Bajaj Auto Ltd. v. Western Maharashtra Development (MANU/MH/0820/2015)

Quick Summary

Two promoters—Bajaj and Western Maharashtra Development Corporation Ltd. (WMDC)—set up Maharashtra Scooters Ltd. (MSL). Their 1974 Protocol Agreement (copied into the Articles) had Clause 7: a pre-emption right between the two. Years later, WMDC wanted to sell its 27% to Bajaj; price disputes went to arbitration. A Single Judge set aside the award by calling Clause 7 illegal under Section 111A (free transferability). The Division Bench held: Clause 7 is valid. It manages the promoters’ inter se relationship and does not block the public’s right to transfer shares.

Citation

MANU/MH/0820/2015 (Bombay High Court)

Court

Bombay High Court

Keywords

Pre-emption, Section 111A, Section 22A SCRA, free transferability, public company

Issues

• Does Clause 7 (pre-emption between Bajaj and WMDC) violate free transferability under Section 111A of the Companies Act, 1956 or earlier Section 22A of the SCRA?
• Can such a clause, embedded in Articles, stand in a public listed company without curtailing the public shareholders’ rights?

Rules

• Shares = movable property: A shareholder may deal with, contract about, and agree on pre-emption for their shares.
• Section 22A SCRA / Section 111A CA 1956: Enacted to stop Boards of public companies from arbitrarily refusing transfers, safeguarding small investors.
• Articles & private bargains: A targeted pre-emption between specific promoters is different from a blanket restriction binding the entire public float.

Facts (Timeline)

Arguments

Judgment (Bombay High Court)

• Pith & purpose of 22A SCRA / 111A CA 1956: To prevent arbitrary board refusals that hurt small investors—not to ban all pre-emptions.
• Clause 7 scope: It governs the relationship between Bajaj and WMDC and does not tie the public 49%. No “private-company-style” blanket lock-in.
• Result: Clause 7 is valid; Single Judge’s view set aside; award could not be struck only on that ground.

Ratio

Free transferability in public companies bars undue board-level restraints, but does not prohibit targeted pre-emption arrangements between identified shareholders, especially where public investors remain unaffected.

Why It Matters

• Clarifies that promoter agreements can coexist with public float rights.
• Distinguishes private restraints from board refusals targeted by Section 111A / 22A.
• Guides drafting of Articles & shareholders’ agreements in listed companies.

Key Takeaways

1. Shares are property; parties may agree to pre-emption.
2. Section 111A / 22A protect the public against board arbitrariness.
3. A clause that only binds specific promoters is not a public-wide restriction.
4. Embed bargains in Articles carefully to reflect scope and avoid chilling public transfers.

Mnemonic + 3-Step Hook

Mnemonic: “P-F-P” — Pre-emption allowed, Free transferability for public, Promoters bound inter se.

1. Spot if clause binds everyone or only promoters.
2. Check policy of 111A / 22A—aimed at board refusals, not private bargains.
3. Conclude validity where public rights stay intact.

IRAC Outline

Issue: Does Clause 7’s pre-emption impair free transferability in a public company?

Rule: Sections 22A SCRA / 111A CA 1956 block arbitrary transfer refusals by boards; shareholders may contract about their own shares.

Application: Clause 7 binds only Bajaj & WMDC; no blanket restraint on the public 49%; consistent with statutory purpose.

Conclusion: Clause 7 valid; Single Judge erred; Division Bench correct.

Glossary

Pre-emption Right

A contractual first right to buy shares before they are offered to others.

Free Transferability

Policy ensuring easy share transfer in public companies, guarding small investors.

Articles of Association

Public document setting internal rules and shareholder rights.

Student FAQs

Related Cases

• Cases on shareholders’ agreements vs Articles in listed entities.
• Pre-emption and public policy under securities law.