Free Transferability of Securities (Section 28)

Free transferability is the organising premise of every securities market: an investor parts with capital today only because she is confident she can exit tomorrow by selling the instrument to someone else. The phrase "free transferability of securities" is, however, a notorious trap for the judiciary and CLAT-PG aspirant. It is routinely tagged to Section 28 of the Securities Contracts (Regulation) Act, 1956 (SCRA), yet Section 28 says nothing about transferability at all — it is the Act's exemption clause, headed "Act not to apply in certain cases." The free-transferability mandate once lived in the SCRA's now-omitted Section 22A, migrated into company law through Section 111A of the Companies Act, 1956, and today sits in Section 58 of the Companies Act, 2013. This article untangles that genealogy, reads Section 28 for what it actually does, and works through the leading authorities — from V.B. Rangaraj to Bajaj Auto, Messer Holdings and Mackintosh Burn — that define how freely a security may, in law, change hands.

What Section 28 Actually Says (and Does Not Say)

The single most important correction an aspirant must internalise is this: Section 28 of the SCRA is not a free-transferability provision. Its marginal heading is "Act not to apply in certain cases," and it is a carve-out that lifts whole categories of dealings out of the SCRA's reach. Clause (a) of Section 28(1) provides that nothing in the Act applies to the Government, the Reserve Bank of India, any local authority, or any corporation set up by a special law, or to any person who has effected a transaction with or through the agency of any such authority. Clause (b) exempts any convertible bond, share warrant, or any option or right in relation thereto, in so far as it entitles the holder to obtain shares of the issuing company at his option on the price agreed when the instrument was issued — the classic protection for convertible-instrument holders and ESOP-style rights.

The practical effect is that an option embedded in a convertible debenture, or a warrant conferring a right to subscribe at a pre-agreed price, is not struck down as an illegal forward or option contract under Sections 13 to 18 of the Act. Section 28 is therefore best understood as a "safe harbour" for legitimate corporate financing instruments and for sovereign and quasi-sovereign actors. Because the topic of "free transferability" is conventionally examined alongside Section 28, the two are bundled in syllabi; but a candidate who writes that "Section 28 guarantees free transferability" has made a hard error of law. For the structure of the Act within which Section 28 sits, see our note on the introduction, object and scheme of the SCRA.

Where Free Transferability Really Lives

If not Section 28, then where? The principle has a three-stage legislative history that examiners love. First, the SCRA itself once contained an express free-transferability provision. The original Section 22A, inserted into the SCRA in 1985, was headed "Free transferability and registration of transfers of securities" and declared that, subject to the grounds it specified, the securities of a company listed on a recognised stock exchange shall be freely transferable. It permitted a company to refuse registration of a transfer only on four narrowly drawn grounds (discussed below). Second, this provision was omitted from the SCRA by the Depositories Act, 1996, and the free-transferability mandate was simultaneously relocated into company law as Section 111A of the Companies Act, 1956. Third, with the repeal of the 1956 company law, the principle now resides in Section 58 of the Companies Act, 2013.

This migration matters for citation hygiene. The number "22A" in the present SCRA no longer refers to transferability at all: after the 1996 omission and subsequent amendments, the current Section 22A of the SCRA confers a right of appeal to the Securities Appellate Tribunal against a recognised stock exchange's refusal to list the securities of a public company. A candidate must therefore date the provision: the original Section 22A (1985–1996) was about transferability; the present Section 22A is about listing appeals, which we treat in the note on listing of securities.

The Omitted Section 22A and Its Four Grounds of Refusal

Because so much modern doctrine descends from it, the original Section 22A deserves close reading. It was enacted against a backdrop of complaints that boards of directors were arbitrarily refusing or sitting on requests to register share transfers, often to entrench incumbent management. The provision recast the board's discretion: a transfer of listed securities was to be registered as of right, and refusal was lawful only on one of four exhaustive grounds — (a) that the instrument of transfer was not proper, was not duly stamped and executed, the share certificate had not been delivered, or some other legal requirement for registration of transfer had not been complied with; (b) that the transfer was in contravention of any law; (c) that the transfer was likely to result in such a change in the composition of the board as would be prejudicial to the interests of the company or to the public interest; and (d) that the transfer was prohibited by an order of a court.

Ground (c) is the conceptual ancestor of today's "sufficient cause" jurisprudence: it recognised, even within a free-transferability regime, that a transfer threatening to hand control to a hostile or undesirable acquirer could be resisted. When Section 22A was omitted in 1996 and the principle moved to Section 111A of the 1956 Act, the four-ground architecture was substantially carried over, with the addition of a power for the (then) Company Law Board / later the Tribunal to direct rectification. Understanding these four grounds is indispensable because the Supreme Court continues to read the modern "sufficient cause" standard against this historical template.

Section 111A: The Shift to Company Law

Section 111A of the Companies Act, 1956, introduced by the Depositories Act, 1996, became the operative free-transferability provision for nearly two decades and generated the bulk of the case law aspirants must know. Section 111A(2) declared that the shares or debentures and any interest therein of a company shall be "freely transferable." The provision drew a sharp public/private distinction: free transferability was the rule for public companies, whereas private companies were permitted (indeed required) to restrict transfer under Section 3(1)(iii) of the 1956 Act. The debate that consumed the High Courts was whether the word "freely" in Section 111A(2) was so absolute that it invalidated every consensual restriction — pre-emption rights, rights of first refusal, tag-along and drag-along clauses — agreed between shareholders of a public company.

Two rival readings emerged. The first, restrictive, view held that "freely transferable" meant free of all fetters, so that any contractual clause limiting a public-company shareholder's ability to sell to anyone, at any time, was void as offending the statute. The second, permissive, view held that the section was directed at the company's power to refuse registration, not at the freedom of individual shareholders to bind themselves by contract; on this view a shareholder remained free to agree to sell on terms, and to enforce that agreement, without impairing the marketability of the share. The tug-of-war between these readings runs through Western Maharashtra Development Corporation, Bajaj Auto and Messer Holdings.

V.B. Rangaraj: The Starting Point on Transfer Restrictions

Any discussion of transferability begins with V.B. Rangaraj v. V.B. Gopalakrishnan, AIR 1992 SC 453. The dispute concerned a private company in which two branches of a family had, by an oral agreement of 1951, agreed that each branch would always hold an equal number of shares and that a member wishing to sell would first offer his shares to members of his own branch. This restriction was never incorporated into the company's articles of association. The Supreme Court held that a restriction on the transfer of shares which is not reflected in the articles is not binding either on the company or on its shareholders. The articles, the Court reasoned, are the constitutional document binding the company and its members inter se; a private side-agreement that conflicts with, or adds to, the regulation of transfers in the articles cannot be enforced so as to bind the company.

For decades Rangaraj was read for the broad proposition that all share-transfer restrictions must live in the articles to be valid. That reading became the principal weapon for those arguing that pre-emption clauses in shareholder agreements were unenforceable, and it set the stage for the public-company controversy under Section 111A. Critically, however, Rangaraj concerned a private company and a restriction sought to be enforced against the company; later courts would confine it to that setting, distinguishing restrictions enforced merely between the contracting shareholders.

Western Maharashtra v. Bajaj Auto: The Restrictive View

The high-water mark of the absolutist reading of free transferability was the single-judge decision of the Bombay High Court in Western Maharashtra Development Corporation Ltd. v. Bajaj Auto Ltd. (2010). Maharashtra Scooters Ltd., a listed public company, had been promoted under a 1974 protocol agreement between the Western Maharashtra Development Corporation (a State entity holding 27%) and Bajaj Auto (holding 24%), the balance being held by the public. Clause 7 of the protocol contained a right of first refusal: a party wishing to sell had to offer its shares to the other first. When a dispute over the valuation and exercise of that right reached the court via an arbitral award, the single judge held that a pre-emptive right of first refusal in respect of shares of a public listed company was contrary to Section 111A of the Companies Act, 1956, and therefore void and unenforceable.

The judge reasoned that "freely transferable" in Section 111A(2) must be given its full literal force: a shareholder of a public company could not be tied down by a pre-emption clause because that would fetter the free marketability the statute intended to guarantee. The decision sent a tremor through the private-equity and joint-venture community, since rights of first refusal and similar exit-protection clauses are the bedrock of negotiated investments. It also squarely teed up the question for an authoritative answer: does free transferability bind only the company's registration power, or does it also disable shareholders from contracting among themselves?

Messer Holdings: The Permissive Turn

The answer came swiftly from a Division Bench of the same High Court in Messer Holdings Ltd. v. Shyam Madanmohan Ruia (Bombay High Court, decided 1 September 2010). The case arose out of competing claims to shares in Bombay Oxygen Ltd., a public company, where a consensual arrangement among shareholders conferred a right of first refusal. The Division Bench held that a private, voluntary arrangement between shareholders relating to transfer of their specific shares — including a right of first refusal — does not violate Section 111A and is enforceable between the contracting parties. Crucially, the Bench clarified that it is neither mandatory for the company to be a party to such an arrangement nor essential that the restriction be written into the articles or bye-laws.

The reasoning marks the decisive doctrinal shift. The Bench read Section 111A as addressed to the company's obligation to register transfers, not as a prohibition on a shareholder freely choosing to dispose of his property on terms he negotiates. A shareholder exercising his ownership by agreeing to offer his shares first to a co-shareholder is exercising, not surrendering, the incident of free transferability. Messer Holdings thus distinguished Rangaraj as a case about enforcement against the company, leaving intact the freedom of shareholders to bind themselves inter se. The appeal to the Supreme Court was disposed of without the apex court conclusively answering the questions of law, so Messer Holdings remains the leading High Court authority on point.

Bajaj Auto (Division Bench): Reconciling the Conflict

The conflict between the single judge in Western Maharashtra and the Division Bench in Messer Holdings was finally settled in Bajaj Auto Ltd. v. Western Maharashtra Development Corporation Ltd., decided by a Division Bench of the Bombay High Court on 8 May 2015. Hearing the appeal from the very award that the single judge had set aside, the Division Bench expressly overruled the restrictive single-judge view and aligned the law with Messer Holdings. It held that Section 111A is not a provision designed to curtail the right of a shareholder to enter into a consensual arrangement with a chosen purchaser of his specific shares. A right of first refusal, requiring the seller to offer his shares to the counter-party at the prevailing market price before selling to outsiders, is valid and enforceable and does not offend free transferability.

The Bench's logic is the examinable ratio: the concept of free transferability of a public company's shares is not affected when a shareholder voluntarily agrees to offer his shares to another party with a right of first purchase at market price, because the share remains marketable and the consideration remains the open-market price. After Bajaj Auto (2015), the settled position in India is that pre-emption rights, rights of first refusal, and similar consensual transfer arrangements among shareholders of a public company are enforceable. This judicial position was later reinforced statutorily, as we discuss next.

Section 58 of the Companies Act, 2013: Statutory Settlement

The Companies Act, 2013 absorbed the Messer Holdings–Bajaj Auto position into the statute. Section 58(2) provides that, without prejudice to sub-section (1), the securities or other interest of any member in a public company shall be freely transferable; but it then adds a decisive proviso: "any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract." That proviso is, in effect, a legislative endorsement of the permissive line of authority — consensual transfer arrangements among shareholders are expressly made enforceable, removing the doubt that Western Maharashtra had created.

The flip side is Section 58(4), which preserves a controlled power of refusal. If a public company, without sufficient cause, refuses to register a transfer within thirty days, the transferee may appeal to the Tribunal within the prescribed period. The phrase "sufficient cause" is the modern descendant of the original Section 22A grounds: free transferability is the default, but a public company is not an automaton bound to register every transfer regardless of consequence. For private companies, Section 2(68) continues to require restrictions on transferability in the articles — so the public/private divide that animated Rangaraj survives intact.

Mackintosh Burn: What Counts as 'Sufficient Cause'

The contours of the "sufficient cause" exception were authoritatively explored by the Supreme Court in Mackintosh Burn Ltd. v. Sarkar and Chowdhury Enterprises (P) Ltd., (2018) 5 SCC 575. Mackintosh Burn was an unlisted public company, a majority of whose shares were held by the Government of West Bengal. The respondent, already holding about 28.5% of the shares, acquired a further 100 shares which would have taken its stake to roughly 39.77%, and sought registration of the transfer. The company refused, contending that the respondent was controlled by a business competitor and that registering the transfer would not be in the company's interest.

The Supreme Court upheld the refusal. It held that under Section 58(4), refusal can rest not only on a violation of law but on "any other sufficient cause," and that "sufficient cause" is wide enough to include grounds that are not in the best interests of the company — such as a transfer that would empower a competitor to influence or take control of the company. The decision significantly enlarged the scope of "sufficient cause" beyond the narrow, technical grounds of the old Section 22A, recognising a substantive, interest-of-the-company dimension. For aspirants, Mackintosh Burn is the leading authority for the proposition that free transferability of public-company shares is a strong default but not an absolute right; it yields to a board's reasoned refusal where a genuinely competing or hostile interest is at stake.

The SCRA's Own Grip: Spot Delivery and Marketable Securities

Although the free-transferability mandate migrated out of the SCRA, the Act retains powerful control over how securities are transferred, and this is the genuinely SCRA-specific dimension of the topic. Section 13 empowers the Central Government to declare that, in a notified State or area, every contract in securities entered into otherwise than between members of a recognised stock exchange, or with their participation, shall be illegal. The lifeline carved out for ordinary off-market transfers is the "spot delivery contract," defined in Section 2(i) as a contract which provides for actual delivery of securities and payment of the price either on the same day as the date of the contract or on the next day. Section 18 exempts spot delivery contracts from the prohibitions in Sections 13 to 17.

A 1969 notification under Section 16 reinforced this scheme by permitting, in effect, only spot delivery, cash, hand delivery and special delivery contracts. The upshot is that a private, off-market transfer of shares — the very mechanism through which pre-emption rights and negotiated exits are effected — is lawful under the SCRA only if structured as a spot delivery contract (or one of the other permitted categories). Free transferability in the market sense, therefore, is not just a company-law right; it is also conditioned by the SCRA's settlement discipline, which the definitions of securities and recognised stock exchange set in context.

Naresh Aggarwala and Bhagwati Developers: The Reach of the SCRA

Two Supreme Court decisions fix the outer boundary of the SCRA's grip on transfers. In Naresh K. Aggarwala & Co. v. Canbank Financial Services Ltd. (Supreme Court, 2010), the Court dealt with the enforceability of off-market securities transactions and underscored that dealings in securities must conform to the SCRA's framework, including its spot-delivery and recognised-stock-exchange requirements; transactions that flout the statutory channel cannot be enforced. The decision is the practical reminder that the freedom to transfer is exercised within, not outside, the SCRA's regulatory architecture.

The more consequential ruling for transferability is Bhagwati Developers (P) Ltd. v. Peerless General Finance & Investment Co. Ltd., (2013) 5 SCC 455 (also reported AIR 2013 SC 1690). The Supreme Court held that the SCRA applies even to the shares of an unlisted public company, because such shares are "marketable securities" within the meaning of the Act. The Court reasoned that marketability does not depend on the size of the market: the number of persons actually willing to buy is irrelevant; what matters is whether the shares are capable of being freely bought and sold, free of statutory transfer restrictions. Since the shares of a public company — listed or not — are freely transferable, they are marketable, and the SCRA's discipline (including the spot-delivery requirement) attaches to their transfer. Bhagwati thus links the company-law concept of free transferability directly to the SCRA's definitional reach: it is precisely because public-company shares are freely transferable that they are "marketable securities" governed by the SCRA.

Depositories and the Mechanics of Frictionless Transfer

The Depositories Act, 1996 — the same enactment that omitted Section 22A from the SCRA — was the structural reform that made free transferability operationally real. By dematerialising securities and recording ownership in electronic book-entry form with depositories such as NSDL and CDSL, the Act eliminated the paper-transfer-deed friction that had made registration refusal a tool of obstruction. Section 7 of the Depositories Act provides that securities held in a depository are freely transferable, and a registered transfer in the depository system effects a valid transfer without the company's case-by-case registration intervention that the old regime required.

The definition of "spot delivery contract" in Section 2(i) of the SCRA was correspondingly expanded to include transfers effected through a depository in accordance with the Depositories Act. In modern practice, almost all transfers of listed securities occur in demat form through the depository and clearing-corporation settlement cycle, which is structured to satisfy the spot-delivery and settlement requirements. Free transferability, the SCRA's spot-delivery discipline, and the depository mechanism therefore now operate as an integrated whole: the right to transfer (company law), the manner of contracting for transfer (SCRA), and the machinery of effecting transfer (Depositories Act) reinforce one another.

Exam Synthesis: Holding the Threads Together

For the judiciary and CLAT-PG candidate, the topic rewards a disciplined, chronological answer. Begin by correcting the premise: Section 28 of the SCRA is the exemption clause ("Act not to apply in certain cases"), shielding Government, RBI, local authorities, special-law corporations and convertible-instrument/warrant options — it is not the source of free transferability. Then trace the principle: original SCRA Section 22A (1985, four grounds) → Section 111A of the Companies Act, 1956 (Depositories Act, 1996) → Section 58 of the Companies Act, 2013.

On the case law, present the arc: V.B. Rangaraj (AIR 1992 SC 453) — restrictions not in the articles do not bind the company; Western Maharashtra v. Bajaj Auto (2010, single judge) — the discredited absolutist view that pre-emption rights violate free transferability; Messer Holdings (2010, Division Bench) and Bajaj Auto (2015, Division Bench) — consensual shareholder arrangements, including rights of first refusal, are enforceable and do not offend free transferability, a position now codified in the proviso to Section 58(2); and Mackintosh Burn, (2018) 5 SCC 575 — "sufficient cause" under Section 58(4) permits refusal where the transferee is a competitor. Finally, anchor the SCRA dimension with Bhagwati Developers, (2013) 5 SCC 455, holding that unlisted public-company shares are marketable securities within the SCRA, and with the spot-delivery requirement of Section 2(i) read with Sections 13, 16 and 18. A candidate who delivers this structure — statute, genealogy, case arc, and the SCRA's settlement discipline — demonstrates command of a topic that defeats most by its mislabelling. For the wider statutory machinery, revisit the SCRA notes hub.