Business Law Assignment

Western Maharashtra Development Corporation

limited
Vs
Bajaj Auto Limited (2010)

Name Girish Premani

Institution JBIMS
Roll No.-15-F-311
Batch MFM II
Code 0400124

1
Sources:
1 http://indiacorplaw.blogspot.in/2015/07/bombay-high-court-on-share-transfer.html

2 https://www.nseindia.com/content/corporate/eq_BAJAJHLDNG_base.pdf
3 Legal Updates Vinod Kothari & Company
 Background of the case

Complainant - Bajaj Auto Limited

Defendant - Western Maharashtra Development Corporation Ltd

On 2nd October, 1974 Western Maharashtra Development
Corporation and Bajaj Auto Limited entered into agreement to incorporate
Maharashtra Scooters Ltd. ("MSL"). Bajaj Auto Limited would grant benefit of
know-how and offer its assistance in the manufacture of two wheeler scooters to MSL
and would also participate in the equity share capital of MSL on the terms and
conditions mention in the agreement, Western Maharashtra Development Corporation
is holding 27% i.e. 30, 85,712 shares of the equity shareholding of MSL and Bajaj Auto
Limited continues to hold 24% i.e.27, 42,848 shares. The balance 49% of the equity
shareholding of MSL is held by the public. Bajaj Auto Limited from last 20 odd years
repeatedly was requesting the defendant to divest/transfer its 27% shareholding to the
Complainant.

The cause of the controversy was Clause 7 of the Protocol Agreement

which states that if either party desires to part with or transfer its shareholding or any
part thereof, in the equity share capital of MSL, such party shall give first option to the
other party for the purchase of such shares at such rate as may be agreed to between the
parties or decided upon by arbitration.

Brief chronological details which leads these parties to file case in court

30th june 2002- On the joint request of the Complainant and the defendant CRISIL
carried out a valuation of the shareholding of the defendant in MSL.

April 2002 The defendant considered selling and transferring its 27% shareholding
to the Complainant

9th April 2003 - Addressed a letter offering to sell its 27% shareholding in MSL
(30,85,712 shares) to the Complainant at a price of Rs.232.20/- per share.

2
Sources:
1 http://indiacorplaw.blogspot.in/2015/07/bombay-high-court-on-share-transfer.html

2 https://www.nseindia.com/content/corporate/eq_BAJAJHLDNG_base.pdf
3 Legal Updates Vinod Kothari & Company
3rd May 2003 - In reply thereto, by their letter, the Complainant, under clause 7 of the
Protocol agreement confirmed their interest in buying the shareholding of the
Respondent. It was however stated that the price at which the shares were offered was
not acceptable to the Complainant and therefore, requested that a meeting be called for
by a High Level Committee to carry out official negotiations to reach a fair and
marketable settlement.

7thMay, 2003 - To confirm Complainant whether their letter dated 3rd May, 2003 was
in response to the buy back by the Bajaj Auto Limited.

10th May 2003 -The Complainant confirmed that their letter dated 3 rd May, 2003 was
a response to the offer made by the defendant under clause 7 of the Protocol Agreement
but the price offered was not acceptable to the Complainant and therefore, requested
that a meeting be called for by the High Level Committee to negotiate the price.

6th June 2003 - the Complainant replied that they were not agreeable to the price of
Rs.232.20 per share as demanded by the defendant and offered to purchase the 27%
shareholding of the defendant at the rate of Rs.75/- per equity share.

27th October 2003 -Defendant addressed a letter to the arbitrator requesting him to
accept his appointment as a Sole Arbitrator for the assignment to determine the value of
the shares. This process of price offer and acceptance has been completed and since no
agreement has been reached on the value of the share. The parties involved have to
proceed to appoint a Sole Arbitrator for the purpose. Kindly forward your acceptance to
be appointed as the Sole Arbitrator for this assignment and also communicate the
retainer ship charges and venue suitable to you for the purpose of Arbitration.

29th December 2003- Joint request was made to arbitrator. Cost of Arbitration shall
be fixed by the 'Arbitration Tribunal' in accordance with Sec. 31(8) of the Arbitration
and Conciliation Act 1996. These costs will be shared equally by both parties.

The Arbitrator, after considering all details held in favour of the Complainant provided
the valuation for selling price of Rs.151.63/- per share.

Complainants perspective - Bajaj Auto Limited

Western Maharashtra Development Corporation Ltd was not ready to

sell/transfer shares even after process of arbitration is followed and which lead the Bajaj
Auto ltd to file a case against western Maharashtra Development Corporation in
Bombay High court in the year 2010.Complainant was appealing to Bombay High court
on strong establishment of the case Messer Holdings v. Shyam Madanmohan
Ruia, which effectively ruled that restrictions expressed in an agreement between
3
Sources:
1 http://indiacorplaw.blogspot.in/2015/07/bombay-high-court-on-share-transfer.html

2 https://www.nseindia.com/content/corporate/eq_BAJAJHLDNG_base.pdf
3 Legal Updates Vinod Kothari & Company
shareholders are not violating of the Companies Act, 1956 (the 1956 Act) and that they
can be enforced inter se among shareholders. The dispute arose out of a share transfer
restriction contained in clause 7 of a protocol agreement between Bajaj Auto ltd and
WMDC, which is in the nature of a right of first refusal. A dispute related to the price at
which Bajaj Auto could exercise the right to acquire WMDCs stake. The matter resulted
in arbitration for determination of the price, wherein an award was issued. They appeal
to court that all terms and condition were mention in the agreement under clause 7 of a
protocol agreement. As per the agreement all procedure are followed and all related
documents are submitted in court the judgment should be in favor of Bajaj Auto
Limited. Clause 7 is not binding any free transfer of shares of MSL which are held by
public as they can free trade on stock exchanges only give first right of refusal to Bajaj
Auto ltd as per the terms and condition of agreement. Bajaj Auto has confirmed the
interest to buy shares at proper valuation for which transparent procedure has been
followed.

Defendants perspective -Western Maharashtra Development Corporation

Ltd

Western Maharashtra Development Corporation Ltd negated the decision of

arbitration and challenges the same before this Court under the provisions of section
34 of the Arbitration and Conciliation Act, 1996 and focused on the point that
MSL being a listed public company, section 111A of the Companies Act 1956 was
thereby violated. Section 111A provides that the shares or debentures of a public
company and any interest therein shall be freely transferable. Section 9 of the
Companies Act further provides that the provisions of the Companies Act shall have
effect notwithstanding anything to the contrary contained in the Memorandum and
Articles of Association of the company. It was therefore submitted that a pre-emption
right recognized by clause 7 of the Protocol Agreement, and which was then
incorporated in the Articles of Association of MSL, must yield to the provisions of
section 111A of the Companies Act. According to defendant In other words, it was
submitted that clause 7 of the Protocol Agreement being contrary to the provisions of
the Companies Act, was unenforceable. It was bounding the shareholders for free
transfer of shares rights of listed company.

4
Sources:
1 http://indiacorplaw.blogspot.in/2015/07/bombay-high-court-on-share-transfer.html

2 https://www.nseindia.com/content/corporate/eq_BAJAJHLDNG_base.pdf
3 Legal Updates Vinod Kothari & Company
 Judgement and its rationale- Decision of the Bombay High Court in 2015

The Bombay High Court highlighting the provisions of Section 111A and
Section 9 of the Companies Act, 1956 thus held that 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 ltd company and same rules cannot be applied. 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 and
cannot be bind any shareholders in the case of listed company. Section 111A and 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.

Bombay high court judgement was relied upon the decision given by the Delhi High
Court in Smt. Pushpa Katoch vs. Manu Maharani Hotels Ltd. Decision of Delhi high
court was based on decision made by Supreme Court in V.B.Rangaraj vs.
Gopalkrishnan The Supreme Court in Rangarajs case has observed that whether
under the Companies Act or the Transfer of Property Act, the shares are transferable
like any other movable property. Restrictions on transferability are valid only if
contained in the companys articles. A private agreement between some shareholders
which contains additional restrictions on transferability is not binding either on the
company or on its shareholders.

Key learning from the case

There can be no restriction on free transfer of shares in case of listed companies in

India. Restriction of transfer of shares is only in case of private limited company. Even
though shareholders enter into any kind of agreement for share transfer it would be void
due to the Section 111A and Section 9 of the Companies Act, 1956.

5
Sources:
1 http://indiacorplaw.blogspot.in/2015/07/bombay-high-court-on-share-transfer.html

2 https://www.nseindia.com/content/corporate/eq_BAJAJHLDNG_base.pdf
3 Legal Updates Vinod Kothari & Company
Current holdings of Maharashtra Scooters Ltd as on quarter ending
December 2016

Source-Bombay Stock exchange

Bajaj Holdings and Investment ltd (BHIL, formerly known as Bajaj Auto Ltd) operates
as an investment company in India.BHIL is primarily a holding & Investment Company
headquarters in Pune.

BHIL currently holds stake in various group companies such as Bajaj Auto Ltd,
Bajaj Finserv Ltd, Bajaj Auto Holdings Ltd and Maharashtra Scooters Ltd.

6
Sources:
1 http://indiacorplaw.blogspot.in/2015/07/bombay-high-court-on-share-transfer.html

2 https://www.nseindia.com/content/corporate/eq_BAJAJHLDNG_base.pdf
3 Legal Updates Vinod Kothari & Company