Western Maharashtra Case

MANU/MH/0109/2010
Equivalent Citation: 2010(4)BomCR873, [2010]154CompCas593(Bom), [2010]102SCL239

(Bom)
IN THE HIGH COURT OF BOMBAY
Arbitration Petition No. 174 of 2006
Decided On: 15.02.2010
Appellants: Western Maharashtra Development Corpn. Ltd.
Vs.
Respondent: Bajaj Auto Limited
Hon'ble Judges/Coram:
Dr. D.Y. Chandrachud, J.
Counsels:
For Appellant/Petitioner/Plaintiff: Rohit Kapadia and Pravin Samdani, Sr. Advs. and Bindi Dave,
Kunal Vajani and Ankit Virmani, Advs., i/b., Wadia Ghandy and Co.
For Respondents/Defendant: Aspi Chinoy and J.J. Bhat, Sr. Advs., Snehal Shah, Shiraj Dhru,
Lata Dhru and Ranju Yadav, Advs. i/b., Dhru and Co.
Subject: Arbitration
Acts/Rules/Orders:
Arbitration and Conciliation Act, 1996 - Section 16, Arbitration and Conciliation Act, 1996 Section 34, Arbitration and Conciliation Act, 1996 - Section 24, Arbitration and Conciliation Act,
1996 - Section 28, Arbitration and Conciliation Act, 1996 - Section 28(1), Arbitration and
Conciliation Act, 1996 - Section 28(2), Arbitration and Conciliation Act, 1996 - Section 31(2),
Arbitration and Conciliation Act, 1996 - Section 31(3), Arbitration and Conciliation Act, 1996 Section 34(2); Companies Act, 1956 - Section 2(13), Companies Act, 1956 - Section 3(1),
Companies Act, 1956 - Section 9, Companies Act, 1956 - Section 43A, Companies Act, 1956 Section 48, Companies Act, 1956 - Section 87A, Companies Act, 1956 - Section 111,
Companies Act, 1956 - Section 111A, Companies Act, 1956 - Section 111A(1), Companies Act,
1956 - Section 111(14), Companies Act, 1956 - Section 155, Companies Act, 1956 - Section
397, Companies Act, 1956 - Section 398; Indian Arbitration Act ;Securities Contract Regulation
Act, 1956 - Section 22A, Securities Contract Regulation Act, 1956 - Section 28(2); Sale of
Goods Act, 1930 - Section 4, Sale of Goods Act, 1930 - Section 5, Sale of Goods Act, 1930 Section 9, Sale of Goods Act, 1930 - Section 9(1), Sale of Goods Act, 1930 - Section 10;
Securities Contracts (Regulation) Act, 1956 ;Depositories Act, 1996 ;SEBI Act, 1992 ;Sick
Industrial Companies (Special Provisions) Act, 1985 ;Specific Relief Act, 1963 - Section 10;
Specific Relief Act, 1877 - Section 12
Cases Referred:
ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705; Delhi Development Authority v. R.S. Sharma &
Co. (2008) 13 SCC 80; Hindustan Zinc Ltd. v. Friends Coal Carbibusatuib (2006) 4 SCC 445;
Commissioner of Wealth Tax v. Mahadeo Jalan (1972) 86 ITR 621; Commissioner of Gift Tax v.
Kusumben D. Mahadevia (1980) 122 ITR 38; Seth Thawardas Pherumal v. Union of India AIR
1955 SC 468; Tarapore and Co. v. Cochin Shipyard Ltd. (1984) 2 SCC 680; Lubrizol (India) Ltd.
v. Lubrizol Corporation U.S.A. 1998(1) ALL MR 435; V.B. Rangaraj v. V.B. Gopalkrishnan (1992)
1 SCC 160; M.S. Madhusoodhanan v. Kerala Kaumudi Pvt. Ltd. (2003) 117 Com. Cases 19;
Ontario Jockey Club Ltd. v. Samuel McBride AIR 1928 Privy Council 291; V.B. Rangaraj v.
Gopalkrishnan (1992) 73 Comp Cases 201; Jainarain Ram Lundia v. Surajmull Sagarmull AIR
1949 FC 211; Bank of India Ltd. v. J.A.H. Chinoy AIR 1950 PC 90; Smt. Pushpa Katoch v. Manu
Maharani Hotels Ltd. 121 (2005) DLT 333
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RML National Law University
Case Note:
Arbitration - Validity of Award - Validity of Contract - Sections 34 and 111A of
Arbitration and Conciliation Act, 1996 and Section 9 of Companies' Act, 1956 - Present
petition filed under Section 34 of Act, 1996 against award passed by arbitrator Petitioner contended that contract on whose basis award was passed was null and
void, therefore, award is unsustainable - Held, party desirous to transfer its
shareholding is obligated to furnish first option to other for purchase of shares at
relevant rate, as may be agreed to between parties or decided upon by arbitration Consequence of Clause 7 of protocol agreement, which has been incorporated in
Articles of Association, is to preclude sale to or purchase by members of public of
shares, which are offered for sale if offer is accepted by petitioner, or as case may be,
by respondent within thirty days of receipt of notice - Effect of clause of preemption is
to impose restriction on free transferability of shares by subjecting norms of
transferability laid down in Section 111A of Act, 1996 to preemptive right created by
agreement between parties - This is impermissible - Section 9 of Act, 1956 gives
overriding force and effect to provisions of Act, 1996, notwithstanding anything to
contrary contained in Memorandum or Articles of Company or in any agreement
executed by it or for that matter in any resolution of Company in general meeting or
of its Board of Directors - A provision contained in Memorandum, Articles, agreement
or Resolution is to extent to which it is repugnant to provisions of Act, 1996 regarded
as void - Therefore, contract between parties is void - Award passed on basis said
contract is unsustainable - Hence award is set aside, petition is allowed
Industry: Auto
JUDGMENT
D.Y. Chandrachud, J.
1. The challenge in these proceedings under Section 34 of the Arbitration and Conciliation Act,
1996 is to an arbitral award dated 14th January 2006 of a sole Arbitrator, Mr. Justice A.V.
Savant.
The Protocol Agreement:
2. On 2nd October 1974, a Protocol Agreement was entered into between the Petitioner and the
Respondent pursuant to which Maharashtra Scooters Ltd. (MSL) was incorporated and
registered under the provisions of the Companies' Act, 1956. MSL is a Public Company and its
shares are listed on the Bombay Stock Exchange and the National Stock Exchange. The
Petitioner is an undertaking of the government of Maharashtra. In accordance with the terms of
the Protocol Agreement, the Petitioner holds 27% of shareholding of MSL while the Respondent
continues to hold 24%. The balance 49% is held by the public. The recitals to the agreement
state that the Petitioner was desirous of availing of the experience and know how of the
Respondent in the manufacture of two wheeler scooters, for the installation of plant and
machinery and the establishment of a Scooter Project. The Respondent agreed to participate in
the equity capital of a new manufacturing Company - MSL. The initial authorized capital of MSL
was Rs. 200 lakhs consisting of Rs. 150 lakhs in equity shares and Rs. 50 lakhs in cumulative
redeemable preference shares. By the agreement, it was agreed that the shareholding of the
Petitioner, the Respondent and of the public shall be in the proportion set out earlier. Neither
party to the agreement could allow the structure of MSL, the number of shares or the rights,
privileges, restrictions or qualifications of any class of shares to be altered or any further issue
of capital to be made without the specific prior consent of the other party. Any further issue of
capital was to be made in a manner that would ensure that the participation by the party in the
total issued equity share capital shall remain in the same proportion. Neither party was entitled
to increase or reduce directly or indirectly its proportion of the shareholding in the equity share
capital of MSL or to deal with its shareholding so as to lose its absolute control over voting
rights. The intent was that the parties to the agreement shall, between them, control at least
51% of the equity capital of MSL.
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Clause 7:
3. Clause 7 of the agreement upon which the dispute in the present case centers, was to the
following effect:
7. If either party desires to part with or transfer its shareholding or any part thereof
in the equity share capital of Maharashtra Scooters Limited, such party shall give
first option to the other party for the purchase of such shares at such rates as may
be agreed to between the parties or decided upon by arbitration. The party desiring
to part with or transfer its shares or any part thereof shall give to the other party a
written notice of such intention specifying the number of shares and the rate at
which it is willing to sell the same and if the other party within 30 days of the
receipt of such notice, agrees, to such proposal for purchase of such shares, the
party giving the notice shall be bound to sell and transfer such shares to the other
party at the rate specified in such notice. If the other party is willing to purchase
the shares but considers the rate proposed to be too high or unacceptable, it shall,
within 30 days from the receipt of the notice, give written intimation to the party
giving notice of its intention to purchase the shares and the question of rate shall be
referred to arbitration of a sole arbitrator if agreed to by both the parties or two
arbitrators one to be appointed by each party in accordance with the provisions of
the Indian Arbitration act. If the party receiving a notice within 30 days of its
receipt, fails to accept the proposal for purchase of the shares, the party giving the
notice will be free to sell the shares to any other party but only at a rate not less
than the rate specified in such notice.
4. The agreement stipulated that of the seven signatories to the Memorandum and Articles of
Association, four would be nominated by the Petitioner and three by the Respondent. The Board
of Directors was to consist of nine Directors, of which five were to be nominees of the Petitioner
and four of the Respondent. The appointment of the Chairman of the Board had to be made
from the names suggested by the Respondent. Though the management of MSL was to vest in
the Board, the daytoday work of the Company was to be carried out by the Chief Executive, to
be appointed by the Board of MSL. The selection of the Chief Executive was to be made from a
panel to be suggested by the Respondent. The parties undertook to ensure that MSL would
enter into an agreement with the Respondent for obtaining technical know how.
The 'offer' and 'acceptance':
5. Between 1986 and 2003, the Respondent had been requesting the Petitioner to divest its
shareholding in MSL in its favour. By a letter dated 9th April 2003, the Petitioner offered to sell
its shares to the Respondent, at a price of Rs. 232.20 per share. By a reply dated 3rd May
2003, the Respondent confirmed its interest in buying the shares, but stated that the price that
was offered by the Petitioner, was not acceptable. The Respondent requested that a meeting be
called of a High Level Committee to carry forward the negotiations in order to reach a fair and
amicable settlement. On 7th May 2003, the Petitioner addressed a letter to the Respondent
stating that the Respondent was required to respond to an offer within one month of the receipt
of the letter and called upon the Respondent to confirm whether this constituted a letter in
response to a buy back by the Respondent. If not, the Respondent was called upon to ensure
that the requisite response was submitted to the Petitioner by the appointed date. By its
response dated 10th May 2003, the Respondent confirmed that its letter dated 3rd May 2003,
was its response under Clause 7 of the Protocol Agreement to the Petitioner's offer dated 9th
April 2003. The Respondent confirmed that by its letter, it has confirmed its intention to
purchase the shares offered, but stated that the price offered was not acceptable to the
Respondent. The Respondent once again renewed its request for a meeting of a High Level
Committee to negotiate upon and resolve the price. On 6th June 2003, the Respondent made a
counter offer on the price of Rs. 75/ per equity share of MSL stating that it reflected a premium
of 5.6% over the prevailing market price as on 6th June 2003. By a letter dated 31st July 2003,
the Respondent stated that in the event that the price offered of Rs. 75/ per share was not
acceptable to the Petitioner, the next step in terms of Clause 7 of the Protocol Agreement was
to initiate the arbitral process.
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Reference to Arbitration:
6. On 23rd September 2003, the Principal Secretary in the Industries, Energy and Labour
Department of the State Government, forwarded a set of names of former Judges of this Court
for appointment of an Arbitrator. On 27th October 2003, the Petitioner addressed a letter to Mr.
Justice A.V. Savant, stating that under the Protocol Agreement, the Petitioner had to make the
first offer to the Respondent and in turn, the Respondent had to accept or reject the offer made
by the Petitioner for divesting its holding in MSL. The letter recorded that "this process has been
completed and since no agreement has been reached, on the value of the shares, as per the
agreement, the parties involved have to proceed to appoint a sole Arbitrator for the purpose".
Accordingly, Mr. Justice A.V. Savant was informed that the Government of Maharashtra had
suggested his appointment as a sole Arbitrator, which had been agreed to, by the Respondent
and by the Petitioner. Correspondence ensued between the parties. On 29th December 2003, a
joint reference to arbitration was made by the Petitioner and by the Respondent to Mr. Justice
A.V. Savant. The terms of reference inter alia were as follows:
1. The appointment of "Sole Arbitrator" is made jointly by BAL and WMDC, in terms
of the Clause No. 7 of the "Protocol Agreement" dated 2 October 1974, between
WMDC and BAL, the copromoters of MSL.
2. BAL had expressed its willingness to buy the stake held by WMDC in MSL. WMDC
had indicated its desire to sell its shareholding in MSL. However, price per share
remained in dispute and hence in accordance with clause No. 7 of the protocol
agreement, "the question of rate" for the purchase by BAL of equity shares in MSL
held by WMDC, is hereby referred to the Sole Arbitrator.
3. The arbitrator shall take into account the Protocol Agreement covenants and all
other concerned factors which may have impact on the share price of MSL shares,
while giving his arbitral award.
Arbitral Proceedings:
7. At the first meeting before the Arbitrator on 10th January 2004, directions were issued for
filing pleadings. On 23rd January 2004, an application was filed by the Petitioner that the
Respondent should be treated as the claimant to the arbitral proceedings and should be
directed to file its statement of claim. At the second meeting before the Arbitrator, directions
were issued to the parties to file their statements regarding the valuation of shares and the
relevant date for valuation. The Petitioner by its letter dated 3rd February 2004, sought a
meeting with the Respondent, on the ground that certain issues "need to be clarified", while
drafting the statement of claim. On 5th February 2004, the Petitioner, in a letter to the
Respondent, claimed that there was an agreement between the parties that the valuation of the
shares should be, as on the last quarter of 2003 and suggested that a specific date, as opposed
to the period of the last quarter, should be agreed. The Respondent by its letter dated 13th
February 2004 denied that there was any such agreement on the relevant date for valuation of
shares, as suggested and set up a case that the relevant date for valuation would be 30th June
2002. The Petitioner by its letter dated 13th February 2004, denied that there was any
agreement, by which the cut off date was to be 30th June 2002. The Respondent in its letter
dated 17th February 2004, once again reiterated that the parties had agreed to 30th June 2002
as the relevant date for valuation.
8. At the third meeting before the Arbitrator on 6th March 2004, it was agreed that parties
would urge their submissions on the preliminary issue as to what should be the relevant date
for valuation.
The challenge to jurisdiction:
9. On 6th April 2004, an application was filed by the Petitioner, questioning the jurisdiction of
the Arbitrator. The contention of the Petitioner was that (i) The Protocol Agreement dated 2nd
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October 1994 was illegal and void on the ground that (a) the agreement was a forward contract
prohibited by the Securities Contract Regulation Act; and (b) The agreement contained
restrictions on the transferability of the shareholding of MSL which were violative of the
provisions of Section 111A read with Section 9 of the Companies' Act, 1956 and hence, void;
(ii) The joint reference dated 29th December 2003, was void inter alia on the ground that it
proceeded on the premise that a concluded contract existed between the Petitioner and the
Respondent though as a matter of fact, no contract had been arrived at since neither of the
parties accepted the offer, nor had they agreed to a cut off date for valuation of shares. The
Respondent filed a reply, opposing the application and inter alia contended that by its letter
dated 3rd May 2003, the offer of the Petitioner had been formally accepted, but had clarified
that the rate was not acceptable. The Respondent contended that in fact and in law, an offer
was made by the Petitioner for the sale of its 27% stake and the Respondent had accepted the
offer to purchase the holding of the Petitioner. There was, it was urged, a concluded contract
with the rate to be ascertained through the arbitral process. Hence, according to the
Respondent, a contract for the sale of the shareholding of the Petitioner had been concluded
and what remained to be determined, was the rate at which the shares would be valued, in
terms of Clause 7 of the Protocol Agreement.
Arbitral Meetings on (i) preliminary objection and (ii) date for valuation:
10. The Arbitrator ruled on the preliminary objection to his jurisdiction, on 21st July 2004.
While rejecting the application, the Arbitrator stated that the reasons for the rejection would
follow and form part of the award. On 10th August 2004, an application was filed by the
Petitioner seeking relief to the effect that the Arbitral Tribunal should "determine and declare
the date of 29th December 2003, being the date of the joint reference made" by the parties "as
the relevant date for the purpose of valuation of the said shares proposed to be sold" by the
Petitioner to the Respondent. By its reply, the Respondent submitted that the relevant date for
valuation should be, 30th June 2002 or, in the alternative, assuming that there was no such
agreement between the parties on that date, the relevant date for valuation should be 3rd May
2003, which was the date on which, the Respondent had accepted the offer of the Petitioner, in
terms of Clause 7 of the Protocol Agreement. On 31st August 2004, the Arbitrator held that the
relevant date for valuation of shares would be 3rd May 2003, when the contract was concluded.
11. The Arbitrator has, in the course of the arbitral award delivered on 29th December 2005,
furnished reasons for accepting 3rd May 2003 as the date for valuation of shares. The Arbitrator
noted that on 9th April 2003, the Petitioner made a specific offer to the Respondent in terms of
Clause 7 of the Protocol Agreement and in terms of the decision of the Government of
Maharashtra to sell its equity shareholding in MSL to the Respondent at Rs. 232.20 per share.
The price of Rs. 232.20 was based on a valuation report submitted by Crisil Advisory Services
on 3rd September 2002. In response to the offer of the Petitioner, the Respondent conveyed its
acceptance on 3rd May 2003, clarifying at the same time that the price was not acceptable. The
Respondent's subsequent letter dated 10th May 2003, once again confirmed that the earlier
letter of 3rd May 2003, was in response to the offer in terms of Clause 7 of the Protocol
Agreement and that by its letter, the Respondent had confirmed its intention to accept the offer
though the price was not acceptable. The Arbitrator held that the correspondence exchanged
between the parties, between 9th April and 6th June 2003, left no manner of doubt that there
was a concluded contract under which the Petitioner was to sell its shares to the Respondent
and the Respondent was to purchase those shares and the contract was concluded on 3rd May
2003. The Arbitrator held consequently, the relevant date for the purpose of valuation would be
3rd May 2003, which was the date on which the contract was concluded. At this stage, it may
also be necessary to note that in the PartI Award, the Arbitrator referred to the provisions of
Sections 9 and 10 of the Sale of Goods Act and relied upon two English judgments and upon a
judgment of the Supreme Court in support of his conclusion that the date of valuation would be
the date of the acceptance of the offer to purchase.
Award:
12. By his arbitral award dated 14th January 2006, the Arbitrator declared that the rate at
which 30,85,712 equity shares of MSL, held by the Petitioner are to be valued as on 3rd May
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2003, for the purposes of sale to the Respondent, is Rs. 15 1.63 per share.
Challenge to the Award
Submissions of Petitioner:
13. In assailing the award under Section 34 of the Arbitration and Conciliation Act, 1996,
Counsel appearing on behalf of the Petitioner urged the following submissions:
(i) The Arbitrator exceeded his jurisdiction in deciding the date for valuation of the
shares of MSL, proposed to be transferred by the Petitioner to the Respondent; (ii)
MSL held 3.4% of the equity capital of Bajaj Auto Ltd. (the Respondent), Bajaj Auto
Finance Ltd. and Bajaj Hindustan Ltd. MSL also held investment in fully paid bonds
and mutual funds. In valuing the shares of MSL, the Arbitrator applied a discount of
30% on the value of the shares held by MSL in the Respondent ("the BAL shares").
The Arbitrator neither adjudicated upon, nor decided why a discount should be
applied to the BAL shares. The Petitioner was selling 27% stake in MSL to the
Respondent as a result of which the Respondent would obtain a majority holding in
MSL and would also as a result obtain 3.4% of the equity capital in BAL. Hence, the
value of the BAL shares held by MSL cannot be subjected to a discount, particularly
since the Respondent had a special interest in the acquisition of a 27% stake in
MSL; (iii) Neither the Arbitrator, nor the valuer whose evidence is accepted by the
Arbitrator, have decided why only the book value of the nonBAL quoted
investments, be taken and not the market value; (iv) No adjudication or
determination has been rendered by the Arbitrator at all on valuation. The
Arbitrator merely stated that fixing of a 30% discount would be just, fair and
reasonable and would meet the ends of justice. This constitutes an error apparent
on the face of the record, since the Arbitrator has proceeded on a basis which is not
permitted by Section 28(2); (v) The invocation of a rationale of a 20 to 40%
discount as a reason by the Arbitrator to apply a 30% discount discloses a total
nonapplication of mind or perversity, on the part of the Arbitrator, considering the
context in which the discount of 20 to 40% came to be stated. The fact that 20 to
40% of the discounted price of MSL shares is translated to a percentage discount in
the holding of BAL shares is such as to shock the conscience of the Court; (vi) The
application of a discount to the BAL holding and the use of only the book value in
the nonBAL holding affects the rights of the Petitioner and causes a direct financial
loss and injury. The value of the discount applied is Rs. 50 crores in the shares of
BAL alone; (vii) The evidence of Mr. Bansi Mehta was liable to be considered
irrelevant, non germane and extraneous to the reference after his answer to
questions 14 to 16 in the course of his evidence. The Arbitrator has to decide a civil
dispute on a balance of probabilities and he must of necessity decide on some
evidence. If the evidence of one side is discarded and the evidence of the other side
is admittedly not under Clause 7 of the Protocol Agreement, on which he is called
upon to make a valuation, the Arbitrator should have come to the conclusion that
on the evidence, he could not value at all; (viii) The fixation of the date for
valuation by the Arbitrator is beyond the scope of the submission; and (ix) The
Protocol Agreement is illegal and any determination under the agreement is void.
The effect of the Protocol Agreement is to create a right and preemption in MSL
which is a listed Company. The Protocol Agreement is incorporated in the Articles of
Association of MSL. The shares of a Public Company are declared by Section 111A
of the Companies' Act, 1956 to be freely transferable. The Articles of Association
must yield to the principle of free transferability embodied in Section 111A and the
preemptive right is inoperable. On this defence, there was virtually no adjudication
by the Arbitrator.
Submissions of Respondent:
14. On the other hand, it was urged on behalf of the Respondent that (i) In pursuance of the
formal offer made by the Petitioner under Clause 7 of the Protocol Agreement to divest itself of
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its 27% holding in MSL and to transfer it to the Respondent, the Respondent accepted the offer
by its letter dated 3rd May 2003. This was clarified by the Respondent by a letter dated 10th
May 2003, by which the Respondent stated that the earlier letter was in terms of Clause 7 of
the Protocol Agreement but the price offered by the Petitioner was not acceptable. In fact, the
letter addressed by the Petitioner to the Arbitrator on 27th October 2003 clearly establishes
that the process had been completed though there was no agreement on the value of the
shares to be sold. The joint reference by the parties to the Arbitrator on 29th December 2003
postulates that a contract for the sale of the Petitioner's holding in MSL to the Respondent
existed though there was a dispute about the rate. The Minutes of the Meeting before the
Arbitrator show that the date for valuation was regarded as an ingredient of the rate and there
was never any dispute about the date of the contract. The tenor of the correspondence which
was exchanged between the parties also shows that all the letters related to the date of
valuation and there was no dispute about the date of the contract. Until the reference was
made to arbitration, the common premise was that the agreement was arrived at, with
reference to the offer dated 9th April 2003, on 3rd May 2003. This was the position until
January 2004. The Arbitrator directed the pleadings to be filed on the valuation of the shares
and the relevant date. It was only in the application of 6th April 2004 that the Petitioner sought
to raise a dispute on whether a concluded contract has come into existence. Hence, the
question as regards the date of valuation was raised not in the context of the contract not being
concluded, but as an ingredient of the rate and it was only in the application of 6th April 2004
that the Petitioner sought to link the date of valuation to the submission that the contract had
not been concluded; (ii) In so far as the question of valuation is concerned, the only ground
which has been raised in the Arbitration Petition (Ground AA) relates to the discounting of the
value of BAL shares held by MSL; (iii) Considering the scope of Section 34 of the Arbitration and
Conciliation Act, 1996, an appellate review of an arbitral award is not permissible in law. The
decision of the Supreme Court in ONGC Ltd. v. Saw Pipes Ltd. MANU/SC/0314/2003 : (2003) 5
SCC 705 does not contemplate an appellate review or suggest a reappraisal of evidence; (iv)
The arbitral award furnishes a valid basis from the evidence for applying a discount of 30% in
the facts of the case. The evidence of Mr. Bansi Mehta suggested that a discount between 28 to
40% would have to be allowed on a conceptual basis whereas on an empirical comparison
based on market capitalization, a discount between 56 to 91% would have to be taken. The
Arbitrator has held that the discount should be no less than 30% in the facts of this case. The
reference by the Arbitrator to the report of Mr. Raghuram indicating a 20 to 40 % discount is
erroneous, because this was a reference to the valuation of MSL shares. But merely because
one ground which is relied upon by the Arbitrator suffers from an error of fact, would not
detract from the validity of the award. There was a wealth of evidence before the Arbitrator in
support of the finding that the discount of 30% is valid. The evidence is referred to in the
arbitral award itself and the award can be sustained on that basis. The realizable value of an
asset is less than the market value in a liquidation valuation; (v) As regards the book value
being taken of the nonBAL holding, the evidence shows that there was no appreciation in the
value of such holding. If the market value was taken, it would have to be discounted, which
would then result in a figure even lower than the book value; (vi) The Arbitrator accepted the
liquidation basis of valuation from the report of Mr. Bansi Mehta and applied a discount. There
is both an adjudication and determination by the Arbitrator. Clause 7 of the Protocol Agreement
does not provide any particular method of valuation. Mr. Bansi Mehta, therefore, stated in his
crossexamination that the classical method has been followed. Clause 7 provides for a fixation
of the rate at which the shares would be sold, which lies in the domain of the Arbitrator. In any
event, this relates to an appreciation of the evidence; (vii) Parties made a specific reference of
a question of law by the application dated 6th April 2004, which was responded to and decided.
The question as regards the legality of Clause 7 of the Protocol Agreement visavis Section 111A
of the Companies' Act, 1956, was not in the original reference. Yet, the question was
specifically referred to the Arbitrator during the pendency of the reference. The decision of the
Arbitrator was invited as a jurisdictional issue, before the Arbitrator considered the merits of the
dispute. Hence, the determination of the Arbitrator is final and cannot be enquired into; (viii) In
any event, the Arbitrator has followed the decision of the Supreme Court in M.S.
Madhusoodhanan v. Kerala Kaumudi Pvt. Ltd. 2003 117 Comp Cas 19. 9. The restriction in the
present case, imposed by Clause 7 of the Protocol Agreement is valid, because it is not one that
binds all shareholders, but which binds two shareholders in a specified contingency. The
restriction is contained in the Articles of Association. Section 111A of the Companies' Act, 1956
does not prohibit agreements entered into between specific shareholders regarding specific
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shares, particularly when incorporated in the Articles of Association.

15. The challenge to the arbitral award can now be taken up for consideration. Did the
Arbitrator exceed his jurisdiction:
16. The submission of the Petitioner is that the Arbitrator acted in excess of his jurisdiction in
deciding the date with reference to which the valuation of the shares had to be determined.
17. On 9th April 2003, the Petitioner addressed a letter to the Respondent by which, it proposed
to divest its shareholding of 30,85,712 equity shares in MSL at an offered price of Rs. 232.20
per equity share to the Respondent. The Petitioner stated that it was making an offer in
accordance with the provisions of Clause 7 of the Protocol Agreement and in view of the
decision of the Government of Maharashtra. The Respondent in its reply dated 3rd May 2003,
confirmed its interest in buying shares offered, but recorded that the price was not acceptable.
The response of the Respondent was in pursuance of Clause 7 of the Protocol Agreement. By a
further letter dated 10th May 2003, the Respondent confirmed that its earlier response of 3rd
May 2003 was to the offer made by the Petitioner on 9th April 2003 and was in terms of Clause
7 of the Protocol Agreement. The Respondent stated that it has confirmed its intention to
purchase the shares offered, but the price offered was not acceptable.
18. The contention of the Petitioner is that the letter of the Respondent dated 3rd May 2003,
was not an unqualified acceptance since a meeting was sought for negotiation to explore a
settlement. In dealing with this submission, it is to be noted that on 31st July 2003, the
Respondent sought the initiation of the arbitral process, in the event that its offer of a price of
Rs. 75 per share was not acceptable. The arbitral process was initiated and on 27th October
2003, the Petitioner addressed a letter to the Arbitrator, recording that under the Protocol
Agreement, the Petitioner had to first make an offer to the Respondent and in turn, the
Respondent had to accept or reject that offer. This process, the Petitioner recorded, "has been
completed and since no agreement has been reached on the value of the shares, as per the
agreement, the parties involved have to appoint a sole Arbitrator for the purpose". Following
this letter, a joint reference to arbitration was made on 29th December 2003. The terms of
reference contain an express statement of fact that the Respondent had expressed its
willingness to buy the stake held by the Petitioner in MSL and that the Petitioner indicated its
desire to sell its shareholding in MSL. However, what remained in dispute was the price per
share and hence, in accordance with Clause 7 of the Protocol Agreement, the "question of rate"
for the purchase by the Respondent of the equity shares held by the Petitioner in MSL, was
being referred. What emerges from the material on record, therefore, is, that in terms of Clause
7 of the Protocol Agreement, the Petitioner had made an offer to sell its shares in MSL, to the
Respondent. The Respondent by its letters dated 3rd May and again 10th May 2003, accepted
the offer to purchase the shares, but indicated that the price suggested by the Petitioner was
not acceptable. Parties at that stage and, as would be noted, even later were ad idem on the
fact that the contract for the sale of shares, stood concluded by the acceptance of the offer
made by the Petitioner. Clause 7 of the Protocol Agreement contemplates that if the party, to
whom an offer is made, "is willing to purchase the shares, but considers the rate proposed, to
be too high or unacceptable", it shall, within thirty days from the receipt of the notice, furnish a
written intimation to the offerer of the intention to purchase shares and the question as regards
the rate at which the shares are to be sold shall be referred to arbitration. In the present case,
the Petitioner by its letter to the Arbitrator dated 27th October 2003, clearly stated that the
process of making of the offer and its acceptance, had been completed and there was no
agreement on the value at which the shares would be sold. It is in this context, that the joint
reference to the Arbitrator proceeded on the basis that a concluded contract for the sale of
shares did exist but there was a dispute about the rate.
19. The Arbitrator, during the course of the second meeting held on 27th January 2004, called
upon the parties to file their statements "regarding the valuation of shares and the relevant
date for valuation". The date for valuation was regarded as an ingredient of the rate, at which
the shares would be sold. There was no dispute about the fact that the contract for the sale of
the shares had been concluded. Consequently, until the reference to arbitration was made,
parties proceeded on the basis that the agreement for the sale of the shares, was founded on
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the letters dated 9th April 2003 and 3rd /10th May 2003. This position held the field until
January 2004. The Arbitrator directed the parties to file pleadings on the valuation of shares
and the relevant date for valuation. The correspondence exchanged between the parties in
February 2004, shows that the dispute was on the date of valuation. It was for the first time, in
the application filed by the Petitioner before the Arbitrator, on 6th April 2004, that the Petitioner
sought to question as to whether a concluded contract had been arrived at. This was an obvious
afterthought and was a clear deviation from the manner in which the Petitioner had understood
the course of dealings between the parties. The reference to the date of valuation was
introduced by the Arbitrator, when there was no dispute about the date of the contract or about
the existence of a concluded contract. When the Arbitrator raised the question as regards the
date of valuation, this was only as an ingredient of the fixation of the rate and the premise of
the reference to arbitration was the existence of a concluded contract. The Arbitrator was not
deciding when the contract was concluded or whether it was concluded. The Arbitrator has, as a
matter of fact, ascertained the date of valuation as an ingredient of the fixation of the rate at
which the shares held by the Petitioner would be sold to the Respondent. The Arbitrator has
held that the relevant date of valuation would be 3rd May 2003, which was the date on which a
concluded contract was arrived at between the parties. In PartI of his Award, the Arbitrator has
held that the date of valuation would be the date on which the offer to purchase was accepted.
In holding thus, the Arbitrator has not transgressed his jurisdiction. The challenge to the
arbitral award on this ground must fail.
Scope of challenge under Section 34 of the Arbitration and Conciliation Act, 1996:
20. Section 34 of the Arbitration and Conciliation Act, 1996, defines the parameters of a
recourse to a Court against an arbitral award. This recourse is, by an application for setting
aside the award, in accordance with the provisions of Subsections (2) and (3) of the provision.
For this case, the focus on the scope of judicial intervention is on sub Clause (iv) of Clause (a)
and on sub Clause (ii) of Clause (b) of Subsection (2) of Section 34. Under these provisions, an
arbitral award may be set aside by the Court, only if (i) The arbitral award deals with a dispute
not contemplated by or not falling within the terms of the submission to arbitration or if it
contains decisions on matters beyond the scope of the submission to arbitration; and (ii) If the
Court finds that the arbitral award is in conflict with the public policy of India.
21. Section 28(1)(a) mandates that the arbitral Tribunal must decide the dispute in accordance
with the substantive law in India. Under Subsection (3), the Tribunal has to decide the dispute,
in accordance with the terms of the contract and after taking into consideration, the usage of
the trade applicable to the transaction. In ONGC v. Saw Pipes (supra) the Supreme Court held
that if an award is in contravention of the provisions of the Act, it is subject to judicial
intervention and can be set aside. If the arbitral Tribunal does not follow the mandatory
procedure under the Act, it would act in excess of its jurisdiction and the award would be
patently illegal. The ground for interference is elucidated thus, by the Supreme Court:
15. The result is - if the award is contrary to the substantive provisions of law or the
provisions of the Act or against the terms of the contract, it would be patently
illegal, which could be interfered under Section 34. However, such failure of
procedure should be patent affecting the rights of the parties.
The illegality, as the Supreme Court noted, must be such as "must go to the root of the matter"
for "if the illegality is of trivial nature, it cannot be held that the award is against public policy".
The decision in Saw Pipes lays down that before an award can be set aside, it must be (i)
Contrary to the fundamental policy of Indian Law; or (ii) Contrary to the interest of India; or
(iii) Contrary to Justice or morality; or (iv) Patently illegal. An award which is so unfair and
unreasonable, that it shocks the conscience of the Court, would be liable to be set aside
because, then it would be contrary to public policy. The Supreme Court, however, emphasized
that if the arbitral Tribunal commits a "mere error of fact or law in reaching its conclusion on a
disputed question referred to it for adjudication", the Court would have no jurisdiction to
interfere with the award. This would depend upon the reference that was made to the
Arbitrator. If there is a general reference to the Tribunal for deciding the dispute and if an
award is based on an erroneous and illegal proposition, the Court would interfere. In the case of
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a reasoned award, the Court can set aside the award if on the face of the award, there is an
erroneous proposition of law or on its application. However, if a specific question of law is
submitted to the Arbitrator an erroneous decision on a point of law does not make the award
bad, unless the Court is satisfied that the Arbitrator has proceeded illegally. The decision of the
Supreme Court in Saw Pipes (supra) does not contemplate an appellate review of an arbitral
award or a reappraisal of the evidence. The Court cannot substitute a conclusion on evidence,
which appears to the Court to be just and proper for the conclusion that is arrived at, by the
arbitral forum. The emphasis in the judgment in Saw Pipes, is that judicial intervention can be
warranted where the arbitral Tribunal has not followed the mandatory procedure prescribed by
Sections 24, 28 or 31(3), which affects the rights of the parties or where the award is contrary
to the substantive provisions of law; to the provisions of the Act or to the terms of the contract.
The emphasis is on a patent illegality. Not every error of law or fact makes an award subject to
judicial intervention.
22. The subsequent judgment of the Supreme Court in Delhi Development Authority v. R.S.
Sharma & Co. MANU/SC/3624/2008 : (2008) 13 SCC 80makes a reference to the earlier
judgments of the Court including the judgment in Hindustan Zinc Ltd. v. Friends Coal
Carbibusatuib MANU/SC/8095/2006 : (2006) 4 SCC 445 which in turn has followed Saw Pipes
(supra). In the judgment in Delhi Development Authority (supra), the Bench of two Learned
Judges of the Supreme Court has summarized the principle for judicial intervention in arbitral
awards, as they emerge from the decided cases, thus:
21. From the above decisions, the following principles emerge:
(a) An award, which is
(i) contrary to substantive provisions of law; or
(ii) the provisions of the Arbitration and Conciliation Act, 1996;
or
(iii) against the terms of the respective contract; or
(iv) patently illegal; or
(v) Prejudicial to the rights of the parties;
is open to interference by the Court under Section 34(2) of the Act.
(b) The award could be set aside if it is contrary to:
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality.
(c) The award could also be set aside if it is so unfair and unreasonable that it
shocks the conscience of the court.
(d) It is open to the court to consider whether the award is against the specific
terms of contract and if so, interfere with it on the ground that it is patently illegal
and opposed to the public policy of India.
At this stage, it would, however, be necessary to note that an arbitral award prejudicial to the
rights of the parties is not an independent head of challenge as such, and this is evident both
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from the decision in Saw Pipes and in the paraphrasing of the principles laid down in that
judgment in Hindustan Zinc. In paragraph 13 of the judgment in Saw Pipes, the Supreme Court
addressed the issue as to whether an award could be set aside if the arbitral Tribunal has not
followed the mandatory procedure prescribed under Sections 24, 28 or 31(3), which affects the
rights of parties. In Hindustan Zinc, the Supreme Court held that an award contrary to the
substantive provisions of law or the provisions of the Act or the terms of the contract, would be
patently illegal and if it affects the rights of the parties would be open to interference of the
Court under Section 31(2).
23. The question as to whether a ground for the interference of the Court has been established
in the facts of this case, must now be considered, in terms of the law laid down by the Supreme
Court.
The question of valuation:
24. MSL has an Operating Section and an Investment Section. MSL's Assembly Plant was set up
under technical know how from the Respondent. The assembly, the Court is informed, was of
the Chetak Scooters of Bajaj. The Investment Section of MSL has holdings in the Bajaj Group of
Companies and others. MSL held 3.4% of the equity capital of the Respondent ("the BAL
shares"), Bajaj Hindustan Ltd. and Bajaj Auto Finance Ltd. The nonBajaj holding was in fully
paid up bonds and Mutual Funds.
25. Principally, two submissions have been urged on behalf of the Petitioner. Firstly, the
Arbitrator has selected a particular method of valuation. Whether a valuation on a liquidation
basis could at all be adopted for a Company which has a going concern, was sought to be
placed in issue and it was urged that MSL is not a Company which is unable to pay its debts.
The Respondent had a special interest in the acquisition of the stake held by the Petitioner in
MSL. By the acquisition of the equity holding of the Petitioner, the Respondent would acquire a
majority holding in MSL, besides the acquisition of 3.4% of the holding in the BAL shares. The
second aspect relates to the discounting of the holding of BAL shares.
26. The Arbitrator culled out the principles for valuation of shares from the judgments of the
Supreme Court in Commissioner of Wealth Tax v. Mahadeo Jalan MANU/SC/0305/1972 : (1972)
86 ITR 621 and Commissioner of Gift Tax v. Kusumben D. Mahadevia MANU/SC/0300/1979 :
(1980) 122 ITR 38 The judgment in Mahadeo Jalan lays down that leaving aside a distress sale,
the factors which are likely to affect the value of shares are: (i) The profit earning capacity of
the Company; (ii)The capacity of the Company to maintain those profits or a reasonable return
for capital invested; (iii) The prospects for capitalization of its earning by declaring bonus
shares and in a case of a financially sound Company, the prospects for the issuance of a rights
issue where existing shareholders can obtain shares for a price less than the market value,
increasing the yield on investment. The Supreme Court, after enunciating various methods of
valuation of shares, namely, (i) yield or profit earning method; (ii) the market value method if
profit is certain; and (iii) liquidity if profit is uncertain, laid down the principles which emerge.
In so far as it is relevant to this case, the propositions (1), (4) and (5) are as follows:
1) Where the shares in a public limited company are quoted on the stock exchange
and there are dealings in them, the price prevailing on the valuation date is the
value of the shares.
4) Where the dividend yield and earning method break down by reason of the
company's inability to earn profits and declare dividends, if the setback is
temporary then it is perhaps possible to take the estimate of the value of the shares
before setback and discount it by a percentage corresponding to the proportionate
fall in the price of quoted shares of companies which have suffered similar reverses.
5) Where the company is ripe for winding up then the breakup value method
determines what would be realized by that process.
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The Arbitrator adverted to certain admitted facts, these being as follows: (i) The principal
activity of MSL involved the assembly of scooters for which completely knocked down kits were
received from the Respondent. The Respondent and MSL had entered into a technical know how
agreement. MSL was assembling Bajaj Chetak Scooters; (ii) Admittedly, the management of
MSL was with the Respondent. Five persons on the Board of Directors were to be nominated by
the Petitioner and four by the Respondent. The Chairman and Managing Director of the
Respondent was to be the Chairman of MSL. Under Clause 154 of the Articles of Association,
several important decisions to be taken by MSL, were subject to the approval of the
Respondent. Moreover, the Chief Executive of MSL was to be appointed by the Board, out of a
panel of names suggested by the Respondent. Key management functions of MSL were virtually
integrated with the Respondent. MSL only has an assembly plant by which it cannot
manufacture, but can only assemble scooters.; (iii) As a result of customer preference for
motorcycles, the market for scooters had shown a declining trend, adversely affecting the
operations of MSL. MSL had suffered operating losses for financial years 200102, 200203 and
200304; (iv) The market share of geared scooters with which MSL is concerned, had gone down
from 23.5% in 19992000 to 4.9% in 200304; (v) MSL requires sales of about 62,000 scooters
per year to achieve a breakeven position, whereas the business plan for the period 200409
indicates production and sale of Chetak Scooters of only 12,000 units per year. The Arbitrator
noted, while dealing with the question of control premium, that even without the sale of its 27%
stake by the Petitioner, the Respondent already had effective managerial control over MSL
without boardroom control. The rationale for a control premium would, therefore, not exist in
the facts of this case. Moreover, it is an admitted fact that the non-core business assets of MSL
which consist of unquoted investments and quoted investments, constitute 96.2% of the
business assets of MSL. Though the main business of MSL was supposed to be in the operating
segment, namely, in the core business assets, that constituted only a negligible operation,
namely, 3.8%. Hence, the core business activity of MSL of assembling scooters was
insignificant. Having regard to these circumstances, the Arbitrator declined to accept the theory
propounded by Mr. Raghuram, the witness for the Petitioner, that a control premium must be
accounted for in the facts of this case. The valuation made by Mr. Raghuram was not accepted
by the Arbitrator for valid reasons which have been noted above. The reasons on the basis of
which the testimony of Mr. Raghuram and his valuation are discarded, are inter alia contained
in paragraph 75 of the award. In fairness, it may be recorded here that Learned Senior Counsel
appearing on behalf of the Petitioner has not pressed that aspect of the matter.
27. Mr. Bansi Mehta was examined as an expert on valuation Mehta was crossexamined on
behalf of the Petitioner, in order to question his justification for adopting the net asset value on
a liquidation basis. The award notes that this method was also recommended by the witness of
the Petitioner in his first report. Mr. Bansi Mehta worked out two different valuations: (i) A
valuation of Rs. 125 per share was worked out by applying a 45% discount on the six monthly
average value on the National Stock Exchange (NSE); and (ii) A value of Rs. 102 per share was
worked out on the basis of a 60% discount on a six monthly average taken from NSE. The
Arbitrator considered it fit to apply a 30% discount "in the facts of the case" and considered
that this would be "just, fair and reasonable and would meet the ends of justice". The six
monthly average on the NSE for 33.87 lakh BAL shares was Rs. 494 per share on which a 30%
discount was applied. Paragraph 100 of the award which reads thus:
In the light of the above, I think interests of justice would be met by fixing the rate
on the basis of the calculations made by Mr. Bansi Mehta in Appendix8 and 9 to his
report subject, however, to two changes. In Appendix 9, he has calculated discount
of 60% on the six monthly average rate on National Stock Exchange, namely
discount of Rs. 296.40 on the rate of Rs. 494/ per share. This results in the value of
a share being Rs. 102.46. In Appendix8, he has calculated 45% discount on the six
monthly average rate on National Stock Exchange namely discount of Rs. 222.30 on
the rate of Rs. 494/ per share. This results in the value of a share being Rs. 124.42.
As reiterated above, Mr. Raghuram himself has indicated a discount of 20% to 40%
in his first report. In the facts of the case, I think that fixing 30% discount would be
just, fair and reasonable and would meet the ends of justice.
28. The Award on valuation is questioned on the ground that there is a violation of the
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provisions of Section 28(2) of the Arbitration and Conciliation Act, 1996. Counsel for the
Petitioner submitted that Mr. Bansi Mehta applied a discount between 45% to 60% and arrived
at the conclusion that the price of a share would vary between Rs. 102 to Rs. 124. The
Arbitrator took a discount of 30% in arriving at a valuation of Rs. 151.63 per share on the
ground that he considered it just, fair and reasonable and to meet the ends of justice. The
submission is that the Arbitrator decided what he thought is fair, just and equitable and this is
not permissible under Section 28(2) of the Act which mandates that the decision has to be
reasoned. The Arbitrator also furnished the reason that Mr. Raghuram, the witness for the
Petitioner, had "himself ... indicated a discount of 20% to 40% in his first report". It was urged
that the discount which Mr. Raghuram suggested in his evidence was on the shares of MSL,
whereas the Arbitrator applied this to the valuation of BAL shares. It was urged that the award,
therefore, shows no reasoning at all and betrays a non application of mind. The factual basis on
which the Arbitrator concluded that a discount of 30% should be applied, was incorrect. As a
result of this process, it was submitted that the discount on BAL shares of Rs. 50.12 crores was
wrongly granted by the Arbitrator.
29. The Arbitrator, in paragraphs 80 and 81 of the Award, considered the report of Mr. Bansi
Mehta. The Arbitrator noted that if a conceptual basis is adopted, the value of the investments
has to be discounted between 20 to 40%. On the other hand, on an empirical comparison of
data on actual valuations, based on market capitalization, a discount of between 56 to 91% is
required to be adopted. In Appendix6A of his report, Mr. Bansi Mehta furnished details of his
working in respect of (i) Tata Investments; and (ii) Industrial Investment Trust, where the
discounts were 82.85% and 9 1.4%. In Appendix6B, where the example of TISCO Ltd. was
considered, the discount applied was 56%. Appendix6C dealt with Bajaj Auto Ltd.
Consequently, an empirical comparison suggested that the discount which is to be applied while
valuing the shares held by an operating company, in other entities, would vary between 56 to
91%. On the other hand, in Appendix7, Mr. Bansi Mehta applied a conceptual or common sense
basis, which showed that the discount on the shareholding held in other Companies, would be
approximately 2840%. Mr. Bansi Mehta, in his answer to Question 147 in the course of his
crossexamination explained the basis on which the discount had been calculated, firstly, taking
an empirical comparison and secondly, on a conceptual analysis. While explaining paragraph
5.3 of his report, Mr. Bansi Mehta makes a reference to what is described as the "C, D, E"
approaches: The acronym stands for 'constraint', 'distance' and 'empirical data'. The Arbitrator
has made a reference in his Award to the answer to Question 147 and to paragraph 5.4 of the
report of Mr. Bansi Mehta, which reads as follows:
5.4 On a conceptual basis, we have set out in Appendix7 what a shareholder can
expect to get if the Investee Company were to realize its investment and, in
abstract theory, distributes the entire proceeds to the shareholders, from which it
will be evident that what a shareholder can hope to achieve is no more than 72% of
the gain. This, in our view, reinforces what is stated earlier that the fair market
value must allow for a discount of about 30%. Accordingly, in our view, MSL's
shareholding in BAL valued at the sixmonthly average rate set out in Appendix5
should be further discounted by no less than 30%.
Mr. Bansi Mehta's evidence, which has been relied upon by the Arbitrator, is, therefore, clear in
stipulating that the holding of MSL in the Respondent, valued on a six monthly average rate,
should be discounted "by no less than 30%". The underlying principle is that, the realizable
value of an asset is less than the market value in a liquidation valuation. The Arbitrator adopted
a discount of 30% on the valuation of BAL shares. The submission that the Arbitrator has done
so, without any reason and in the absence of any basis, is incorrect. The evidence of Mr. Bansi
Mehta, which the Arbitrator accepts, contains a detailed elaboration of the rationale for making
a discount on the valuation of BAL shares. Mr. Mehta considered discounting both from an
empirical and a conceptual perspective. Empirically, the valuation of the BAL shares would be
susceptible to a discount of between 56 to 91%, whereas, conceptually, the discount would be,
no less than 30%. The Arbitrator in adopting the discount of 30%, cannot, therefore, be
faulted. The figure of 30% is traceable to the evidence of Mr. Bansi Mehta who states that the
discount should be no less than 30%. The observations of the Arbitrator in paragraph 100 of
the Award, also refer to Appendices 8 and 9, where Mr. Bansi Mehta considered the empirical
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basis. The observations of the Arbitrator in paragraph 100 that "in the facts of the case .. fixing
30% discount would be just, fair and reasonable and would meet the ends of justice", cannot be
read in isolation or be utilized to suggest that the Arbitrator was applying his own notion of
what is equitable, fair and just.
30. Section 28 of the Act postulates that the arbitral Tribunal has to decide the dispute
submitted to arbitration in accordance with the substantive law for the time being in force, in
India. The arbitral Tribunal can decide ex aequo et bono or as amiable compositeur only if the
parties have expressly authorised it, to do so, this being the mandate of sub section (2) of
Section 28. The arbitral Tribunal under subsection (3), has to decide in accordance with the
terms of the contract and is required to take into account the usages of the trade. In the
present case, the discount of 30% that has been applied to the BAL holding, is not adopted by
the arbitral Tribunal as amiable compositeur or on notions fairness and equity. The discount is
founded upon considerations which are germane and which were based on the evidence on
record. The sufficiency and quality of the evidence, are matters for the arbitral Tribunal to
determine. The arbitral Tribunal accepted the evidence of Mr. Bansi Mehta for valid reasons,
recording that the crossexamination has not resulted in any significant dilution of the evidence.
In one area, there is an error of fact on the part of the Arbitrator where he refers to the report
of Mr. Raghuram as having indicated a discount of 30 to 40%. Admittedly, the discount that
was referred to in the report of Mr. Raghuram dealt with the valuation of MSL shares (not the
BAL shares). On this aspect, the Arbitrator has misread the evidence and one ground which
weighed with him, would constitute an error of fact. But, as already discussed earlier, there was
a wealth of evidence before the Arbitrator, which was accepted by him to demonstrate that a
discount of 30% was susceptible both on a conceptual and an empirical basis. The challenge on
this ground is, therefore, lacking in substance.
Book value of nonBAL holdings:
31. The submission is that the Arbitrator was not justified in taking the book value of nonBAL
quoted investments, as opposed to the market value. A brief reference to the evidence of Mr.
Bansi Mehta, would be in order. Mr. Bansi Mehta was crossexamined with reference to
paragraph 5.1 of his report, where he has stated that "adopting the book value, as a realizable
value, the value for that component would correspond to such book value". Mr. Mehta stated
that this is a normal practice for assets that are in the nature of liquid instruments since they
are presumed to have been acquired to earn a recurring rather than the maturity return. Vol. II
Question 128 page 557 In answer to Question 164, Mr. Mehta stated that the nonBAL
investments can be encashed easily and that there was "not much appreciation". The most
proximate balance sheet of MSL as of 31st March 2003, showed that almost 98% or more of the
appreciation in the quoted investments had come on account of MSL's shareholding in BAL.
Since the appreciation of other quoted investments, was not material, there was no need to
apply a discount to that value. Mr. Mehta explained that if he had taken the realizable value of
the other assets of the Investment Section of MSL and had applied a discount to that value, the
value of the Investment Section, would have been even lower and not higher. The evidence of
Mr. Mehta, therefore, indicates that the reason why he adopted the book value for nonBAL
holdings was that there was no significant appreciation in the value of those holdings. If the
market value were to be taken, it would have to be discounted, which would result in a value
even lower and not higher. In the circumstances, there is a cogent justification on the evidence
for applying the book value for nonBAL quoted investments.
32. The Arbitrator accepted the liquidation basis from the report of Mr. Bansi Mehta for
valuation and applied a discount. There is an adjudication and determination by the Arbitrator.
During the course of the submissions, a considerable degree of emphasis was sought to be
placed on the methodology adopted by Mr. Mehta of determining the rate based on an objective
fair valuation. Paragraph 3.2 of the report states that the classical concept of valuation is the
price, which would be fetched between a willing buyer and willing seller. BAL being a listed
Company, whose shares are held by a wide body of investors, Mr. Mehta stated that his
approach to valuation was guided by the "concept of an objective valuation between a willing
buyer and a willing seller". Mr. Mehta was asked, during the course of the crossexamination, to
demonstrate what part of Clause 7 of the Protocol Agreement requires a determination of an
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objective fair valuation. In his answer, he clarified that in the absence of any particular
provision concerning the method of valuation he would adhere to the classical concept of an
objective fair valuation between a willing seller and a willing buyer. Mr. Mehta deposed that
what he had stated in the report about the approach to valuation, was not inconsistent with
Clause 7 of the Protocol Agreement. He stated that he had not done the valuation under Clause
7 of the Agreement. His evidence was that when a valuation is required, and no specific formula
or guideline has been prescribed, the approach is to ascertain, what can be a fair value between
a willing, (but not over eager) buyer and a willing (but not a distress) seller. The contention
that the report of Mr. Mehta must be discarded because, he has not carried out the valuation
under Clause 7 lacks substance. Clause 7 of the Protocol Agreement does not provide for any
particular method of valuation. Consequently, Mr. Mehta stated, in the course of his crossexamination, that the classical method had been followed. Clause 7 of the Agreement provides
for a fixation of the rate, which lies in the domain of the Arbitrator. That in any case lies in the
realm of the appreciation of evidence.
33. Section 4 of the Sale of Goods Act, 1930 provides that a contract of the sale of goods is a
contract whereby the seller transfers or agrees to transfer the property in goods to the buyer
for a price. Under Section 5, a contract of sale is made by an offer to buy or sell goods for a
price and the acceptance of such offer. The contract may provide for the immediate delivery of
the goods or immediate payment of the price or both, or for the delivery or payment by
installments, or that the delivery or payment or both shall be postponed. The price in a contract
of sale can be fixed under Section 9(1) by the contract or may be left to be fixed in a manner
thereby agreed or that may be determined by the course of dealing between the parties. Where
the price is not determined in accordance with the provisions of subsection (1) of Section 9, the
buyer shall pay the seller a reasonable price and what is reasonable is a question of fact,
determined on the circumstances of each case.
34. The challenge to the valuation must fail.
Section 111A of the Companies' Act, 1956:
35. The challenge under this head, is to the legality of Clause 7 of the Protocol Agreement. The
submission of the Petitioner is that Clause 7 creates a right of preemption. MSL is a listed public
Company. The Protocol Agreement is incorporated in the Articles of Association. Section 111A of
the Companies' Act, 1956 provides that the shares or debentures of a Company and any
interest therein, shall be freely transferable. Section 9 stipulates that the provisions of the Act
shall have effect, notwithstanding anything to the contrary contained in the Memorandum or
Articles of Association. Hence, the preemptive right recognized by Clause 7 of the Protocol
Agreement and incorporated in the Articles of Association, must yield to Section 111A. In the
present case, it was submitted that on the challenge to the legality of the preemptive right
created by Clause 7 of the Protocol Agreement, as incorporated in the Articles, there is virtually
no adjudication by the Arbitrator.
Was there a reference on a specific question of law?
36. On behalf of the Respondent, an objection was raised to the maintainability of the challenge
under Section 34, on the ground that by an application dated 6th April 2004, the legality of
Clause 7 was squarely placed in issue for a decision by the Arbitrator. This, it was urged, would
constitute a specific reference of a question of law, on which the decision of the Arbitrator would
be final. The submission is that the application dated 6th April 2004, was responded to and
decided: there was a reference of a specific question of law and though this was not part of the
original reference to arbitration yet, during the pendency of the reference, the question was
sought to be raised. The decision of the Arbitrator was, it was submitted, an adjudication on a
reference of a specific question of law upon which, finality must vest in the decision of the
Arbitrator.
37. The position as it obtained under the Arbitration Act, 1940, was that the Arbitrator could
decide an issue of jurisdiction pro tem. Where, however, parties referred a specific question of
law and agreed to be bound by the decision of the Arbitrator, that decision became final. This
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was a principle of judge made law. The Arbitration and Conciliation Act, 1996, empowers the
arbitral Tribunal, by Section 16, to rule on its own jurisdiction, including ruling on any objection
with respect to the existence or validity of the arbitration agreement. For that purpose, an
arbitration clause, which forms part of the contract is to be treated as an agreement
independent of the other terms of the contract and a decision of the arbitral Tribunal that the
contract is null and void shall not entail ipso jure the invalidity of the arbitration clause. The
arbitral Tribunal has to decide on a plea that it does not have jurisdiction and where the
Tribunal takes a decision rejecting the plea, it has to continue with the arbitral proceedings and
make an arbitral award. A party aggrieved by the arbitral award is empowered to make an
application for setting aside the award in accordance with the provisions of Section 34. That is
the scheme legislated upon by Parliament in the Arbitration and Conciliation Act, 1996, in
regard to the empowerment of an arbitral Tribunal to rule on its jurisdiction.
38. In ONGC v. Saw Pipes Ltd. (supra), the Supreme Court recognized that "if a specific
question of law is submitted to the Arbitrator, an erroneous decision in point of law does not
make the award bad, so as to permit its being set aside, unless the Court is satisfied that the
Arbitrator had proceeded illegally." para 54 page 736
39. The issues which fall for determination are: (i) What are the requirements that must be
fulfilled in law in order to postulate that parties have referred a specific question of law; and (ii)
Whether in the present case, the parties must be regarded as having made a reference to the
Arbitrator on a specific question of law.
The specific question doctrine:
40. Since the judgment of the Supreme Court in Seth Thawardas Pherumal v. Union of India
MANU/SC/0070/1955 : AIR 1955 SC 468 it is now a settled principle of law that a distinction
has to be made between those cases in which a question of law is specifically referred for the
decision of the Arbitrator and those in which a question of law incidentally arises while deciding
the question that is actually referred. If parties refer a question of law specifically to the
Arbitrator and it is manifest that they seek a decision from the Arbitrator in preference to a
decision of the Court, the decision of the Arbitrator would be binding on the parties and the
Court would not impose its perspective on the law in supersession of the decision of the
Arbitrator. In Thawardas Pherumal, the Supreme Court formulated the principle in the following
terms:
If a question of law is specifically referred and it is evident that the parties desire to
have a decision from the arbitrator about that rather than one from the Courts,
then the Courts will not interfere, though even there, there is authority for the view
that the courts will interfere if it is apparent that the arbitrator has acted illegally in
reaching his decision, that is to say, if he has decided on inadmissible evidence or
on principles of construction that the law does not countenance or something of that
nature.
Consequently, for the principle to be attracted, it must be evident that (i) a question of law is in
issue; (ii) the parties have specifically agreed to refer it to the Arbitrator; and (iii) parties have
agreed to be bound by the Arbitrator's decision. Otherwise, the jurisdiction of the Court to
determine the validity of an arbitral award, on grounds contemplated by the statute, would not
be ousted. The submission of incidental arguments on a question of law does not amount to a
specific reference of a question of law.
41. In the subsequent judgment of the Supreme Court in Tarapore and Co. v. Cochin Shipyard
Ltd. MANU/SC/0002/1984 : (1984) 2 SCC 680 Thawardas Pherumal's case was regarded as
being an authority for the proposition that where the parties specifically agreed to refer a
specific question of law for the decision of the Arbitrator and agreed to be bound by it, the
Court cannot set aside the award on the ground of an error of law apparent on the face of it
even though the decision of the Arbitrator may not be in accord with the law as understood by
the Court. In Tarapore, the principle was formulated in the following terms by the Supreme
Court:
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If a question of law is specifically referred and it becomes evident that the parties
desired to have a decision on the specific question from the arbitrator about that
rather than one from court, then the court will not interfere with the award of the
arbitrator on the ground that there is an error of law apparent on the face of the
award even if the view of law taken by the arbitrator does not accord with the view
of the court. This view of law taken in England was stated by this Court to be the
same in this country and since the decision in Seth Thawardas case (AIR 1955 SC
468) which follows earlier decisions in England and India, it has not been departed
from.
In that case, the reference to the Arbitrator was on the following questions: (i) Whether the
claim for compensation fell within the purview of the arbitration clause, Clause 40 of the
General Conditions of the Contract; and (ii) If it did, whether the claimant was entitled to
compensation. The Supreme Court held that the parties agreed to submit a specific question
even with regard to the scope, ambit, width and construction of the arbitration clause, including
the question as to whether the arbitration clause would cover the dispute raised between the
parties. The Arbitrator was required to decide whether the dispute is arbitrable and, if it was, to
decide the extent of compensation. There was, therefore, held to be a reference of a specific
question of law.
42. In a judgment of a Learned Single Judge of this Court, in Lubrizol (India) Ltd. v. Lubrizol
Corporation U.S.A. MANU/MH/0112/1998 : 1998(1) ALL MR 435 these decisions were followed,
and the Court held that there is a distinction between a case where disputes are referred to an
arbitration in the decision of which, a question of law becomes material from a case in which a
specific question of law is referred and parties agreed to be bound by the Arbitrator's decision.
When a question of law is a point at issue, unless both sides specifically agree to refer it and
agree to be bound by the Arbitrator's decision, the jurisdiction of the Court to set things right,
when an error is apparent from the face of the record, is not ousted. The mere submission of
incidental arguments on a point of law, during the course of proceedings, is not enough.
43. In the present case, an application was filed on 6th April 2004, by the Petitioner before the
Arbitrator seeking a ruling that the arbitral Tribunal had no jurisdiction to entertain and decide
the dispute inter alia on the ground that the Protocol Agreement was void for several reasons,
among them being, that it placed restrictions on the transferability of the shareholding of MSL,
in violation of the provisions of Section 111A read with Section 9 of the Companies' Act, 1956.
The application was responded to by the Respondent. That by itself cannot be regarded as
amounting to a reference of a specific question of law for the decision of the Arbitrator. During
the proceedings, the Petitioner questioned the jurisdiction of the Arbitrator by presenting its
application of 6th April 2004. The Arbitrator was entitled to rule on his jurisdiction in terms of
the provisions of Section 16 of the Act. The application was opposed by the Respondent. This
cannot amount to a reference of a specific question of law. Nor for that matter, is there intrinsic
material to lead the Court to the conclusion that the parties intended to be bound by the
decision of the Arbitrator, so as to oust the jurisdiction of the Court under Section 34 of the
Arbitration and Conciliation Act, 1996. Clearly, there was no reference on a specific question of
law, so as to render the decision of the Arbitrator binding, or beyond the pale of the reviewing
Court under Section 34.
The Section 111A challenge:
44. That leads the Court to the decision of the Arbitrator on the challenge grounded upon the
provisions of Section 111A of the Companies' Act, 1956. While dealing with the issue, the
Arbitrator has extracted the provisions of Section 111A of the Companies' Act, 1956, recorded
the submission of the Petitioner, including a reference to the decisions of the Supreme Court in
(i) V.B. Rangaraj v. V.B. Gopalkrishnan MANU/SC/0076/1992 : (1992) 1 SCC 160 and (ii) M.S.
Madhusoodhanan v. Kerala Kaumudi Pvt. Ltd. (2003) 117 Comp Cas 19 The Arbitrator has,
after citing the judgment of the Madhusoodanan's case, held thus:
In view of the above, it is clear that the ratio of the decision in Rangaraj's case has
no application to the facts of the present case which is governed by the Protocol
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Agreement dated 2nd October 1974. In the present case, the so called restriction is
in fact incorporated in the Articles of Association which is a feature of distinction
from the facts in Rangaraj's case.
45. Section 111A of the Companies' Act, 1956, provides that subject to the provisions of the
Section, "the shares or debentures and any interest therein of a Company shall be freely
transferable". Section 9 provides that save as otherwise expressly provided in the Act, the
provisions of the Act shall have effect notwithstanding anything to the contrary contained in the
Memorandum or Articles of a Company or in any agreement executed by it, or in any resolution
passed by the Company in general meeting or by its Board of Directors. Any provision contain
in the Memorandum, Articles, agreement or resolution shall, to the extent to which it is
repugnant to the provisions of the Act, become or be void, as the case may be.
46. Originally, under the provisions of the Companies' Act, 1956, a transferor or a transferee
seeking relief in respect of a transfer/transmission of shares in a public or private Company
could either file an appeal under Section 111 or apply for rectification of the Register of
Members under Section 155. With effect from 17th January 1986, Section 22A was inserted in
the Securities Contracts (Regulation) Act, 1956. Section 22A provided that the shares of a
registered Company shall be freely transferable. A Company could refuse transfer only on four
specified grounds. On 20th September 1995, the Depositories Ordinance was promulgated. The
ordinance thereafter, was enacted into legislation by the Depositories Act, 1996.
47. Upon the enactment of the Depositories Act, 1996, Sub-section 14 was inserted into Section
111 of the Act by which it was provided that a Company for the purposes of Section 111 of the
Companies' Act, 1956 means a private Company and includes a private Company which has
become a public Company under Section 43A. Section 111A was introduced into the Companies'
Act, 1956 by the Depositories Act, 1996 with effect from 20th September 1995. Subsection (1)
of Section 111A provides that a company for the purpose of the Section means a company
other than a company as defined in subsection (14) of Section 111. Hence, Section 111A
applies to public companies. Section 111A has been inserted to provide for the free
transferability of the shares or debentures of a public company other than a private company or
a private company governed by Section 43A. The Company Law Board has been empowered to
direct a rectification of the Register of Members if a transfer is made in contravention of the
SEBI Act, 1992; the Sick Industrial Companies (Special Provisions) Act, 1985; or any other law,
for the time being in force, on an application being made, inter alia by the Company or SEBI.
Simultaneously, the provisions of Section 22A of the Securities Contracts (Regulation) Act,
1956, were omitted.
48. Section 3(1) (iii) of the Companies' Act, 1956 defines the expression "private company" to
mean, a company which has a minimum paid up capital of one lakh rupees or such higher paid
up capital as may be prescribed, and by its articles: (a) restricts the right to transfer its shares,
if any; (b) limits its members to fifty not including those who are or were formerly in the
employment of the Company and were members while in employment; (c) prohibits any
invitation to the public to subscribe for any shares or debentures; and (d) prohibits any
invitation or acceptance of deposits from persons other than its members or directors or
relatives. A company which is not a private company, falls within the definition of expression
"public company" under Section 3(1)(iv).
49. The Companies' Act, 1956 makes a clear distinction in its regard to the transferability of
shares. By definition, a "private company" is a company, which restricts the right to transfer its
shares. Consequently, upon a refusal of a private company to transfer its shares, a remedy is
provided by the Act. In the case of a public company, the Act provides that the shares or
debentures and any interest therein of a company shall be freely transferable.
50. The expression "transfer" is defined in Webster as "to convey or remove from one place,
person etc. to another" or "to make over the possession or control of" Webster's Encyclopedic
Unabridged Dictionary page 2009 New Deluxe Edition. The expression "transferable" is defined
in Black's Law Dictionary, Seventh Edition page 1504 to mean, "capable of being transferred,
together with all rights of the original holder". The expression "transfer" is defined to mean to
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"convey or remove from one place or one person to another; to pass or hand over from one to
another especially to change over the possession or control or; to sell or give". In Stroud's
Judicial Dictionary of Words and Phrases, 3rd Edition, page 3080 and in P. Ramanatha Aiyar's
Advanced Law Lexicon, 2005 Edition page 4751 the expression "transferable" is defined as
follows:
Transferable. An interest which by statute or otherwise is made "not transferable"
cannot be parted with either by act of parties or by operation of law (Gathercole v.
Smith 17 Ch D 1). In that case, Lush L.J., said, "The word 'transferable' is of the
widest possible import, and includes 'every' means by which the property may be
passed from one person to another.
51. In Ontario Jockey Club Ltd. v. Samuel McBride AIR 1928 Privy Council 291 the Privy Council
dealt with a case, where the transfer of shares in the Ontario Jockey Club Ltd. was refused on
the ground inter alia that the provisions of the Bye laws had not been observed. In proceedings
to enforce registration, the Supreme Court of Canada ordered the Company to enter the name
of the transferee on the Register. In appeal, the Privy Council noted that Bye law 37 of the
Company provided that "no shares or interest in the Club shall, at any time be transferred to
any person not already a shareholder, until the Club had an opportunity to find a purchaser for
such share or interest". At the material time, the relevant provisions of Section 48 of the
legislation in Ontario provided that the shares of a company shall be deemed to be personal
estate and shall be transferable on the books of the Company, in such manner and subject to
such conditions and restrictions as may be imposed by the Act or by the Byelaws of the
Company. Under Section 87A, the Directors were empowered to make Byelaws to regulate the
transfer of shares. In the context of a restriction contained in Byelaw 87 and the provisions of
the Ontario legislation, the Privy Council held thus:
That restrictions may be placed upon a shareholder's right of transfer of his shares
cannot be questioned. The cases are numerous in which such restrictions have been
upheld. Shares are prima facie transferable. But there is no law which precludes the
shareholders from contracting for value that they shall each submit to any
reasonable restriction which they choose to agree to. It may be for the benefit of
the company that, for instance, shares shall not be transferred to rivals in the
company's trade. A restriction which precludes a shareholder altogether from
transferring may be invalid, but a restriction which does no more than give a right
of preemption is valid.
The judgment of the Privy Council in Ontario Jockey Club's case, therefore, involved a situation
in which the legislation in Ontario, authorised the Board of Directors to regulate the transfer of
shares and transferability of the shares of the Company. The Byelaws specifically contemplated
a restriction on transferability otherwise than to a member of the Company.
52. In India, the Supreme Court held in V.B. Rangaraj v. Gopalkrishnan (1992) 73 Comp Cas
201 that an agreement between the members of a family, who were the only shareholders of a
private Company, which imposed a restriction on the shareholders' right to transfer the shares,
was contrary to the Articles of Association and was not binding on the Company or its
shareholders. In Ms. Madhusoodhanan v. Kerala Kaumudi (supra), the First Respondent was a
private Company. An agreement, styled as a Karar was entered into between the mother, the
Appellant and the other brothers about the division of the effective control over family concerns
among the other four brothers and the transfer of shares of one of the brothers in the Company
to the Appellant. Parties agreed that each of the sons would have a majority shareholding in
one of the concerns. Mrs. Justice Ruma Pal, speaking for the Bench of the Supreme Court,
noted that in deciding whether the agreement should be implemented, the basic fact was that
each brother had been given a majority shareholding in the Company specified against his
name in the Karar and since the others three brothers had taken the full benefit of the
agreement, they were bound to comply with by its terms. The Supreme Court observed thus:
It is settled law that shares are movable properties and are transferable. As far as
private companies like Kerala Kaumudi are concerned, the Articles of Association
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restrict the shareholder's right to transfer shares and prohibit any invitations to the
public to subscribe for any shares in, or debentures of the company. This is how a
"private company" is now defined in Section 3(1)(iii) of the Companies' Act, 1956
and how it was defined in Section 2(13) of the 1913 Act.
Subject to this restriction, a holder of shares in a private company may agree to sell
his shares to a person of his choice. Such agreements are specifically enforceable
under Section 10 of the Specific Relief Act, 1963, which corresponds to Section 12
of the Specific Relief Act, 1877. The section provides that specific performance of
such contracts may be enforced when there exists no standard for ascertaining the
actual damage caused by the nonperformance of the act agreed to be done; or
when the act agreed to be done is such that compensation in money for its nonperformance would not afford adequate relief. In the case of a contract to transfer
movable properties "of special value or interest to the plaintiff, or consisting of
goods which are not easily obtainable in the market", it has been held by a long line
of authority that shares in a private limited company would come within the phrase
"not easily obtainable in the market" (see: Jainarain Ram Lundia v. Surajmull
Sagarmull MANU/FE/0018/1949 : AIR 1949 FC 211, 218). The Privy Council in the
Bank of India Ltd. v. J.A.H. Chinoy MANU/PR/0035/1949 : AIR 1950 PC 90said : "it
is also the opinion of the Board that, having regard to the nature of the company
and the limited market for its shares, damages would not be an adequate remedy".
Specific performance of a contract for transfers of shares in a private limited
company could be granted.
The judgment in Madhusoodhanan, therefore, deals with a private Company. The observations
of the Supreme Court noted earlier, expressly clarified that as far as private Companies are
concerned, the Articles of Association restrict shareholders' rights to transfer the shares and
prohibit invitation to the public to subscribe to shares or debentures of the Company. An
agreement by which, subject to its restriction, a holder of shares agrees to sell his shares to a
person of his choice is specifically enforceable in view of the limited market for the shares of
such a Company. Madhusoodhanan's case involved a private Company. The Supreme Court
held that the decision in Rangaraj was distinguishable inasmuch as there was no restriction on
the transferability of the shares in the Karar and the Karar itself was an agreement between
particular shareholders relating to the transfer of specified shares. The agreement, ruled the
Supreme Court, was capable of specific performance. A situation involving the restriction on the
transferability of shares in a private Company has to be contrasted with cases involving public
Companies where the law provides for free transferability. Free transferability of shares is the
norm in the case of shares in a public Company.
53. The provision contained in the law for the free transferability of shares in a public Company
is founded on the principle that members of the public must have the freedom to purchase and,
every shareholder, the freedom to transfer. The incorporation of a Company in the public, as
distinguished from the private, realm leads to specific consequences and the imposition of
obligations envisaged in law. Those who promote and manage public companies assume those
obligations. Corresponding to those obligations are rights, which the law recognizes as inhering
in the members of the public who subscribe to shares. The principle of free transferability must
be given a broad dimension in order to fulfill the object of the law. Imposing restrictions on the
principle of free transferability, is a legislative function, simply because the postulate of free
transferability was enunciated as a matter of legislative policy when Parliament introduced
Section 111A into the Companies' Act, 1956. That is a binding precept which governs the
discourse on transferability of shares. The word "transferable" is of the widest possible import
and Parliament by using the expression "freely transferable", has reinforced the legislative
intent of allowing transfers of shares of public companies in a free and efficient domain.
54. The effect of Clause 7 of the Protocol Agreement is to create a right of preemption between
the Petitioner and the Respondent in the event that either of them seeks to part with or transfer
its shareholding in MSL. In that event, the party desirous to transfer its shareholding is
obligated to furnish a first option to the other for the purchase of the shares at such rate, as
may be agreed to between the parties or decided upon by arbitration. The consequence of
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Clause 7 of the Protocol Agreement, which has been incorporated in the Articles of Association,
is to preclude sale to or purchase by the members of the public of the shares, which are offered
for sale if the offer is accepted by the Petitioner, or as the case may be, by the Respondent
within thirty days of the receipt of the notice. The effect of a clause of preemption is to impose
a restriction on the free transferability of the shares by subjecting the norms of transferability
laid down in Section 111A to a preemptive right created by the agreement between the parties.
This is impermissible. Section 9 of the Companies' Act, 1956 gives overriding force and effect to
the provisions of the Act, notwithstanding anything to the contrary contained in the
Memorandum or Articles of a Company or in any agreement executed by it or for that matter in
any resolution of the Company in general meeting or of its Board of Directors. A provision
contained in the Memorandum, Articles, Agreement or Resolution is to the extent to which it is
repugnant to the provisions of the Act, regarded as void.
55. The Delhi High Court had occasion to consider the issue in its decision in Smt. Pushpa
Katoch v. Manu Maharani Hotels Ltd. MANU/DE/0867/2005 : 121 (2005) DLT 333 In the case
before the Delhi High Court, in a Petition under Sections 397 and 398 of the Companies' Act,
1956, one of the grievances was that three sisters of the Appellant had transferred their
shareholding in a Public Limited Company, in violation of a right of preemption contained in a
family settlement. The Company Law Board held that the Articles of Association of the
Company, which was a Public Limited Company, did not recognize a right of preemption. Since
the Company was a Public Limited Company, no fetter could be imposed on the right of the
shareholder to transfer his shares, by virtue of the provisions of Section 111A. The CLB rested
its decision both on the basis that the preemptive right was not recognized by the Articles of
Association and on the foundation that a Public Company could not have a provision recognizing
preemptive rights to its members. The Delhi High Court in an appeal arising out of the
judgment of the CLB relied upon the judgment of the Supreme Court in Rangaraj (supra) to
hold that a restriction which is not specified in the Articles, would not bind either the Company
or its shareholders. The Delhi High Court also held that by virtue of the provisions of Section
111A, the right of a shareholder to transfer his/her shares could not be fettered. Mr. Justice
A.K. Sikri held thus:
The CLB further rightly mentioned that as per the provisions of Section 111A of the
Act, there could not be any fetters on the right of a shareholder to transfer his/her
shares. It may be noted that the Legislature has made different provisions for
transfer of shares in case of private limited company and public limited company.
Section 111, which deals with "Power to refuse registration and appeal against
refusal", relates to the private limited companies. On the other hand, provisions of
Section 111A dealing with "Rectification of register on transfer" are attracted in the
case of public limited companies. While restrictions can be stipulated in the Articles
of Association so far as transfer of shares of a private limited company is
concerned, subsection (2) of Section 111A of the Act specifically provides that the
shares or debentures and any interest therein of a company shall be freely
transferable. Proviso to this Sub-section further stipulates that if a company without
sufficient cause refuses to transfer the shares within two months, the transferee
may file an appeal to the Company Law Board and "it shall direct company to
register the transfer of shares". Since the respondent No. 1 company is a public
limited company, the CLB rightly opined that there could be no fetters on the right
of a shareholder to transfer his/her shares. We have already noted that there is no
such provision giving preemptory right to other promoters in the Articles of
Association. Even if there was such a provision in the Articles of Association, it
would have been ultra vires the provisions of the Act, as no company can provide in
the Articles of Association any matter which offends the specific provision of an act
(see Re. Denver Hotel Co., 1893(1) Chancery Division 495). No doubt, the four
sisters promoted the company and their intention was to make the family property
as a hotel and run the same. No doubt, in the Board meeting held on 16th March
1994 and the Memorandum of Family Agreement it was recorded that any promoter
wanting to sell the shares would first offer the same to other promoters. However,
at the same time, while incorporating this company, the promoters decided to have
a public company limited by shares rather than a private company. They should
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have understood the implication and consequences of getting a public company

incorporated. If they wanted such an arrangement, as recorded in the minutes of
the meeting dated 16th March 1994 and the Memorandum of Family Settlement,
they should have been wise enough to incorporate a private company and further to
provide such a clause in the Articles of Association. After incorporating a public
company, it was too late in the day to think of such an arrangement and recording
the same in the Board meeting or the family settlement, which could not have any
legal basis.
A Special Leave Petition against the judgment of the Delhi High Court was dismissed by the
Supreme Court on 7th April 2006. I am in respectful agreement with the view of the Delhi High
Court which reflects the correct position in law.
56. Counsel appearing on behalf of the Respondent submitted that Section 111A has no
application to contracts for the transfer of particular shares between particular shareholders
when incorporated in the Articles of Association. The submission is that restrictions which bind
third parties are bad. Section 111A was intended to curb the power of the Board of Directors to
obstruct transfers and clearer words would be required to destabilize bargains which are the
heart of commerce.
57. The submission that Section 111A would not interdict "an agreement between particular
shareholders relating to the transfer of specified shares" is based on the judgment of the
Supreme Court in Madhusoodhanan (supra). In that case, as already noted earlier, the
Supreme Court noted that the Karar was an agreement between "particular shareholders
relating to the transfer of the specified shares". What is significant is that the Company in that
case was a private Company. The Supreme Court noted with some emphasis that in the case of
a private Company, the Articles of Association would restrict the right of shareholders to
transfer shares and prohibit invitation to the public to subscribe for shares or debentures of the
Company. The position in law of a Public Company is materially different. By the provisions of
the Companies' Act, 1956, restrictions on the transferability of shares which are contemplated
by the definition of a "private company" under Section 3(1)(iii) are expressly made
impermissible in the case of a public company by the provisions of Section 111A. Once that be
the position, the submission urged on behalf of the Respondent cannot be accepted. In essence,
the submission of the Respondent is that the provisions of Section 111A should be read as
being subject to a contract to the contrary. A restriction to that effect cannot be read into the
provision of Section 111A; firstly because, such a restriction is not mentioned in the statutory
provision; secondly, the word "transferable" is of the widest import; and thirdly, the context in
which the provision has been introduced, is susceptible to the inference that it should be given
a wide meaning. Where the language of the statute is plain and unambiguous, neither the
consequence nor the conduct of parties would be of relevance. Reliance was sought to be
placed on a notification that was issued on 27th June 1961 by which, in exercise of powers
conferred by Section 28(2) of the Securities Contracts (Regulation) Act, 1956, the Central
Government specified contracts of preemption as contained in promotion or collaboration
agreements or in the Articles of Association of a Limited Company as contracts to which the
said Act shall not apply. That notification, it has to be noted, related to an exemption from the
provisions of the SCRA and cannot override the plain mandate of Section 111A. Besides,
Section 111A was introduced in the Companies' Act, 1956 by the Depositories Act, 1996 with
effect from 20th September 1995. The plain intendment and meaning of Section 111A must
prevail.
58. The arbitral award on this aspect of the matter, is completely contrary to the governing
principles of law. The award is contrary to substantive provisions of law and is patently illegal.
The illegality in the present case, is something that goes to the root of the matter and is
certainly not one which can be termed as of a trivial nature. The award must, in the
circumstances, be held to be contrary to public policy. The Arbitrator cited the judgment of the
Supreme Court in Madhusoodhanan's case and held that the principle which was laid down in
the earlier judgment in Rangaraj was inapplicable inasmuch as the restriction creating a
preemptive right was incorporated in the Articles of Association. The Arbitrator proceeded on
the basis that the presence of a clause conferring a right of preemption in the Articles of
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Association was sufficient to dispose of the challenge to the legality of the provision. In this, the
Arbitrator has fallen into a patent illegality. The fact that the restriction is contained in the
Articles of Association would deal with the submission based on the application of the Rangaraj
principle. But that is not dispositive of the legality of a provision by which a right of preemption
is created in the case of a Public Limited Company. The Arbitrator has ignored the express and
specific provisions of the Companies' Act, 1956; lost sight of the very concept of free
transferability of the shares of a Public Limited Company and failed to apply the provisions of
Section 9 under which overriding force is given to the Act notwithstanding anything to the
contrary contained in the Memorandum, Articles or agreement.
59. For all these reasons, the award of the Learned Arbitrator would have to be set aside. The
Petition is accordingly made absolute in terms of prayer Clause (a) by setting aside the award.
There shall be no order as to costs.
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MANU/MH/0109/2010

Equivalent Citation: 2010(4)BomCR873, [2010]154CompCas593(Bom), [2010]102SCL239

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RML National Law University

RML National Law University

RML National Law University

RML National Law University

RML National Law University

RML National Law University

shares, particularly when incorporated in the Articles of Association.

RML National Law University

RML National Law University

RML National Law University

RML National Law University

RML National Law University

RML National Law University

RML National Law University

RML National Law University

RML National Law University

RML National Law University

RML National Law University

RML National Law University

RML National Law University

RML National Law University

have understood the implication and consequences of getting a public company

RML National Law University

Manupatra Information Solutions Pvt. Ltd.

RML National Law University

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