blank transfer forms were given as security.
(vi) The transfer, if approved, would be prejudicial to the interest of the company.
(vii) The transferee is an undesirable person and if the shares were transferred in his favour, he is bound to create difficulties and problems for the company which would not be in the interest of the company.
(viii) The transferors have filed Suit No. 1054 of 1988 in the Bombay High Court against the transferee for redemption of 16,440 shares and the matter is pending.
11. In addition to the grounds/views stated in the resolution passed by the board of directors on November 14, 1987, the respondent-company has taken additional grounds for rejection of the request for transfer holding the sale of shares void because of contravention of the provisions of Section 176 of the Indian Contract Act and the provisions of Sections 13 and 18 of the Securities Contractors (Regulation) Act, 1956. Both the parties have cited case law to support their arguments. We have considered the decisions given by the Calcutta High Court in B.K. Holdings (P.) Ltd. v. Prem Chand Jute Mills  53 Comp Cas 367 (Cal) and the two-member Bench of the Bombay High Court in Dahiben Umedbhai Patel v. Norman James Hamilton  57 Comp Cas 700. It is true that the single judge of the Calcutta High Court had held, by an order dated July 16, 1980, that the Securities Contracts (Regulation) Act applies also to transactions which are totally outside the purview of the stock exchange. It has been held that whatever is capable of being bought or sold in the market is marketable. The learned judge of the Calcutta High Court, however, did not consider as to how the shares of a simple public limited company not listed on the stock exchange are capable of being bought and sold in the market. There is no market for these shares and one has to determine the price by considering the various methods of valuation of shares. The two-member Bench of the Bombay High Court had held by an order dated December 8, 1982, that the words of Section 2(h)(i) plainly read are incapable of any other meaning except that the Legislature made the definition of "securities" an inclusive one having regard to the object with which the Act was enacted, viz., to control transactions which are carried on in a market, i.e., the stock exchange. The securities referred to in the definition were clearly intended to have a character of marketability. It was held that considering the various provisions of the Act, the stock exchange is contemplated as a market given under the Act and the shares which are sold in the market must have a high degree of liquidity by virtue of their character of free transferability and such a character of free transferability is to be found only in the shares of a public company. Since the decision of the two-member Bench of the Bombay High Court is a later decision, we are bound to follow it and we, therefore, hold that the provisions of the Securities Contracts (Regulation) Act will be applicable to the shares of a public limited company which are being traded on the stock exchange.
12. It is also to be noted that almost all the sections of the Securities Contracts (Regulation) Act refer to the stock exchange although such a reference is not there in Sections 13, 14, 16 and 17 of the Act. But then, reference to Section 13 in juxtaposition to reference to Section 9 of the Act in Section 14, which deals with all contracts entered into in any State or area notified under Section 13, is itself corroborative of the fact that Section 13 cannot be applied except for transactions in a recognised stock exchange. It is also noteworthy that Section 18 refers to Sections 13, 14, 15 and 17 in one go when it is evident that Section 15 applies only in respect of transactions in a recognised stock exchange. A perusal of the provisions of the Securities Contracts (Regulation) Act also shows that there are many sections where there is no reference to recognised stock exchanges. Yet, a careful perusal of the provisions made in certain sections of the Act shows that these sections would not apply in respect of shares not listed on a recognised stock exchange. For example, Section 16, which confers powers on the Central Government to prohibit contracts in certain cases does not refer to recognised stock exchanges. The Objects and Reasons appended to the Bill made it clear that the words "after consultation with the recognised stock exchanges, if any, in the State or area" occurred in the Bill after the words "it may". While proposing omissions of these words from the section, the Joint Committee observed:
"The committee do not see any special advantage in consulting the recognised stock exchanges concerned when undesirable speculation takes place in any area and the Government are of the opinion that it should be stopped."
13. The transfer of shares of a company takes place by executing documents as contemplated by Regulation 18 of Table A of the Companies Act. It is also a common practice that shares are pledged while taking a loan and blank transfer forms are signed and handed over to the pledgee. Whenever any such blank transfer forms are given, the transferor also passes the authority to the transferee to fill in the blank forms. No evidence has come to our knowledge to indicate that the shares were handed over to the transferee as security without authority to the transferee to fill in the blanks. Even accepting the arguments advanced by the transferor, it is an admitted fact that there was physical delivery of shares along with the blank transfer forms for transfer of title between the transferor/pledger and transferee/pledgee.
14. It is a well-settled principle that in order to test whether the board of directors have exercised the powers given in the articles of association while refusing the registration of shares, there are three tests which are to be applied :
(i) whether the directors acted in the interest of the company ;
(ii) whether they acted on wrong principles ; and
(iii) whether they acted for a collateral purpose.
15. Considering the reasons stated in the board's resolution dated November 11, 1987, it is quite clear that the board was more concerned with the disputes between the transferee and the chairman of the company and disputes between the members of the Mehta family. At the board of directors' meeting when the decision for rejection of the transfer of shares was taken, Shri K.P. Mehta, one of the respondents, was present as a director of the company though it is mentioned in the resolution that he did not vote on that resolution. It is also a well-settled principle that the company cannot reject the transfer of shares on the ground that the transferor has not received consideration. The duty of the company caused by the law is only to ensure that the instrument is duly stamped and duly executed. Though it is also mentioned in the board's resolution that the transfer would be prejudicial to the interest of the company as the transferee is likely to create difficulties to the company, it is quite clear that the resolution rejecting the transfer of shares was passed in order to protect the other interest of the directors including the chairman of the company. The interest of the company and the interest of the directors are different and cannot be equated. It is also on record that Shri P.M. Pochkhanwala has presided over the board of directors meeting held on March 7, 1986, winch was held just prior to sending the letter dated April 20, 1986; on which the appellant is relying. From the list of directors filed by the company on November 5, 1990, it seems that Shri F.M. Pochkhanwala is no longer a director of the company. While in the board of directors resolution dated November 11, 1987, all the details are mentioned there is no mention regarding the alleged letter written by Shri Pochkhanwala either confirming or challenging the contention of the appellant. It is also on record that along with the letter dated April 28, 1986, signed by Shri F.M. Pochkhanwala, a certificate of the secretary of the company listing out the title of the shares on various impugned shares was also enclosed. It can, therefore, be concluded that the letter signed by Shri F.M. Pochkhanwala was sent only by the company. The company had adequate opportunity if they wanted to challenge such letter by filing an affidavit of Shri F.M. Pochkhanwala instead of just denying the existence of such letter. Further, the board of directors have taken into account extraneous considerations as to the dispute between directors and their family members while rejecting the transfer of impugned shares and are not for bona fide reasons. It may be pointed out that as per the doctrine of indoor management, an outsider can presume that the internal management of the company has been regular and is being carried on in accordance with the memorandum and articles of association (Freeman and Lochyer v. Buckhurst Park Properties (Mangal) Ltd.  1 All ER 630 ;  34 Comp Cas 405 ;  2 Comp LJ 36) :
In the present case, the appellant is neither a shareholder nor a director in the company and is an outsider. The company cannot take the plea that the decision of the board of directors conveyed by Shri F.M. Pochkhanwala, chairman, is without jurisdiction.
16. It is quite clear that the company is not a listed company though it is a public limited company. The Securities Contracts (Regulation) Act is for regulating the working of the stock exchanges. Its main purpose is to regulate the working of the stock exchanges as well as to regulate the transfer of listed securities. In respect of transactions completed with the help of share brokers, the transaction is essentially in the nature of a contract to sell. While in respect of transactions where the pledged shares are involved, the title passes as soon as the pledgee hands over the security and gives the blank transfer form and, therefore, we do not think that such transactions are in violation of Section 13 of the Act. A number of financial institutions accept pledge of shares in blank transfer forms and if the pledger fails to pay the liabilities, the blank transfer forms are completed and lodged for transfer. If such transactions are considered as void according to the provisions of Sections 13 and 18 of the Securities Contracts (Regulation) Act, it will create innumerable difficulties and will negate the existing commercial practices prevailing in the market. In view of this we have no hesitation to conclude that by signing the blank transfer forms on July 20, 1987, in respect of shares which were already in the physical custody of the pledgee, the transfer of shares was complete for all the purposes.
17. In view of the foregoing, the appeals are allowed and the company, the Deccan Paper Mills Co. Ltd., is hereby directed to register the transfer of impugned shares and that the company shall give effect to this decision within ten days of the receipt of this order. There will, however, be no order as to costs.