Courts have been divided in their views on the applicability of the Securities Contract (Regulations) Act, 1956 to transactions involving shares of unlisted public companies. Two significant issues relating to this were decided by the Supreme Court of India recently, and the ruling could have a significantly adverse result on commercial contracts of share purchases. The apex court in Bhagwati v. Peerless Gen. Finance, ruled that the term ‘marketability’ must be widely interpreted to mean ‘saleability’. Therefore, as shares of an unlisted public company are saleable, though outside a stock exchange, they would fall within the definition of “securities” [Section 2(h)].
The Act prohibits forward contracts in securities i.e. where the delivery occurs after the contract has been entered into. Since securities are now widely defined, a shareholder agreement in an unlisted public company may be unenforceable as it could be in violation of the forward contract prohibition contained in the Act and enforced by a circular. This would be the result unless the shareholder or share purchase agreement is promptly followed by delivery.
Another finding by the court on spot delivery also finds later delivery would result in the prohibition against off exchange non-spot delivery contracts. While the original intent of the prohibition, introduced in 1969, was to curb speculation, the effect of the restriction after this ruling would be to damage non-speculative commercial contracts. The prohibition drafted in a different era of suspicion towards speculation needs to be repealed. This can be done without statutory amendment as SEBI and the government have been given powers to specify the classes and persons to whom the prohibition applies. This needs to be done on an urgent basis as investor confidence does not require another jolt of pointless uncertainty.