‘Marketable Securities’ and ‘Spot Delivery Contracts’: The Supreme Court’s Analysis of the SCRA

In its recent judgment in Bhagwati
Developers v Peerless General Finance
, the Supreme Court has considered
some important questions relating to the interpretation of the Securities
Contract (Regulation) Act, 1956 [“SCRA”].
There were principally two questions before the Court: (i) the applicability of the SCRA to public unlisted companies and (ii) the construction of a settlement
agreement to ascertain whether a prior agreement was a ‘spot delivery contract’
as defined in section 2(i) of the SCRA. With respect, it appears that the
answer the Supreme Court gave to the second question is clearly incorrect. The
answer it gave to the first is correct as a matter of precedent but, as Professor
has powerfully argued, the reasoning in those cases highlights the
need for a Bench of appropriate strength to review this area of the law.

The facts are of some importance and must be analysed
with care. In July 1986, Bhagwati Developers Pvt Ltd [“BDPL”] advanced a sum of Rs. 38 lakhs to Mr Tuhin Kanti Ghosh [“TKG”] to be used by him to acquire
3,530 equity shares of Peerless General Finance and Investment Co [“Peerless”]. TKG bought the shares and was
to repay the loan by December 1991. On October 30, 1987, TKG—for what reason it
is not stated—agreed to transfer this block of 3,530 shares to BDPL in full
repayment of the loan. He handed over the transfer deeds (which, it was later
alleged, were not properly executed) and stated in a letter of even date that
all dividends, bonus shares and other benefits attached to the block of 3,530
shares would be payable to BDPL. Soon after, Peerless declared an issue of
bonus shares in the ratio 1:1. As the registered holder, TKG got a further
3,530 shares. BDPL wrote to him in December 1987 asking for fresh transfer
deeds for the block of (now) 7,060 shares. TKG did not do so. In 1991, a
further bonus issue in the same proportion was announced, and TKG now had

In May 1991, BDPL instituted a suit in the Civil Court
in Allahabad to restrain TKG from claiming any right in the 14,120 shares and
obtained an interim injunction. On 21.11.1994, the parties arrived at a
settlement, under which TKG recognised that he had sold the 3,530 shares to
BDPL in October 1987
but, in consideration of not contesting the suit, was
to be paid a further sum of Rs. 10 lakhs, and allowed to retain the amounts
received by way of dividend until October 1989. For his part, TKG gave up his
claim to the 14,120 shares, which BDPL now sought to register with Peerless. Peerless
refused registration on the ground (inter
) that the transfer of shares
from TKG to BDPL was not a ‘spot delivery contract’ as defined in section 2(i)
and therefore a nullity. The Company Law Board agreed, and dismissed BDPL’s
petition challenging the refusal. A single judge of the Calcutta High Court
dismissed the appeal, which was challenged in the Supreme Court.

The first issue was whether the SCRA applies to
public, unlisted companies. This depends on whether the shares of such a
company can be described as “…other
marketable securities of a like nature…
” for the purposes of s 2(h) of the
SCRA. The correct view (although not the view accepted by the courts) is that
it cannot. The reasons are set out persuasively in Professor
article and I will here summarise the two that seem to me to be
the most powerful: (i) the
legislative history of the SCRA—notably the Bombay Securities Contract Control
Act, the Gorwalla Committee Report and the speech of Finance Minister CD
Deshmukh on November 28, 1955 establish clearly that the object of the SCRA is
to curb speculation, which
presupposes the existence of a market price; and (ii) ‘Stock exchange’ is defined in s 2(j) as a body constituted
for the purpose of… “dealing in securities.
Since the word ‘securities’ in that section must be given the meaning assigned
to it in s 2(h), it would be most surprising if a public unlisted company is
part of s 2(h)—for it would follow that its shares (without the company being listed) should be dealt with in a stock
exchange. However, the courts, with a few exceptions, have rejected this
analysis, and generally equated ‘marketable’ with ‘freely transferable’, heavily
influenced by the definition of ‘marketable’ that appears in the Oxford Dictionary
and Black’s Law. In Bhagwati v Peerless,
the Supreme Court has endorsed this: “the
size of the market is of no consequence… the number of persons willing to
purchase such shares would not be decisive
”. To the Court, the only reason
the shares of a private company are
not marketable (for there are persons willing to purchase those shares too) is
that they are not ‘freely transferable’. In other words, any security that is ‘freely transferable’
is ‘marketable’. The Court goes on to say:

However,   when   the  
statute   prohibits   or  
limits transfer   of   shares  
to   a specified   category  
of people   with   onerous  
conditions   or   restrictions, right   of  
shareholders   to   transfer  
or   the   free transferability is jeopardized and in
that case those shares with these limitations cannot be said to be marketable    
It is not quite clear from where the Court derived the
proposition that restrictions must be ‘onerous’. Quite apart from that, it is
also not clear why the shares of a public company are freely transferable, if
the Bombay High Court is
right that private agreements are outside the ambit of s 111A (which, we have
argued it is
, although not for the reasons it gave). The Supreme Court also
observes that section 13 may apply even if s 2(h) does not (at p 16). In the
ultimate analysis, the conclusion that the SCRA applies to public unlisted
companies is consistent with existing law: indeed, it is surprising that Sahara was not cited.  

It is in its resolution of the second issue that the
Court, with respect, erred. A ‘spot delivery contract’ is defined in s 2(i) as
a “contract which provides for actual
delivery of securities and the payment of price either on the same day
as the contract or on the next day
”. Peerless’ case was that the sum of Rs.
10 lakhs paid by BDPL to TKG in November 1994 as consideration for settling the
suit was actually the price paid for the shares transferred by TKG to BDPL in
October 1987; since some seven years elapsed between the contract and payment,
it was not a spot delivery contract. It is, with respect, extraordinary that
this contention was successful before the Company Law Board, the Calcutta High
Court and the Supreme Court. There are three fundamental objections to it:

(1)   Unless TKG and BDPL were clairvoyant, neither could
have known in 1987 that a dispute would arise and that BDPL would pay TKG Rs.
10 lakhs some seven years later. Yet, both plainly intended to transfer the
shares in October 1987, for which the consideration was that the loan would be
discharged. The discharge of a debt in kind (through shares, rather than money)
is not open to the objection in Pinnel’s
, for that rule does not apply to payment in kind, and was in any event
specifically abolished in Indian law (see ss 41 and 63 and Kapur Chand Godha’s case). It is axiomatic that there can be
no consideration for a contract that is already concluded: in the famous case
of Roscorla v Thomas (1842) 114 ER
496, a warranty given by a seller of a horse was held to be void for want of
consideration because he had already sold the horse (for consideration—the
price). Likewise here—nothing BDPL promised or paid after October 1987 could
possibly have been consideration for the sale of shares because that was
concluded, and BDPL had acquired title: it could not have paid TKG anything to
sell something he had already sold, and which it had already bought. This should
have led to the conclusion that Rs. 10 lakhs was consideration for a separate
agreement—to settle the suit.

(2)  The Supreme Court appears to have been influenced by
the fact that the settlement agreement stated that Rs. 10 lakhs was paid as
consideration for the shares. Even if it did, it is irrelevant because it
cannot furnish consideration for a contract concluded in 1987. In any case, the
Settlement Agreement did not. The text of the Settlement Agreement is
reproduced in in the judgment of the High Court under appeal, reported in 128 CompCas 444 and records that: (i)TKG has lawfully sold the original shares…on 30th October
1987…and thereupon TKG ceased to have any beneficial interest
”; (ii) TKG shall co-operate with BDPL in
having BDPL registered, by executing fresh transfer deeds if necessary, and
relinquish all its right, title and interest, for which Rs. 10 lakhs is paid.
It is apparent that Rs. 10 lakhs is consideration for the fresh agreement to settle TKG’s claims (ie, his defences to the
suit instituted by BDPL).

(3)   It may be asked what the purpose of paying Rs. 10
lakhs was. The answer is that a compromise agreement generates its own
consideration, provided the parties believe bona
that they have a claim (even if the belief is subsequently shown to be
mistaken) (see Treitel on Contract,
Chapter 3 and Wade v Simeon (1846) 2
CB 548). Here both parties plainly did: BDPL instituted the suit, and TKG
presumably defended it. Rs. 10 lakhs (and the agreement to allow TKG to retain
the amount received as dividend) was consideration for the settlement, not the
transfer of shares. It was, therefore, a spot delivery contract.

Ironically, while this judgment will be cited for its conclusion
that the SCRA applies to public unlisted companies, it is the analysis of the
second that is likely to be more controversial. It is not just a matter of
construction of this particular agreement: it is difficult to see how any agreement to settle a suit filed for
a declaration of title to the shares of a public unlisted company will not be
governed by this judgment. Indeed, the somewhat odd result is this: a contract for the
sale of shares is a spot delivery contract if it is performed in accordance
with its terms, but is not a spot delivery contract if one of the parties is in
breach, and the buyer settles the dispute by paying the seller a fresh sum of

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V. Niranjan


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