1

INTHEHIGHCOURTOFJUDICATUREATBOMBAY O.O.C.J. ARBITRATIONPETITIONNO.174OF2006 WesternMaharashtraDevelopmentCorpn.Ltd., havingitsregisteredofficeat2ndFllor, KuberaChambers,Dr.RajendraPrasadRoad, ShivajiNagar,Pune411005. ...Petitioner. Vs. BajajAutoLimited, havingitsregisteredofficeat BombayPuneRoad,Akurdi,Pune411035 anditsofficeatBajajBhavan, 11Floor,26,NarimanPoint, Mumbai400021. ...Respondent. .... Mr. Rohit Kapadia, Sr. Advocate with Mr.Pravin Samdani, Sr. Advocate and Ms.Bindi Dave, Mr.Kunal Vajani and Mr.Ankit Virmanii/b.M/s.WadiaGhandy&Co.forthePetitioner. Mr. Aspi Chinoy, Sr.Advocate with Mr.J.J. Bhat, Sr.Advocate, Mr.Snehal Shah, Mr.Shiraj Dhru, Mrs.Lata Dhru and Ms.Ranju Yadavi/b.Dhru&Co.fortheRespondent. ..... CORAM:DR.D.Y.CHANDRACHUD,J. February15,2010. JUDGMENT: ThechallengeintheseproceedingsunderSection34of theArbitrationandConciliationAct,1996istoanarbitral award dated14thJanuary2006ofasoleArbitrator,Mr.JusticeA.V.Savant.

TheProtocolAgreement:

2.

On2ndOctober1974,aProtocolAgreementwasentered

intobetweenthePetitionerandtheRespondentpursuanttowhich MaharashtraScootersLtd.(MSL)wasincorporatedandregistered undertheprovisionsoftheCompaniesAct,1956.MSLisaPublic CompanyanditssharesarelistedontheBombayStockExchange andtheNationalStockExchange.ThePetitionerisanundertaking ofthegovernmentofMaharashtra. Inaccordancewiththeterms of the Protocol Agreement, the Petitioner holds 27% of shareholding of MSL while the Respondent continues to hold 24%. Thebalance49%isheldbythepublic. Therecitalstothe agreementstatethatthePetitionerwasdesirousofavailingofthe experienceandknowhowof theRespondentinthemanufacture oftwowheelerscooters,fortheinstallationofplantandmachinery and the establishment of a Scooter Project. The Respondent agreedtoparticipateintheequitycapitalofanewmanufacturing CompanyMSL.TheinitialauthorizedcapitalofMSLwasRs.200 lakhsconsistingofRs.150lakhsinequitysharesandRs.50lakhsin cumulative redeemable preference shares. By the agreement, it wasagreedthattheshareholdingofthePetitioner,theRespondent andofthepublicshallbeintheproportionsetoutearlier.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 ofshares tobe altered or anyfurther issueofcapitaltobemadewithoutthespecificpriorconsentofthe other party. Any further issue of capital was to be made in a mannerthatwouldensurethattheparticipationbythepartyinthe 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 equitysharecapitalofMSLortodealwithitsshareholdingsoas toloseitsabsolutecontrolovervotingrights.Theintentwasthat thepartiestotheagreementshall,betweenthem,controlatleast 51%oftheequitycapitalofMSL.

Clause7: 3. Clause7oftheagreementuponwhichthedisputeinthe

presentcasecenters,wastothefollowingeffect: 7. Ifeitherpartydesirestopartwithortransfer itsshareholdingoranypartthereofintheequityshare capitalofMaharashtraScootersLimited,suchpartyshall give first optiontotheotherpartyforthepurchase of suchsharesatsuchratesasmaybeagreedtobetween

the parties or decided upon by arbitration. The party desiring topart withor transfer itsshares or anypart thereofshallgivetotheotherpartyawrittennoticeof suchintentionspecifyingthenumberofsharesandthe rateatwhichitiswillingtosellthesameandiftheother partywithin30daysofthereceiptofsuchnotice,agrees, tosuchproposalforpurchaseofsuchshares,theparty givingthenoticeshallbeboundtosellandtransfersuch shares to the other party at the rate specified in such notice. If the other party is willing to purchase the sharesbutconsiderstherateproposedtobetoohighor unacceptable,itshall,within30daysfromthereceiptof the notice, give written intimation to the party giving notice of its intention to purchase the shares and the questionofrateshallbereferredtoarbitrationofasole arbitrator if agreed to by both the parties or two arbitrators one to be appointed by each party in accordancewiththeprovisionsoftheIndianArbitration act.Ifthepartyreceivinganoticewithin30daysofits receipt,failstoaccepttheproposalforpurchaseofthe shares,thepartygivingthenoticewillbefreetosellthe sharestoanyotherpartybutonlyataratenotlessthan theratespecifiedinsuchnotice.

4.

Theagreementstipulatedthatofthesevensignatoriesto

the Memorandum and Articles of Association, four would be nominated by the Petitioner and three by the Respondent. The BoardofDirectorswastoconsistofnineDirectors,ofwhichfive weretobenomineesofthePetitionerandfouroftheRespondent. Theappointmentof theChairman oftheBoardhadtobe made from the names suggested by the Respondent. Though the

managementofMSLwastovestintheBoard,thedaytodaywork oftheCompanywastobecarriedoutbytheChiefExecutive,tobe 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 technicalknowhow.

Theofferandacceptance:

5.

Between 1986 and 2003, the Respondent had been

requestingthePetitionertodivestitsshareholdinginMSLinits favour. Byaletterdated9th April2003,thePetitionerofferedto sellitssharestotheRespondent,atapriceofRs.232.20pershare. 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 requestedthatameetingbecalledofaHighLevelCommitteeto carryforwardthenegotiationsinordertoreachafairandamicable settlement. On7th May2003,thePetitioneraddressedaletterto

the Respondent stating that the Respondent was required to respondtoanofferwithinonemonthofthereceiptoftheletter and called upon the Respondent to confirm whether this constitutedaletterinresponsetoabuybackbytheRespondent. Ifnot,theRespondentwascalledupontoensurethattherequisite responsewassubmittedtothePetitionerbytheappointeddate.By itsresponsedated10th May2003,theRespondentconfirmedthat itsletterdated3rd May2003,wasitsresponseunderClause7of the Protocol Agreement to the Petitioners offer dated 9th April 2003. The Respondent confirmed that by its letter, it has confirmeditsintentiontopurchasethesharesoffered,butstated thatthepriceofferedwasnotacceptabletotheRespondent.The Respondent once again renewed its request for a meeting of a HighLevelCommitteetonegotiateuponandresolvetheprice.On 6thJune2003,theRespondentmadeacounterofferonthepriceof Rs.75/perequityshareofMSLstatingthatitreflectedapremium of5.6%overtheprevailingmarketpriceason6thJune2003.Bya letterdated31stJuly2003,theRespondentstatedthatintheevent thatthepriceofferedofRs.75/persharewasnotacceptabletothe Petitioner, the next step in terms of clause 7 of the Protocol

Agreementwastoinitiatethearbitralprocess.

ReferencetoArbitration:

6.

On23rd September2003,thePrincipalSecretaryinthe

Industries, Energy and Labour Department of the State Government, forwarded a set of names of former Judges of this CourtforappointmentofanArbitrator.On27thOctober2003,the PetitioneraddressedalettertoMr.JusticeA.V.Savant,statingthat undertheProtocolAgreement,thePetitionerhadtomakethefirst offertotheRespondentandinturn,theRespondenthadtoaccept orrejecttheoffermadebythePetitionerfordivestingitsholding inMSL.Theletterrecordedthatthisprocesshasbeencompleted and since no agreement has been reached, on the value of the shares,aspertheagreement,thepartiesinvolvedhavetoproceed to appoint a sole Arbitrator for the purpose. Accordingly, Mr.Justice A.V.Savant was informed that the Government of MaharashtrahadsuggestedhisappointmentasasoleArbitrator, which had been agreed to, by the Respondent and by the Petitioner. Correspondenceensuedbetweentheparties. On29th

December2003,ajointreferencetoarbitrationwasmadebythe PetitionerandbytheRespondenttoMr.JusticeA.V.Savant.The termsofreferenceinteraliawereasfollows: 1. TheappointmentofSoleArbitratorismade jointlybyBALandWMDC,intermsoftheClauseno.7of the Protocol Agreement dated 2 October 1974, betweenWMDCandBAL,thecopromotersofMSL. 2. BAL hadexpressed its willingness to buy the stakeheldbyWMDCinMSL.WMDChadindicatedits desire tosellitsshareholdinginMSL. However, price pershareremainedindisputeandhenceinaccordance withclauseno.7oftheprotocolagreement,thequestion ofrateforthepurchasebyBALofequitysharesinMSL heldbyWMDC,isherebyreferredtotheSoleArbitrator. 3. The arbitrator shall take into account the Protocol Agreement covenants and all other concerned factorswhichmayhaveimpactonthesharepriceofMSL shares,whilegivinghisarbitralaward.

ArbitralProceedings:

7.

AtthefirstmeetingbeforetheArbitratoron10thJanuary

2004,directionswereissuedforfilingpleadings.On23rdJanuary 2004, an application was filed by the Petitioner that the Respondent should be treated as the claimant to the arbitral proceedingsandshouldbedirectedtofileitsstatementofclaim.

AtthesecondmeetingbeforetheArbitrator,directionswereissued to the parties to file their statements regarding the valuation of sharesandtherelevantdateforvaluation. ThePetitionerbyits letter dated 3rd February 2004, sought a meeting with the Respondent, on the ground that certain issues need to be clarified,whiledraftingthestatementofclaim. On5th February 2004,thePetitioner, inalettertotheRespondent, claimed that therewasanagreementbetweenthepartiesthatthevaluationof thesharesshouldbe,asonthelastquarterof2003andsuggested thataspecificdate,asopposedtotheperiodofthelastquarter, shouldbeagreed.TheRespondentbyitsletterdated13thFebruary 2004deniedthattherewasanysuchagreement ontherelevant dateforvaluationofshares,assuggestedandsetupacasethatthe relevant date for valuation would be 30th June 2002. The Petitionerbyitsletterdated13thFebruary2004,deniedthatthere wasanyagreement,bywhichthecutoffdatewastobe30 thJune 2002.TheRespondentinitsletterdated17thFebruary2004,once againreiteratedthatthepartieshadagreedto30th June2002as therelevantdateforvaluation.

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8.

AtthethirdmeetingbeforetheArbitratoron6th March

2004,itwasagreedthatpartieswouldurgetheirsubmissionson thepreliminaryissueastowhatshouldbethe relevant date for valuation.

Thechallengetojurisdiction: 9. On 6th April 2004, an application was filed by the

Petitioner, questioning the jurisdiction of the Arbitrator. The contentionof thePetitionerwasthat(i)TheProtocolAgreement dated2ndOctober1994wasillegalandvoidonthegroundthat(a) theagreementwasaforwardcontractprohibitedbytheSecurities Contract Regulation Act; and (b) The agreement contained restrictionsonthetransferabilityoftheshareholdingofMSLwhich wereviolativeoftheprovisionsofSection111AreadwithSection 9 of the Companies Act, 1956 and hence, void; (ii) The joint reference dated 29th December 2003, was void inter alia on the groundthatitproceededonthepremisethataconcludedcontract existedbetween thePetitionerandtheRespondent thoughasa matteroffact,nocontracthadbeenarrivedatsinceneitherofthe partiesacceptedtheoffer,norhadtheyagreedtoacutoffdatefor

11

valuationofshares. TheRespondent filedareply, opposingthe applicationandinteraliacontendedthatbyitsletterdated3rdMay 2003,theofferofthePetitionerhadbeenformallyaccepted,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 forthesale of its27%stake andtheRespondent had acceptedtheoffertopurchasetheholdingofthePetitioner.There was, it was urged, a concluded contract with the rate to be ascertainedthroughthearbitralprocess.Hence,accordingtothe Respondent, a contract for the sale of the shareholding of the Petitioner had been concluded and what remained to be determined,wastherateatwhichtheshareswouldbevalued,in termsofclause7oftheProtocolAgreement.

ArbitralMeetingson(i)preliminaryobjectionand(ii)datefor valuation:

10.

TheArbitratorruledonthepreliminaryobjectiontohis

jurisdiction,on21stJuly2004.Whilerejectingtheapplication,the Arbitrator stated that the reasons for the rejection would follow

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andformpartoftheaward.On10thAugust2004,anapplication was filed by the Petitioner seeking relief to the effect that the Arbitral Tribunal shoulddetermine anddeclare thedateof29th December2003,beingthedateofthejointreferencemadebythe partiesastherelevantdateforthepurposeofvaluationofthesaid sharesproposedtobesoldbythePetitionertotheRespondent. Byitsreply,theRespondentsubmittedthattherelevantdatefor valuationshouldbe,30thJune2002or,inthealternative,assuming thattherewasnosuchagreementbetweenthepartiesonthatdate, therelevantdateforvaluationshouldbe3rdMay2003,whichwas thedateonwhich,theRespondenthadacceptedtheofferofthe Petitioner,intermsofclause7oftheProtocolAgreement.On31st August 2004, the Arbitrator held that the relevant date for valuationofshareswouldbe3rdMay2003,whenthecontractwas concluded.

11.

TheArbitratorhas, inthecourse ofthearbitral award

deliveredon29th December2005,furnishedreasonsforaccepting 3rd May2003asthedateforvaluationofshares. TheArbitrator notedthaton9thApril2003,thePetitionermadeaspecificofferto

13

theRespondentintermsofclause7oftheProtocolAgreementand intermsofthedecisionoftheGovernmentofMaharashtratosell itsequityshareholdinginMSLtotheRespondentatRs.232.20per share. The price of Rs.232.20 was based on a valuation report submittedbyCrisilAdvisoryServiceson3rdSeptember2002.In responsetotheofferofthePetitioner,theRespondentconveyedits acceptanceon3rd May2003,clarifyingatthesametimethatthe price was not acceptable. The Respondents subsequent letter dated10thMay2003,onceagainconfirmedthattheearlierletter of3rdMay2003,wasinresponsetotheofferintermsofclause7of theProtocolAgreementandthatbyitsletter,theRespondenthad confirmeditsintentiontoaccepttheofferthoughthepricewasnot acceptable. The Arbitrator held that the correspondence exchanged between the parties, between 9th April and 6th June 2003,leftnomannerofdoubtthattherewasaconcludedcontract underwhichthePetitionerwastosellitssharestotheRespondent andtheRespondentwastopurchasethosesharesandthecontract was concluded on 3rd May 2003. The Arbitrator held consequently,therelevantdateforthepurposeofvaluationwould be3rd May2003, whichwasthedateonwhichthecontractwas

14

concluded. Atthisstage,itmayalsobenecessarytonotethatin the PartI Award, the Arbitrator referred to the provisions of Sections9and10oftheSaleofGoodsActandreliedupontwo EnglishjudgmentsanduponajudgmentoftheSupremeCourtin supportofhisconclusionthatthedateofvaluationwouldbethe dateoftheacceptanceoftheoffertopurchase.

Award: 12. By his arbitral award dated 14th January 2006, the

Arbitratordeclaredthattherateatwhich30,85,712equityshares ofMSL,heldbythePetitioneraretobevaluedason3rdMay2003, forthepurposesofsaletotheRespondent,isRs.151.63pershare.

ChallengetotheAward SubmissionsofPetitioner: 13. In assailing the award under Section 34 of the

Arbitration and Conciliation Act, 1996, Counsel appearing on behalfofthePetitionerurgedthefollowingsubmissions: (i)TheArbitratorexceededhisjurisdictionindeciding

15

the date for valuation of the shares of MSL, proposed to be transferredbythePetitionertotheRespondent;(ii)MSLheld3.4% oftheequitycapitalofBajajAutoLtd.(theRespondent),BajajAuto FinanceLtd.andBajajHindustanLtd.MSLalsoheldinvestmentin fullypaidbondsandmutualfunds.InvaluingthesharesofMSL, theArbitratorappliedadiscountof30%onthevalueoftheshares heldbyMSLintheRespondent(theBALshares).TheArbitrator neitheradjudicatedupon,nordecidedwhy adiscountshouldbe appliedtotheBALshares.ThePetitionerwasselling27%stakein MSLtotheRespondentasaresultofwhichtheRespondentwould obtainamajorityholdinginMSLandwouldalsoasaresultobtain 3.4%oftheequitycapitalinBAL. Hence,thevalueoftheBAL sharesheldbyMSLcannotbesubjectedtoadiscount,particularly sincetheRespondenthadaspecialinterestintheacquisitionofa 27% stake in MSL; (iii) Neither the Arbitrator, nor the valuer whose evidence is accepted bytheArbitrator, have decided why onlythebookvalueofthenonBALquotedinvestments,betaken andnotthemarketvalue;(iv)Noadjudicationordetermination has been rendered by the Arbitrator at all on valuation. The Arbitratormerelystatedthatfixingofa30%discount would be

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just,fairandreasonableandwouldmeettheendsofjustice.This constitutesanerrorapparentonthefaceoftherecord,sincethe Arbitrator has proceeded on a basis which is not permitted by section 28(2); (v) The invocation ofa rationale of a 20to40% discount as a reason by the Arbitrator to apply a 30% discount disclosesatotalnonapplicationofmindorperversity,onthepart oftheArbitrator,consideringthecontextinwhichthediscountof 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 conscienceoftheCourt;(vi)Theapplicationofadiscounttothe BALholdingandtheuseofonlythebookvalueinthenonBAL holding affects the rights of the Petitioner and causes a direct financiallossandinjury.ThevalueofthediscountappliedisRs.50 croresinthesharesofBALalone;(vii)TheevidenceofMr.Bansi Mehta was liable to be considered irrelevant, nongermane and extraneoustothereferenceafterhisanswertoquestions14to16 inthecourseofhisevidence.TheArbitratorhastodecideacivil dispute on a balance of probabilities and he must of necessity decideonsomeevidence.Iftheevidenceofonesideisdiscarded

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andtheevidenceoftheothersideisadmittedlynotunderClause7 oftheProtocolAgreement,onwhichheiscalledupontomakea valuation,theArbitratorshouldhavecometotheconclusionthat ontheevidence,hecouldnotvalueatall;(viii)Thefixationofthe date for valuation by the Arbitrator is beyond the scope of the submission; and(ix) TheProtocol Agreement isillegal andany 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 incorporatedintheArticlesofAssociationofMSL.Thesharesofa PublicCompanyaredeclaredbySection111AoftheCompanies 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,therewasvirtuallynoadjudicationbytheArbitrator.

SubmissionsofRespondent: 14. On the other hand, it was urged on behalf of the

Respondentthat(i)Inpursuanceoftheformaloffermadebythe Petitionerunderclause7oftheProtocolAgreementtodivestitself

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ofits27%holdinginMSLandtotransferittotheRespondent,the Respondent accepted the offer by its letter dated 3rd May 2003. This wasclarifiedbytheRespondent byaletterdated10 th May 2003,bywhichtheRespondentstatedthattheearlierletterwasin termsofclause7 of the ProtocolAgreementbutthepriceoffered bythePetitionerwasnotacceptable.Infact,theletteraddressed by the Petitioner to the Arbitrator on 27th October 2003 clearly establishesthattheprocesshadbeencompletedthoughtherewas no agreement on the value of the shares to be sold. The joint referencebytheparties totheArbitratoron29th December2003 postulatesthatacontractforthesaleofthePetitionersholdingin MSLtotheRespondentexistedthoughtherewasadisputeabout therate. TheMinutesoftheMeetingbeforetheArbitratorshow thatthedateforvaluationwasregardedasaningredient ofthe rate and there was never any dispute about the date of the contract. Thetenorofthecorrespondencewhichwasexchanged betweentheparties alsoshowsthatallthelettersrelatedtothe dateofvaluationandtherewasnodisputeaboutthedateofthe contract.Untilthereferencewasmadetoarbitration,thecommon premisewasthattheagreementwasarrivedat,withreferenceto

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the offer dated 9th April 2003, on 3rd May 2003. This was the positionuntilJanuary2004.TheArbitratordirectedthepleadings tobefiledonthevaluationofthesharesandtherelevantdate.It was only in the application of 6th April 2004 that the Petitioner sought to raise a dispute on whether a concluded contract has comeintoexistence.Hence,thequestionasregardsthedateof valuationwasraisednotinthecontextofthecontractnotbeing concluded,butasaningredientoftherateanditwasonlyinthe applicationof6th April2004thatthePetitionersoughttolinkthe dateofvaluationtothesubmissionthatthecontracthadnotbeen concluded;(ii)Insofarasthequestionofvaluationisconcerned, theonlygroundwhichhasbeenraisedintheArbitrationPetition (GroundAA)relatestothediscountingofthevalueofBALshares held by MSL; (iii) Considering the scope of Section 34 of the ArbitrationandConciliationAct,1996,anappellatereviewofan arbitral award is not permissible in law. The decision of the Supreme Court in ONGC Ltd. Vs. Saw Pipes Ltd.,1 does not contemplate an appellate review or suggest a reappraisal of evidence;(iv)Thearbitralawardfurnishesavalidbasisfromthe
1 (2003) 5 SCC 705

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evidenceforapplyingadiscountof30% inthefactsofthecase. The evidence of Mr.Bansi Mehta suggested that a discount between28to40%wouldhavetobeallowedonaconceptualbasis whereas on an empirical comparison based on market capitalization, a discount between 56 to 91% would have to be taken.TheArbitratorhasheldthatthediscountshouldbenoless than30%inthefactsofthiscase.ThereferencebytheArbitrator tothereportofMr.Raghuramindicatinga20to40%discountis erroneous,becausethiswasareferencetothevaluationofMSL shares.Butmerelybecauseonegroundwhichisrelieduponbythe Arbitratorsuffersfromanerroroffact,wouldnotdetractfromthe validityoftheaward. Therewasawealthofevidencebeforethe Arbitrator in support of the finding that the discount of 30% is valid. Theevidenceisreferredtointhearbitralawarditselfand theawardcanbesustainedonthatbasis.Therealizablevalueof anassetislessthanthemarketvalueinaliquidationvaluation;(v) AsregardsthebookvaluebeingtakenofthenonBALholding,the evidenceshowsthattherewasnoappreciationinthevalueofsuch holding. If the market value was taken, it would have to be discounted,whichwouldthenresultinafigureevenlowerthan

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thebookvalue;(vi)TheArbitratoracceptedtheliquidationbasisof valuation from the report of Mr.Bansi Mehta and applied a discount.Thereisbothanadjudicationanddeterminationbythe Arbitrator. Clause7oftheProtocolAgreementdoesnotprovide any particular method of valuation. Mr.Bansi Mehta, therefore, statedinhiscrossexaminationthattheclassicalmethodhasbeen followed.Clause7providesforafixationoftherateatwhichthe shareswouldbesold,whichliesinthedomainoftheArbitrator.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. ThequestionasregardsthelegalityofClause7ofthe ProtocolAgreementvisavisSection111AoftheCompaniesAct, 1956, was not in the original reference. Yet, the question was specificallyreferredtotheArbitratorduringthependencyofthe reference. The decision of the Arbitrator was invited as a jurisdictionalissue,beforetheArbitratorconsideredthemeritsof thedispute.Hence,thedeterminationoftheArbitratorisfinaland cannot be enquired into; (viii) In any event, the Arbitrator has followed the decision of the Supreme Court in

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M.S.Madhusoodhanan vs. Kerala Kaumudi Pvt.Ltd.2 9. The restrictioninthepresentcase,imposedbyClause7oftheProtocol 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. Section111AoftheCompaniesAct,1956doesnot prohibit agreements entered into between specific shareholders regarding specific shares, particularly when incorporated in the ArticlesofAssociation.

15.

Thechallengetothearbitralawardcannowbetakenup

forconsideration.

DidtheArbitratorexceedhisjurisdiction:

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.
2 2003 Vol.117 Company Cases 19

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17.

On9thApril2003,thePetitioneraddressedalettertothe

Respondent by which, it proposed to divest its shareholding of 30,85,712equitysharesinMSLatanofferedpriceofRs.232.20per equitysharetotheRespondent.ThePetitionerstatedthatitwas makinganofferinaccordancewiththeprovisionsofClause7of the Protocol Agreement and in view of the decision of the GovernmentofMaharashtra.TheRespondentinitsreplydated3rd May 2003, confirmed its interest in buying shares offered, but recordedthatthepricewasnotacceptable. Theresponseofthe Respondent was in pursuance of Clause 7 of the Protocol Agreement. By a further letter dated 10th May 2003, the Respondent confirmedthatitsearlier response of3rd May2003 wastotheoffermadebythePetitioneron9thApril2003andwas intermsofclause7oftheProtocolAgreement. TheRespondent stated that it has confirmed its intention to purchase the shares offered,butthepriceofferedwasnotacceptable.

18.

ThecontentionofthePetitioneristhattheletterofthe

Respondentdated3rdMay2003,wasnotanunqualifiedacceptance

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sinceameetingwassoughtfornegotiationtoexploreasettlement. Indealingwiththissubmission,itistobenotedthaton31st July 2003,theRespondentsoughttheinitiationofthearbitralprocess, intheeventthatitsofferofaprice ofRs.75persharewasnot acceptable.Thearbitralprocesswasinitiatedandon27thOctober 2003,thePetitioneraddressedalettertotheArbitrator,recording thatundertheProtocolAgreement,thePetitionerhadtofirstmake an offer to the Respondent and in turn, the Respondent had to acceptorrejectthatoffer. Thisprocess,thePetitionerrecorded, hasbeencompletedandsincenoagreementhasbeenreachedon thevalueoftheshares,aspertheagreement,thepartiesinvolved havetoappointasoleArbitratorforthepurpose.Followingthis letter,ajointreferencetoarbitrationwasmadeon29thDecember 2003.Thetermsofreferencecontainanexpressstatementoffact thattheRespondenthadexpresseditswillingnesstobuythestake heldbythePetitionerinMSLandthatthePetitionerindicatedits desiretosellitsshareholdinginMSL.However,whatremainedin dispute was the price per share and hence, in accordance with Clause7oftheProtocolAgreement,thequestionofrateforthe purchase by the Respondent of the equity shares held by the

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Petitioner in MSL, was being referred. What emerges from the materialonrecord,therefore,is,thatintermsofClause7 ofthe Protocol Agreement, the Petitioner had made an offer to sell its sharesinMSL,totheRespondent. TheRespondentbyitsletters dated 3rd May and again 10th May 2003, accepted the offer to purchasetheshares,butindicatedthatthepricesuggestedbythe Petitionerwasnotacceptable.Partiesatthatstageand,aswould benoted,evenlaterwereadidemonthefactthatthecontractfor thesaleofshares,stoodconcludedbytheacceptanceoftheoffer made by the Petitioner. Clause 7 of the Protocol Agreement contemplatesthatiftheparty,towhomanofferismade,iswilling topurchasetheshares,butconsiderstherateproposed,tobetoo highorunacceptable,itshall,withinthirtydaysfromthereceipt of the notice, furnish a written intimation to the offerer of the intentiontopurchasesharesandthequestionasregardstherateat whichthesharesaretobesoldshallbereferredtoarbitration.In thepresentcase,thePetitionerbyitslettertotheArbitratordated 27thOctober2003,clearlystatedthattheprocessofmakingofthe offer and its acceptance, had been completed and there was no agreementonthevalueatwhichtheshareswouldbesold.Itisin

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thiscontext,thatthejointreferencetotheArbitratorproceededon thebasisthataconcludedcontractforthesaleofsharesdidexist buttherewasadisputeabouttherate.

19.

TheArbitrator,duringthecourseofthesecondmeeting

held on 27th January 2004, called upon the parties to file their statementsregardingthevaluationofsharesandtherelevantdate for valuation. The date for valuation was regarded as an ingredientoftherate,atwhichtheshareswouldbesold. There wasnodisputeaboutthefactthatthecontractforthesaleofthe shares hadbeenconcluded. Consequently,untilthereferenceto arbitration was made, parties proceeded on the basis that the agreementforthesaleofthe shares,wasfoundedontheletters dated9thApril2003and3rd/10thMay2003.Thispositionheldthe fielduntilJanuary2004.TheArbitratordirectedthepartiestofile pleadings on the valuation of shares and the relevant date for valuation. Thecorrespondenceexchangedbetweenthepartiesin February 2004, shows that the dispute was on the date of valuation.Itwasforthefirsttime,intheapplicationfiledbythe Petitioner before the Arbitrator, on 6th April 2004, that the

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Petitionersoughttoquestionastowhetheraconcludedcontract hadbeenarrivedat.Thiswasanobviousafterthoughtandwasa clear deviation from the manner in which the Petitioner had understood the course of dealings between the parties. The referencetothedateofvaluationwasintroducedbytheArbitrator, whentherewasnodisputeaboutthedateofthecontractorabout theexistenceofaconcludedcontract.WhentheArbitratorraised thequestionasregardsthedateofvaluation,thiswasonlyasan ingredient of the fixation of the rate and the premise of the referencetoarbitrationwastheexistenceofaconcludedcontract. TheArbitratorwasnotdecidingwhenthecontractwasconcluded orwhetheritwasconcluded. TheArbitratorhas,asamatterof fact, ascertained the date of valuation as an ingredient of the fixationoftherateatwhichthesharesheldbythePetitionerwould be sold to the Respondent. The Arbitrator has held that the relevantdateofvaluationwouldbe3rd May2003,whichwasthe date on which a concluded contract was arrived at between the parties.InPartIofhisAward,theArbitratorhasheldthatthedate ofvaluationwouldbethedateonwhichtheoffertopurchasewas accepted. Inholdingthus,theArbitratorhasnottransgressedhis

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jurisdiction. Thechallenge tothearbitralawardonthisground mustfail.

Scope of challenge under Section 34 of the Arbitration and ConciliationAct,1996:

20.

Section 34 of the ArbitrationandConciliationAct,1996,

definestheparametersofarecoursetoaCourtagainstanabitral award. This recourse is, by an application for setting aside the award,inaccordancewiththeprovisionsofsubsections(2)and (3) of the provision. For this case, the focus on the scope of judicialinterventionisonsubclause(iv)ofclause(a)andonsub clause(ii)ofclause(b)ofsubsection(2) ofSection34. Under theseprovisions,anarbitralawardmaybesetasidebytheCourt, only if (i) The arbitral award deals with a dispute not contemplatedbyornotfallingwithinthetermsofthesubmission to arbitration or if it contains decisions on matters beyond the scopeofthesubmissiontoarbitration;and(ii)IftheCourtfinds thatthearbitralawardisinconflictwiththepublicpolicyofIndia.

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21.

Section 28(1)(a) mandates that the arbitral Tribunal

mustdecidethedisputeinaccordancewiththesubstantivelawin India. Under subSection (3), the Tribunal has to decide the dispute, in accordance with the terms of the contract and after takingintoconsideration,theusageofthetradeapplicabletothe transaction. In ONGCvs.SawPipes (supra)theSupremeCourt heldthatifanawardisincontraventionoftheprovisionsofthe Act,itissubjecttojudicialinterventionandcanbesetaside.Ifthe arbitralTribunaldoesnotfollowthemandatoryprocedureunder the Act, it would act in excess of its jurisdiction and the award wouldbepatentlyillegal.Thegroundforinterferenceiselucidated thus,bytheSupremeCourt:
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 SupremeCourtnoted,mustbesuchasmust

gototherootofthematterforiftheillegalityisoftrivialnature, it cannot be held that the award is against public policy. The decisioninSawPipeslaysdownthatbeforeanawardcanbeset

30

aside,itmustbe(i)ContrarytothefundamentalpolicyofIndian Law;or(ii)ContrarytotheinterestofIndia;or(iii)Contraryto Justiceormorality;or(iv)Patentlyillegal.Anawardwhichisso unfairandunreasonable,thatitshockstheconscienceoftheCourt, wouldbeliabletobesetasidebecause,thenitwouldbecontrary topublicpolicy.TheSupremeCourt,however,emphasizedthatif 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 withtheaward. Thiswoulddependuponthereferencethatwas made to the Arbitrator. If there is a general reference to the Tribunalfordecidingthe disputeandifanawardisbasedonan erroneousandillegalproposition,theCourtwouldinterfere.Inthe caseofareasonedaward,theCourtcansetasidetheawardifon thefaceoftheaward,thereisanerroneouspropositionoflawor on its application. However, if a specific question of law is submittedtotheArbitratoranerroneousdecisiononapointoflaw doesnotmaketheawardbad,unlesstheCourtissatisfiedthatthe Arbitrator has proceeded illegally. Thedecision ofthe Supreme Courtin SawPipes (supra)doesnotcontemplate anappellate

31

reviewofanarbitralawardorareappraisaloftheevidence. The Courtcannot substituteaconclusiononevidence,whichappears totheCourttobejustandproperfortheconclusionthatisarrived at,bythearbitralforum. Theemphasisinthejudgmentin Saw Pipes, is that judicial intervention can be warranted where the arbitral Tribunal has not followed the mandatory procedure prescribedbySections24,28or31(3),whichaffectstherightsof the parties or where the award is contrary to the substantive provisionsoflaw;totheprovisionsoftheActortothetermsofthe contract.Theemphasisisonapatentillegality.Noteveryerrorof laworfactmakesanawardsubjecttojudicialintervention.

22.

ThesubsequentjudgmentoftheSupremeCourtinDelhi

Development Authority vs. R.S.Sharma & Co.,3 makes a reference to the earlier judgments of the Court including the judgment in Hindustan Zinc Ltd. vs. Friends Coal Carbibusatuib,4 whichinturnhasfollowed SawPipes (supra). In the judgment in Delhi Development Authority (supra), the Bench of two Learned Judges of the Supreme Court has
3 (2008) 13 SCC 80 4 (2006) 4 SCC 445

32

summarized the principle for judicial intervention in arbitral awards,astheyemergefromthedecidedcases,thus: 21. From the above decisions, the following principlesemerge: (a)Anaward,whichis (i)contrarytosubstantiveprovisionsoflaw;or (ii)theprovisionsoftheArbitrationandConciliation Act,1996; or (iii)againstthetermsoftherespectivecontract;or (iv)patentlyillegal;or (v)Prejudicialtotherightsoftheparties; isopentointerferencebytheCourtunderSection34(2) oftheAct. (b)Theawardcouldbesetasideifitiscontraryto: (a)fundamentalpolicyofIndianlaw;or (b)theinterestofIndia;or (c)justiceormorality. (c)Theawardcouldalsobesetasideifitissounfairand unreasonablethatitshockstheconscienceofthecourt. (d)Itisopentothecourttoconsiderwhethertheaward is against the specific terms of contract and if so, interferewithitonthegroundthatitispatentlyillegal andopposedtothepublicpolicyofIndia.

At this stage, it would, however, be necessary to note that an arbitralaward prejudicialtotherightsofthepartiesisnot an independenthead ofchallengeassuch,andthisisevidentboth

33

from the decision in Saw Pipes and in the paraphrasing of the principles laid down in that judgment in Hindustan Zinc. In paragraph13ofthejudgmentin SawPipes,theSupremeCourt addressedtheissueastowhetheranawardcouldbesetasideifthe arbitral Tribunal has not followed the mandatory procedure prescribedunderSections24,28or31(3),whichaffectstherights ofparties. In Hindustan Zinc,theSupremeCourt heldthatan award contrary to the substantive provisions of law or the provisions of the Act or the terms of the contract, would be patentlyillegal and ifit affectstherightsoftheparties wouldbe opentointerferenceoftheCourtunderSection31(2).

23.

Thequestionastowhetheragroundfortheinterference

oftheCourthasbeenestablishedinthefactsofthiscase,mustnow be considered, in terms of the law laid down by the Supreme Court.

Thequestionofvaluation: 24. MSL has an Operating Section and an Investment

Section. MSLs AssemblyPlantwassetupundertechnicalknow

34

howfromtheRespondent. Theassembly,theCourtisinformed, wasoftheChetakScootersofBajaj. TheInvestmentSection of MSL has holdings in the Bajaj Group of Companies and others. MSLheld3.4%oftheequitycapitaloftheRespondent(theBAL shares), BajajHindustanLtd.andBajajAutoFinanceLtd. The nonBajajholdingwasinfullypaidupbondsandMutualFunds.

25.

Principally,twosubmissionshavebeenurgedonbehalf

of thePetitioner. Firstly,theArbitratorhasselectedaparticular methodofvaluation. Whetheravaluationonaliquidationbasis couldatallbeadoptedforaCompanywhichhasagoingconcern, wassoughttobeplacedinissueanditwasurgedthatMSLisnota Companywhichisunabletopayitsdebts. The Respondent had a
special interest in the acquisition of the stake held by thePetitioner

inMSL.BytheacquisitionoftheequityholdingofthePetitioner, theRespondentwouldacquireamajorityholdinginMSL,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.

35

26.

TheArbitratorculledouttheprinciplesforvaluationof

sharesfromthejudgmentsoftheSupremeCourtinCommissioner ofWealthTaxvs.MahadeoJalan,5 and CommissionerofGift Taxvs.KusumbenD.Mahadevia.6 Thejudgmentin Mahadeo Jalanlaysdownthatleavingasideadistresssale,thefactorswhich arelikelytoaffectthevalueofsharesare:(i)Theprofitearning capacity of the Company; (ii)The capacity of the Company to maintainthoseprofitsorareasonablereturnforcapitalinvested; (iii) The prospects for capitalization of its earning by declaring bonusshares andinacaseofafinanciallysoundCompany, the prospects for the issuance of a rights issue where existing shareholders can obtain shares for a price less than the market value,increasingtheyieldon investment. TheSupremeCourt, afterenunciatingvariousmethodsofvaluationofshares,namely, (i)yieldorprofitearningmethod;(ii)themarketvaluemethodif profitiscertain;and(iii)liquidityifprofitisuncertain,laiddown theprincipleswhichemerge.Insofarasitisrelevanttothiscase, thepropositions(1),(4)and(5)areasfollows: 1) Wherethesharesinapubliclimitedcompany arequotedonthestockexchangeandtherearedealings
5 (1972) 86 ITR 621 6 (1980) 122 ITR 38

36

inthem,thepriceprevailingonthevaluationdateisthe valueoftheshares. 4) Wherethedividendyieldandearningmethod breakdownbyreasonofthecompanysinabilitytoearn profitsanddeclaredividends,ifthesetbackistemporary then it is perhaps possible to take the estimate of the valueofthesharesbeforesetbackanddiscountitbya percentagecorrespondingtotheproportionatefallinthe priceofquotedsharesofcompanieswhichhavesuffered similarreverses. 5) Wherethecompanyisripeforwindingupthen the breakup value method determines what would be realizedbythatprocess.

TheArbitratoradvertedtocertainadmittedfacts, thesebeingas follows:(i)TheprincipalactivityofMSLinvolvedtheassemblyof scooters for which completely knocked down kits were received fromtheRespondent.TheRespondentandMSLhadenteredinto a technical know how agreement. MSL was assembling Bajaj ChetakScooters;(ii)Admittedly,themanagementofMSLwaswith theRespondent.FivepersonsontheBoardofDirectorsweretobe nominated by the Petitioner and four by the Respondent. The ChairmanandManagingDirectoroftheRespondentwastobethe ChairmanofMSL.UnderClause154oftheArticlesofAssociation, severalimportantdecisionstobetakenbyMSL,weresubjecttothe

37

approvaloftheRespondent.Moreover,theChiefExecutiveofMSL was to be appointed by the Board, out of a panel of names suggestedbytheRespondent.KeymanagementfunctionsofMSL werevirtuallyintegratedwiththeRespondent. MSLonlyhasan assembly plant by which it cannot manufacture, but can only assemble scooters.; (iii) As a result of customer preference for motorcycles,themarketforscootershadshownadecliningtrend, adversely affecting the operations of MSL. MSL had suffered operatinglossesforfinancialyears200102,200203and200304; (iv) The market share of geared scooters with which MSL is concerned,hadgonedownfrom23.5%in19992000to4.9%in 200304;(v)MSLrequiressalesofabout62,000scootersperyear toachieveabreakevenposition,whereasthebusinessplanforthe period200409indicatesproductionandsaleofChetakScootersof only12,000unitsperyear. TheArbitratornoted,while dealing withthequestionofcontrolpremium,thatevenwithout thesale of its 27%stake bythe Petitioner, the Respondent already had effectivemanagerialcontroloverMSLwithoutboardroomcontrol. Therationaleforacontrolpremiumwould,therefore,notexistin thefactsofthiscase.Moreover,itisanadmittedfactthatthenon

38

corebusinessassetsofMSLwhichconsistofunquotedinvestments andquotedinvestments,constitute96.2%ofthebusinessassetsof MSL.ThoughthemainbusinessofMSLwassupposedtobeinthe operating segment, namely, in the core business assets, that constitutedonlyanegligibleoperation,namely,3.8%.Hence,the core business activity of MSL of assembling scooters was insignificant.Havingregardtothesecircumstances,theArbitrator 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.RaghuramwasnotacceptedbytheArbitratorforvalidreasons whichhavebeennotedabove.Thereasonsonthebasisofwhich thetestimonyofMr.Raghuramandhisvaluationarediscarded,are interalia contained inparagraph75oftheaward.Infairness,it mayberecordedherethatLearnedSeniorCounselappearingon behalfofthePetitionerhasnotpressedthataspectofthematter.

27.

Mr.BansiMehtawasexaminedasanexpertonvaluation

by the Respondent. The Arbitrator noted that Mr.Bansi

39

MehtawascrossexaminedonbehalfofthePetitioner,inorderto question his justification for adopting the net asset value on a liquidation basis. The award notes that this method was also recommendedbythewitnessofthePetitionerinhisfirstreport. Mr.Bansi Mehta worked out two different valuations: (i) A valuationofRs.125persharewasworkedoutbyapplyinga45% discountonthesixmonthlyaveragevalueontheNationalStock Exchange(NSE);and(ii)AvalueofRs.102persharewasworked outonthebasisofa60%discountonasixmonthlyaveragetaken fromNSE.TheArbitratorconsidereditfittoapplya30%discount inthefactsofthecaseandconsideredthatthiswouldbejust, fairandreasonableandwouldmeettheendsofjustice. Thesix monthlyaverageontheNSEfor33.87lakhBALshareswasRs.494 pershareonwhicha30%discountwasapplied.Paragraph100of theawardwhichreadsthus: In the light of the above, I think interests of justice would be met by fixing the rate on the basis of the calculationsmadebyMr.BansiMehtainAppendix8and 9 to his report subject, however, to two changes. In Appendix9,hehascalculateddiscountof60%onthesix monthly average rate on National Stock Exchange, namelydiscountofRs.296.40ontherateofRs.494/per share. This results in the value of a share being Rs. 102.46.InAppendix8,hehascalculated45%discount

40

on the six monthly average rate on National Stock Exchange namely discount ofRs.222.30 on the rate of Rs.494/pershare. Thisresultsinthevalueofashare being Rs.124.42. As reiterated above, Mr.Raghuram himself hasindicatedadiscountof20%to40%inhis firstreport. Inthefactsofthecase,Ithinkthatfixing 30% discount would be just, fair and reasonable and wouldmeettheendsofjustice.

28.

The Award on valuation is questioned on the ground

thatthereisaviolationoftheprovisionsofSection28(2)ofthe ArbitrationandConciliationAct,1996.CounselforthePetitioner submittedthatMr.BansiMehtaappliedadiscountbetween45%to 60%andarrivedattheconclusionthatthepriceofasharewould varybetweenRs.102toRs.124.TheArbitratortookadiscountof 30% in arriving at a valuation of Rs.151.63 per share on the groundthatheconsidereditjust,fairandreasonableandtomeet theendsofjustice. ThesubmissionisthattheArbitratordecided what he thought is fair, just and equitable and this is not permissible underSection 28(2)oftheAct whichmandatesthat thedecisionhastobereasoned.TheArbitratoralsofurnishedthe reason that Mr.Raghuram, the witness for the Petitioner, had himself...indicatedadiscountof20%to40%inhisfirstreport.

41

Itwasurgedthatthediscountwhich Mr.Raghuramsuggestedin his evidence was on the shares of MSL, whereas the Arbitrator appliedthistothevaluationofBALshares.Itwasurgedthatthe award, therefore, shows no reasoning at all and betrays a non application of mind. The factual basis on which the Arbitrator concludedthatadiscountof30%shouldbeapplied,wasincorrect. Asaresultofthisprocess,itwassubmittedthatthediscounton BAL shares of Rs.50.12 crores was wrongly granted by the Arbitrator.

29.

TheArbitrator,inparagraphs80and81oftheAward,

consideredthereport ofMr.BansiMehta. TheArbitratornoted thatifaconceptualbasisisadopted,thevalueoftheinvestments hastobediscountedbetween20to40%.Ontheotherhand,on anempirical comparisonofdataonactualvaluations,basedon marketcapitalization,adiscountofbetween56to91%isrequired to be adopted. In Appendix6A of his report, Mr.Bansi Mehta furnisheddetailsofhisworkinginrespectof(i)TataInvestments; and (ii) Industrial Investment Trust, where the discounts were 82.85%and91.4%.InAppendix6B,wheretheexampleofTISCO

42

Ltd.wasconsidered,thediscountappliedwas56%.Appendix6C dealtwithBajajAutoLtd.Consequently,anempiricalcomparison suggestedthatthediscountwhichistobeappliedwhilevaluing thesharesheldbyanoperatingcompany,inotherentities,would vary between 56 to 91%. On the other hand, in Appendix7, Mr.Bansi Mehta applied a conceptual or common sense basis, whichshowedthatthediscountontheshareholdingheldinother Companies,wouldbeapproximately2840%. Mr.BansiMehta,in hisanswertoQuestion147inthecourseofhiscrossexamination explained the basis on which the discount had been calculated, firstly, taking an empirical comparison and secondly, on a conceptualanalysis.Whileexplainingparagraph5.3ofhisreport, Mr.BansiMehtamakesareferencetowhatisdescribedastheC, D,Eapproache:Theacronymstandsforconstraint,distanceand empiricaldata.TheArbitratorhasmadeareferenceinhisAward totheanswertoQuestion147andtoparagraph5.4ofthereport ofMr.BansiMehta,whichreadsasfollows: 5.4 On a conceptual basis, we have set out in Appendix7whatashareholdercanexpecttogetifthe InvesteeCompanyweretorealizeitsinvestmentand,in abstract theory, distributes the entire proceeds to the shareholders,fromwhichitwillbeevidentthat whata

43

shareholdercanhopetoachieveisnomorethan72%of the gain. This, in our view, reinforces what is stated earlier that the fair market value must allow for a discountofabout30%.Accordingly,inourview,MSLs shareholdinginBAL valuedatthesixmonthlyaverage ratesetoutinAppendix5shouldbefurtherdiscounted bynolessthan30%.(emphasissupplied).

Mr.Bansi Mehtas evidence, which has been relied upon by the Arbitrator,is,therefore, clearinstipulatingthattheholdingof MSL in the Respondent, valued on a six monthly average rate, should be discounted by no less than 30%. The underlying principle isthat,therealizablevalueofanassetislessthanthe marketvalueinaliquidationvaluation.TheArbitratoradopteda discountof30%onthevaluationofBALshares. Thesubmission 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 elaborationoftherationaleformakingadiscountonthevaluation of BAL shares. Mr.Mehta considered discounting both from an empiricalandaconceptualperspective.Empirically,thevaluation oftheBALshareswouldbesusceptibletoadiscountofbetween56 to91%,whereas,conceptually,thediscountwouldbe,nolessthan

44

30%. The Arbitrator in adopting the discount of 30%, cannot, therefore, be faulted. The figure of 30% is traceable to the evidenceofMr.BansiMehtawhostatesthatthediscountshouldbe nolessthan30%.TheobservationsoftheArbitratorinparagraph 100 of the Award, also refer to Appendices 8 and 9, where Mr.BansiMehtaconsideredtheempiricalbasis. Theobservations oftheArbitratorinparagraph100thatinthefactsofthecase.. fixing30%discountwouldbejust,fairandreasonableandwould meettheendsofjustice,cannotbereadinisolationorbeutilized tosuggestthattheArbitratorwasapplyinghisownnotionofwhat isequitable,fairandjust.

30.

Section28oftheActpostulatesthatthearbitralTribunal

has todecide the dispute submitted toarbitration inaccordance withthesubstantivelawforthetimebeinginforce,inIndia.The arbitral Tribunal can decide ex aequo et bono or as amiable compositeur onlyifthepartieshaveexpresslyauthorisedit,todo so,thisbeingthemandateofsubSection(2)ofSection28.The arbitral Tribunal under subsection (3), has to decide in accordancewiththetermsofthecontractandisrequiredtotake

45

into account the usages of the trade. In the present case, the discountof30%thathasbeenappliedtotheBALholding,isnot adopted by the arbitral Tribunal as amiable compositeur or on notions fairness and equity. The discount is founded upon considerationswhicharegermaneandwhichwerebasedonthe evidenceonrecord. Thesufficiencyandqualityoftheevidence, aremattersforthearbitralTribunal todetermine. Thearbitral Tribunal accepted the evidence of Mr.Bansi Mehta for valid reasons,recordingthatthecrossexaminationhasnotresultedin anysignificantdilutionoftheevidence. Inonearea,thereisan erroroffactonthepartoftheArbitratorwherehereferstothe report of Mr.Raghuram as having indicated a discount of 30 to 40%.Admittedly,thediscountthatwasreferredtointhereport ofMr.Raghuramdealtwiththevaluationof MSLshares (notthe BAL shares). On this aspect, the Arbitrator has misread the evidence and one ground which weighed with him, would constituteanerroroffact.But,asalreadydiscussedearlier,there wasawealthofevidencebeforetheArbitrator,whichwasaccepted byhimtodemonstratethatadiscountof30%wassusceptibleboth on a conceptual and an empirical basis. The challenge on this

46

groundis,therefore,lackinginsubstance.

BookvalueofnonBALholdings: 31. ThesubmissionisthattheArbitratorwasnotjustifiedin

takingthebookvalueofnonBALquotedinvestments,asopposed tothemarketvalue.AbriefreferencetotheevidenceofMr.Bansi Mehta,wouldbeinorder. Mr.BansiMehtawascrossexamined withreferencetoparagraph5.1ofhisreport,wherehehasstated thatadoptingthebookvalue,asarealizablevalue,thevaluefor thatcomponentwouldcorrespondtosuchbookvalue.Mr.Mehta statedthatthisisanormalpracticeforassetsthatareinthenature of liquid instruments since they are presumed to have been acquiredtoearnarecurringratherthanthematurityreturn.7 In answer to Question 164, Mr.Mehta stated that the nonBAL investmentscanbeencashedeasilyandthattherewasnotmuch appreciation.ThemostproximatebalancesheetofMSLasof31st March2003,showedthatalmost98%ormoreoftheappreciation in the quoted investments had come on account of MSLs shareholding in BAL. Since the appreciation of other quoted

7 Vol.II Question 128 page 557

47

investments, was not material, there was no need to apply a discounttothatvalue. Mr.Mehtaexplainedthatifhehadtaken therealizablevalueoftheotherassetsoftheInvestmentSectionof MSL and had applied a discount to that value, the value of the InvestmentSection,wouldhavebeenevenlowerandnothigher. TheevidenceofMr.Mehta,therefore,indicatesthatthereasonwhy he adopted the book value for nonBAL holdings was that there wasnosignificantappreciationinthevalueofthoseholdings.Ifthe market value weretobe taken,itwouldhave tobe discounted, whichwouldresultinavalueevenlowerandnothigher. Inthe circumstances, there isa cogent justification on theevidence for applyingthebookvaluefornonBALquotedinvestments.

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 emphasiswassoughttobeplacedonthemethodologyadoptedby Mr.Mehta of determining the rate based on an objective fair valuation. Paragraph 3.2 of the report states that the classical

48

conceptofvaluationistheprice,whichwouldbefetchedbetween awillingbuyerand willingseller. BALbeingalistedCompany, whosesharesareheldbyawidebodyofinvestors,Mr.Mehtastated thathisapproachtovaluationwasguidedbytheconceptofan objectivevaluationbetweenawillingbuyerandawillingseller. Mr.Mehtawasasked,duringthecourseofthecrossexamination, todemonstratewhatpartofClause7oftheProtocolAgreement requires a determination of an objective fair valuation. In his answer,heclarifiedthatintheabsenceofanyparticularprovision concerning the method of valuation he would adhere to the classicalconcept of anobjective fairvaluationbetweenawilling sellerandawillingbuyer. Mr.Mehtadeposedthatwhathehad stated in the report about the approach to valuation, was not inconsistentwithClause7oftheProtocolAgreement. Hestated that he had not done the valuation under Clause 7 of the Agreement. Hisevidencewasthatwhenavaluationisrequired, 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. ThecontentionthatthereportofMr.Mehtamust

49

bediscardedbecause,hehasnotcarriedoutthevaluationunder Clause7lackssubstance.Clause7oftheProtocolAgreementdoes notprovideforanyparticularmethodofvaluation.Consequently, Mr.Mehtastated,inthecourseofhiscrossexamination,thatthe classicalmethodhadbeenfollowed. Clause7oftheAgreement providesforafixationoftherate,whichliesinthedomainofthe Arbitrator.Thatinanycaseliesintherealmoftheappreciationof evidence.

33.

Section4oftheSaleofGoodsAct,1930providesthata

contract of the sale of goods is a contract whereby the seller transfersoragreestotransfertheproperty ingoodstothebuyer foraprice.UnderSection5,acontractofsaleismadebyanoffer tobuyorsellgoodsforapriceandtheacceptanceofsuchoffer. Thecontractmayprovidefortheimmediatedeliveryofthegoods orimmediatepaymentofthepriceorboth,orforthedeliveryor paymentbyinstalments,orthatthedeliveryorpayment orboth shall be postponed. The price in a contract of sale can be fixed underSection9(1)bythecontractormaybelefttobefixedina mannertherebyagreedorthatmaybedeterminedbythecourseof

50

dealingbetweentheparties.Wherethepriceisnotdeterminedin accordancewiththeprovisionsofsubsection(1)ofsection9,the buyershallpaythesellerareasonablepriceandwhatisreasonable isaquestionoffact,determinedonthecircumstancesofeachcase.

34.

Thechallengetothevaluationmustfail.

Section111AoftheCompaniesAct,1956: 35. Thechallengeunderthishead,istothelegalityofClause

7oftheProtocolAgreement. ThesubmissionofthePetitioneris thatclause7createsarightofpreemption.MSLisalistedpublic Company. TheProtocolAgreementisincorporatedintheArticles ofAssociation.Section111AoftheCompaniesAct,1956provides that the shares or debentures of a Company and any interest therein,shallbefreelytransferable. Section9stipulatesthatthe provisionsoftheActshallhaveeffect,notwithstandinganythingto the contrary contained in the Memorandum or Articles of Association. Hence,thepreemptiverightrecognizedbyClause7 of the Protocol Agreement and incorporated in the Articles of Association,mustyieldtoSection111A. Inthepresentcase, it

51

was submitted that on the challenge to the legality of the pre emptiverightcreatedbyClause 7oftheProtocolAgreement,as incorporated intheArticles,thereisvirtuallynoadjudicationby theArbitrator.

Wasthereareferenceonaspecificquestionoflaw? 36. OnbehalfoftheRespondent,anobjectionwasraisedto

the maintainability of the challenge under Section 34, on the groundthatbyanapplicationdated6thApril2004,thelegalityof clause 7 was squarely placed in issue for a decision by the Arbitrator.This,itwasurged,wouldconstituteaspecificreference ofaquestionoflaw,onwhichthedecisionoftheArbitratorwould be final. The submission is that the application dated 6th April 2004,wasrespondedtoanddecided:therewasareferenceofa specific question of law and though this was not part of the original reference to arbitration yet, during the pendency of the reference,thequestionwassoughttoberaised. Thedecisionof the Arbitrator was, it was submitted, an adjudication on a referenceofaspecificquestionoflawuponwhich,finalitymust vestinthedecisionoftheArbitrator.

52

37.

The position as it obtained under the Arbitration Act,

1940,wasthattheArbitratorcoulddecideanissueofjurisdiction protem. Where,however, partiesreferredaspecificquestionof lawandagreedtobeboundbythedecisionoftheArbitrator,that decision became final. Thiswasaprinciple ofjudge made law. TheArbitrationandConciliationAct,1996,empowersthearbitral Tribunal,bySection16,toruleonitsownjurisdiction,including rulingonanyobjectionwithrespecttotheexistenceorvalidityof thearbitrationagreement.Forthatpurpose,anarbitrationclause, whichformspartofthecontractistobetreatedasanagreement independentoftheothertermsofthecontractandadecisionofthe arbitralTribunalthatthecontractisnullandvoidshallnotentail ipso jure the invalidity of the arbitration clause. The arbitral Tribunalhastodecideonapleathatitdoesnothavejurisdiction andwheretheTribunaltakesadecisionrejectingtheplea,ithasto continuewiththearbitralproceedingsandmakeanarbitralaward. Apartyaggrievedbythearbitralawardisempoweredtomakean application for setting aside the award in accordance with the provisionsofSection34. Thatisthescheme legislateduponby

53

ParliamentintheArbitrationandConciliationAct,1996,inregard to the empowerment of an arbitral Tribunal to rule on its jurisdiction.

38.

InONGCvs.SawPipesLtd.(supra),theSupremeCourt

recognizedthatifaspecificquestionoflawissubmittedtothe Arbitrator,anerroneousdecision inpointoflawdoesnotmake theawardbad,soastopermititsbeingsetaside,unlesstheCourt issatisfiedthattheArbitratorhadproceededillegally.8

39.

Theissueswhichfallfordeterminationare:(i)Whatare

therequirementsthatmustbefulfilledinlawinordertopostulate that parties have referred a specific question of law; and (ii) Whether in the present case, the parties must be regarded as havingmadeareferencetotheArbitratoronaspecificquestionof law.

Thespecificquestiondoctrine: 40. Since the judgment of the Supreme Court in Seth

8 para 54 page 736

54

Thawardas Pherumal vs. Union of India,9 it is now a settled principleoflawthatadistinctionhastobemadebetweenthose 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 ArbitratorinpreferencetoadecisionoftheCourt,thedecisionof theArbitratorwouldbebindingonthepartiesandtheCourtwould not impose its perspective on the law in supersession of the decisionoftheArbitrator.InThawardasPherumal,theSupreme Courtformulatedtheprincipleinthefollowingterms: If a question of law is specifically referred and it is evidentthatthepartiesdesire tohaveadecision from the arbitrator about that rather than one from the Courts,thentheCourtswillnotinterfere,thougheven there,thereisauthorityfortheviewthatthecourtswill interfere if it is apparent that the arbitrator has acted illegallyinreachinghisdecision,thatistosay,ifhehas decided on inadmissible evidence or on principles of construction that the law does not countenance or somethingofthatnature.

Consequently,fortheprincipletobeattracted,itmustbeevident
9 AIR 1955 SC 468

55

that (i) a question of law is in issue; (ii) the parties have specificallyagreedtoreferittotheArbitrator;and(iii)partieshave agreedtobeboundbytheArbitratorsdecision. Otherwise,the jurisdiction of the Court to determine the validity of an arbitral award, on grounds contemplated by the statute, would not be ousted. Thesubmissionofincidentalargumentsonaquestionof lawdoesnotamounttoaspecificreferenceofaquestionoflaw.

41.

In the subsequent judgment of the Supreme Court in

Tarapore and Co. vs. Cochin Shipyard Ltd.,10 Thawardas Pherumals 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 agreedtobeboundbyit,theCourtcannotsetasidetheawardon the ground of an error of law apparent on the face of it even thoughthedecisionoftheArbitratormaynotbeinaccordwiththe lawasunderstood bytheCourt. In Tarapore,theprinciplewas formulatedinthefollowingtermsbytheSupremeCourt: If a question of law is specifically referred and it becomes evident that the parties desired to have a
10 (1984) 2 SCC 680

56

decision on the specific question from the arbitrator aboutthatratherthanonefromcourt,thenthecourtwill not interfere with the award of the arbitrator on the groundthatthereisanerroroflawapparentontheface 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) whichfollowsearlierdecisionsinEnglandandIndia,it hasnotbeendepartedfrom.

Inthatcase,thereferencetotheArbitratorwasonthefollowing questions:(i)Whethertheclaimforcompensationfellwithinthe purview of the arbitration clause, clause 40 of the General ConditionsoftheContract;and(ii)Ifitdid,whethertheclaimant wasentitledtocompensation. TheSupremeCourtheldthatthe partiesagreedtosubmitaspecificquestioneven withregardto thescope,ambit,widthandconstructionofthearbitrationclause, includingthequestionastowhetherthearbitrationclausewould coverthedisputeraisedbetweentheparties.TheArbitratorwas requiredtodecidewhetherthedisputeisarbitrableand,ifitwas, todecidetheextentofcompensation.Therewas,therefore,held tobeareferenceofaspecificquestionoflaw.

57

42.

InajudgmentofaLearnedSingleJudgeofthisCourt,in

Lubrizol (India) Ltd. vs. Lubrizol Corporation U.S.A.,11 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 materialfromacaseinwhichaspecificquestionoflawisreferred andpartiesagreedtobeboundbytheArbitratorsdecision.When aquestionoflawisapointatissue,unlessbothsidesspecifically agreetoreferitandagreetobeboundbytheArbitratorsdecision, thejurisdictionoftheCourttosetthingsright,whenanerroris apparent from the face of the record, is not ousted. The mere submissionofincidentalargumentsonapointoflaw,duringthe courseofproceedings,isnotenough.

43.

Inthepresentcase,anapplicationwasfiledon6thApril

2004,bythePetitionerbeforetheArbitratorseekingarulingthat thearbitralTribunalhadnojurisdictiontoentertainanddecidethe dispute interalia onthegroundthattheProtocolAgreementwas void for several reasons, among them being, that it placed
11 1998(1) ALL MR 435

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restrictions on the transferability of the shareholding of MSL, in violationoftheprovisionsofSection111AreadwithSection9of theCompaniesAct,1956. Theapplicationwasrespondedtoby theRespondent.Thatbyitselfcannotberegardedasamountingto a reference of a specific question of law for the decision of the Arbitrator. During theproceedings, thePetitioner questioned the jurisdiction of the Arbitrator by presenting its application of 6th April2004.TheArbitratorwasentitledtoruleonhisjurisdiction intermsoftheprovisionsofSection16oftheAct.Theapplication was opposed by the Respondent. This cannot amount to a referenceofaspecificquestionoflaw.Norforthatmatter,isthere intrinsic material to lead the Court to the conclusion that the partiesintendedtobeboundbythedecisionoftheArbitrator,soas to oust the jurisdiction of the Court under Section 34 of the Arbitration and Conciliation Act, 1996. Clearly, there was no referenceonaspecificquestionoflaw,soastorenderthedecision oftheArbitratorbinding,orbeyondthepaleofthereviewingCourt underSection34.

TheSection111Achallenge:

59

44.

ThatleadstheCourttothedecisionoftheArbitratoron

thechallengegroundedupontheprovisionsofSection111Aofthe CompaniesAct,1956.Whiledealingwiththeissue,theArbitrator hasextractedtheprovisionsofSection111AoftheCompaniesAct, 1956, recorded the submission of the Petitioner, including a reference to the decisions of the Supreme Court in (i) V.B. Rangaraj vs. V.B.Gopalkrishnan,12 and (ii)

M.S.Madhusoodhanan vs. Kerala Kaumudi Pvt.Ltd.13 The Arbitratorhas,aftercitingthejudgmentoftheMadhusoodanans case,heldthus: In view of the above, it is clear that the ratio of the decisioninRangarajscasehasnoapplicationtothefacts of the present case which is governed by the Protocol Agreementdated2ndOctober1974.Inthepresentcase, the so called restriction is in fact incorporated in the Articles of Association which is afeature of distinction fromthefactsinRangarajscase.

45.

Section111AoftheCompaniesAct,1956,providesthat

subjecttotheprovisionsoftheSection,thesharesordebentures andanyinterestthereinofaCompanyshallbefreelytransferable. Section9providesthatsaveasotherwiseexpresslyprovidedinthe

12 (1992) 1 SCC 160 13 (2003) 117 Com.Cases 19

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Act, the provisions of the Act shall have effect notwithstanding anythingtothecontrarycontainedintheMemorandumorArticles 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,agreementorresolutionshall,totheextenttowhichitis repugnanttotheprovisionsoftheAct,becomeorbevoid,asthe casemaybe.

46.

Originally, undertheprovisionsoftheCompaniesAct,

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 rectificationoftheRegisterofMembersunderSection155. With effect from 17th January 1986, Section 22A was inserted in the SecuritiesContracts(Regulation)Act,1956.Section22Aprovided thatthesharesofaregisteredCompanyshallbefreelytransferable. ACompanycouldrefusetransferonlyonfourspecifiedgrounds. On 20th September 1995, the Depositories Ordinance was promulgated. The ordinance thereafter, was enacted into

61

legislationbytheDepositoriesAct,1996.

47.

UpontheenactmentoftheDepositoriesAct,1996,sub

section14wasinsertedintoSection111oftheActbywhichitwas providedthataCompanyforthepurposesofSection111ofthe 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 September1995.Subsection(1)ofSection111Aprovidesthata companyforthepurposeoftheSectionmeansacompanyother than a company as defined in subsection (14) of Section 111. Hence, Section111Aappliestopubliccompanies. Section111A 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 CompanyLawBoardhasbeenempoweredtodirectarectification oftheRegisterofMembersifatransferismadeincontraventionof the SEBI Act, 1992; the Sick Industrial Companies (Special Provisions)Act,1985;oranyotherlaw,forthetimebeinginforce,

62

onanapplicationbeingmade,interaliabytheCompanyorSEBI. Simultaneously, the provisions of Section 22A of the Securities Contracts(Regulation)Act,1956,wereomitted.

48.

Section3(1)(iii)oftheCompaniesAct,1956definesthe

expression private company to mean, a company which has a minimumpaidupcapitalofonelakhrupeesorsuchhigherpaidup capitalasmaybeprescribed,andbyitsarticles:(a)restrictsthe righttotransferitsshares,ifany;(b)limitsitsmemberstofiftynot includingthosewhoareorwereformerlyintheemploymentofthe Companyandwerememberswhileinemployment;(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.Acompanywhichisnotaprivatecompany,fallswithin thedefinitionofexpressionpubliccompanyunderSection3(1) (iv).

49.

TheCompaniesAct,1956makesacleardistinctioninits

governing provisions relating toprivate andpublic companies in

63

regardtothetransferabilityof shares. Bydefinition,aprivate company is a company, which restricts the right to transfer its shares. Consequently, upon a refusal of a private company to transferitsshares,aremedyisprovidedbytheAct.Inthecaseofa publiccompany,theActprovidesthatthesharesordebenturesand anyinterestthereinofacompanyshallbefreelytransferable.

50.

The expression transfer is defined in Webster as to

convey orremovefromoneplace,personetc.toanotherorto make over the possession or control of.14 The expression transferableisdefinedin BlacksLawDictionary,15 tomean, capable of being transferred, together with all rights of the originalholder. Theexpressiontransferisdefinedtomeanto convey or remove from one place orone person toanother; to passorhandoverfromonetoanotherespeciallytochangeover thepossessionorcontrolor;tosellorgive.In StroudsJudicial DictionaryofWordsandPhrases,3rd Edition,page3080andin P.RamanathaAiyarsAdvanced LawLexicon,16 theexpression transferableisdefinedasfollows:
14 Websters Encyclopedic Unabridged Dictionary page 2009 New Deluxe Edition 15 Seventh Edition page 1504 16 2005 Edition page 4751

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Transferable.Aninterestwhichbystatuteorotherwise ismadenottransferablecannotbepartedwitheither byactofpartiesorbyoperationoflaw(Gathercolev. Smith 17 Ch D 1). In thatcase, Lush L.J., said, The wordtransferableisofthewidestpossibleimport,and includes every means by which the property may be passedfromonepersontoanother.

51.

In Ontario Jockey Club Ltd. vs. Samuel McBride,17

thePrivyCouncildealtwithacase,wherethetransferofsharesin theOntarioJockeyClubLtd.wasrefusedonthegroundinteralia thattheprovisions oftheByelaws hadnotbeenobserved. In proceedingstoenforceregistration,theSupremeCourtofCanada orderedtheCompanytoenterthenameofthetransfereeonthe Register.Inappeal,thePrivyCouncilnotedthatByelaw37ofthe CompanyprovidedthatnosharesorinterestintheClubshall,at anytimebetransferredtoanyperson notalreadyashareholder, until the Club had an opportunity to find a purchaser for such shareorinterest.Atthematerialtime,therelevantprovisionsof Section48ofthelegislationinOntarioprovidedthatthesharesof a company shall be deemed to be personal estate and shall be transferable on the books of the Company, in such manner and
17 AIR 1928 Privy Council 291

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subjecttosuchconditionsandrestrictionsasmaybeimposedby theActorbytheByelawsoftheCompany.UnderSection87A,the Directors were empowered to make Byelaws to regulate the transferofshares.InthecontextofarestrictioncontainedinBye law 87 and the provisions of the Ontario legislation, the Privy Councilheldthus: That restrictions may be placed upon a shareholders rightoftransferofhissharescannotbequestioned.The casesarenumerousinwhichsuchrestrictionshavebeen upheld.Sharesareprimafacietransferable.Butthereis no law which precludes the shareholders from contractingforvaluethattheyshalleachsubmittoany reasonablerestrictionwhichtheychoosetoagreeto. It maybeforthebenefitofthecompanythat,forinstance, sharesshallnotbetransferredtorivalsinthecompanys trade. A restriction which precludes a shareholder altogether from transferring may be invalid, but a restrictionwhichdoesnomorethangivearightofpre emptionisvalid.

ThejudgmentofthePrivyCouncilinOntarioJockeyClubscase, therefore,involvedasituationinwhichthelegislationinOntario, authorisedtheBoardofDirectorstoregulatethetransferofshares and transferability of the shares of theCompany. The Byelaws specificallycontemplatedarestrictionontransferabilityotherwise thantoamemberoftheCompany.

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52.

In India, the Supreme Court held in V.B.Rangaraj vs.

Gopalkrishnan,18 thatanagreementbetweenthemembersofa family, who were the only shareholders of a private Company, whichimposedarestrictionontheshareholdersrighttotransfer theshares,wascontrarytotheArticlesofAssociationandwasnot binding on the Company or its shareholders. In

MS.Madhusoodhanan vs. Kerala Kaumudi (supra), the First Respondent wasaprivateCompany. Anagreement,styledasa Kararwasenteredintobetweenthemother,theAppellantandthe other brothers about the division of the effective control over familyconcernsamongtheotherfourbrothersandthetransferof 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 decidingwhethertheagreementshouldbeimplemented,thebasic factwasthateachbrotherhadbeengivenamajorityshareholding intheCompanyspecifiedagainsthisnameintheKararandsince
18 (1992) 73 Comp Cases 201

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the others three brothers had taken the full benefit of the agreement, they were bound to comply with by its terms. The SupremeCourtobservedthus: Itissettledlawthatsharesaremovablepropertiesand aretransferable. AsfarasprivatecompanieslikeKerala Kaumudi are concerned, the Articles of Association restrict the shareholders right to transfer shares and prohibitanyinvitationstothepublictosubscribeforany sharesin,ordebenturesofthecompany.Thisishowa privatecompanyisnowdefinedinsection3(1)(iii)of the Companies Act, 1956 and how it was defined in section2(13)ofthe1913Act. Subjecttothisrestriction,aholderofsharesin a private company may agree to sell his shares to a person of his choice. Suchagreements are specifically enforceableunderSection10oftheSpecificReliefAct, 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 damagecausedbythenonperformanceoftheactagreed tobedone;orwhentheactagreedtobedoneissuch that compensation in money for its nonperformance would not afford adequate relief. In the case of a contracttotransfermovablepropertiesofspecialvalue orinteresttotheplaintiff,orconsistingofgoodswhich arenoteasilyobtainableinthemarket,ithasbeenheld byalonglineofauthoritythatsharesinaprivatelimited company would come within the phrase not easily obtainableinthemarket(see:JainarainRamLundiav. SurajmullSagarmull,AIR1949FC211,218).ThePrivy Council in the Bank of India Ltd. v. J.A.H.Chinoy, AIR 1950PC90 said:it isalsotheopinion oftheBoard that,havingregardtothenatureofthecompanyandthe limitedmarketforitsshares,damageswouldnotbean

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adequate remedy. Specific performance of a contract fortransfersofsharesinaprivatelimitedcompanycould begranted.(emphasissupplied).

The judgment in Madhusoodhanan, therefore, deals with a privateCompany. TheobservationsoftheSupremeCourtnoted earlier, expressly clarified that as far as private Companies are concerned, theArticlesofAssociationrestrictshareholdersrights to transfer the shares and prohibit invitation to the public to subscribetosharesordebenturesoftheCompany.Anagreement bywhich,subjecttoitsrestriction,aholderofsharesagreestosell hisshares toaperson ofhischoice isspecificallyenforceable in view of the limited market for the shares of such a Company. Madhusoodhanans case involved a private Company. The Supreme Court held that the decision in Rangaraj was distinguishable inasmuch as there was no restriction on the transferabilityofthesharesintheKararandtheKararitselfwasan agreementbetweenparticularshareholdersrelatingtothetransfer ofspecifiedshares.Theagreement,ruledtheSupremeCourt,was capable of specific performance. A situation involving the restrictiononthetransferabilityofsharesinaprivateCompanyhas

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tobecontrastedwithcasesinvolvingpublicCompanieswherethe lawprovidesforfreetransferability. Freetransferabilityofshares isthenorminthecaseofsharesinapublicCompany.

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 aCompanyinthepublic, asdistinguishedfrom the private, realm leads to specific consequences and the impositionofobligations envisagedinlaw. Thosewhopromote and manage public companies assume those obligations. Corresponding to those obligations are rights, which the law recognizesasinheringinthemembersofthepublicwhosubscribe to shares. Theprincipleoffreetransferabilitymustbegivena broaddimensioninordertofulfilltheobjectofthelaw.Imposing restrictionsontheprincipleoffreetransferability,isalegislative function, simplybecause thepostulate offreetransferabilitywas enunciated as a matter of legislative policy when Parliament introducedSection111AintotheCompaniesAct,1956.Thatisa

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bindingpreceptwhichgovernsthediscourseontransferabilityof shares.Thewordtransferableisofthewidestpossibleimportand Parliament by using the expression freely transferable, has reinforcedthelegislativeintentofallowingtransfersofsharesof publiccompaniesinafreeandefficientdomain.

54.

Theeffect ofClause 7oftheProtocol Agreement isto

create a right of preemption between the Petitioner and the Respondentintheeventthateitherofthemseekstopartwithor transferitsshareholdinginMSL.Inthatevent,thepartydesirous totransferitsshareholdingisobligatedtofurnishafirstoptionto theotherforthepurchaseofthesharesatsuchrate,asmaybe agreedtobetweenthepartiesordecideduponbyarbitration.The consequence of Clause 7 of the Protocol Agreement, which has beenincorporatedintheArticlesofAssociation,istoprecludesale toorpurchasebythemembersofthepublicoftheshares,which areofferedforsaleiftheofferisacceptedbythePetitioner,oras the case may be, by the Respondent within thirty days of the receiptofthenotice. Theeffectofaclauseofpreemptionisto impose a restriction on the free transferability of the shares by

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subjectingthenormsoftransferabilitylaiddowninSection111A to a preemptive right created by the agreement between the parties. Thisisimpermissible. Section9oftheCompaniesAct, 1956givesoverridingforceandeffecttotheprovisionsoftheAct, notwithstanding anything to the contrary contained in the Memorandum or Articles of a Company or in any agreement executedbyitorforthatmatterinanyresolutionoftheCompany in general meeting or of its Board of Directors. A provision containedintheMemorandum,Articles,AgreementorResolution istotheextenttowhichitisrepugnanttotheprovisionsoftheAct, regardedasvoid.

55.

TheDelhiHighCourthadoccasiontoconsidertheissue

initsdecisioninSmt.PushpaKatochvs.ManuMaharaniHotels Ltd.19InthecasebeforetheDelhiHighCourt,inaPetitionunder Sections 397 and 398 of the Companies Act, 1956, one of the grievanceswasthatthreesistersoftheAppellanthadtransferred theirshareholdinginaPublicLimitedCompany,inviolationofa right of preemption contained in a family settlement. The
19 121(2005) DLT 333

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Company Law Board held that the Articles of Association of the Company,whichwasaPublicLimitedCompany,didnotrecognize arightofpreemption. SincetheCompanywasaPublicLimited Company, no fetter could be imposed on the right of the shareholder to transfer his shares, by virtue of the provisions of Section111A.TheCLBresteditsdecisionbothonthebasisthat the preemptive right was not recognized by the Articles of AssociationandonthefoundationthataPublicCompanycouldnot have a provision recognizing preemptive rights to its members. TheDelhiHighCourtinanappealarisingoutofthejudgmentof the CLB relied upon the judgment of the Supreme Court in Rangaraj(supra)toholdthatarestrictionwhichisnotspecifiedin the Articles, would not bind either the Company or its shareholders.TheDelhiHighCourtalsoheldthatbyvirtueofthe provisionsofSection111A,therightofashareholdertotransfer his/her shares could not be fettered. Mr.Justice A.K.Sikri held thus: The CLB further rightly mentioned that as per the provisionsofSection111AoftheAct,therecouldnotbe any fetters on the right of a shareholder to transfer his/hershares.ItmaybenotedthattheLegislaturehas madedifferentprovisionsfortransferofsharesincaseof

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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, provisionsofSection111AdealingwithRectificationof registerontransferareattractedinthecaseofpublic limitedcompanies. Whilerestrictionscanbestipulated intheArticlesofAssociationsofarastransferofshares of a private limited company is concerned, subsection (2)ofSection111AoftheActspecificallyprovidesthat the shares or debentures and any interest therein of a companyshallbefreelytransferable.Provisotothissub section further stipulates that if a company without sufficientcauserefusestotransfertheshareswithintwo months, the transferee may file an appeal to the Company Law Board and it shall direct company to registerthetransferofshares.SincetherespondentNo. 1companyisapubliclimitedcompany,theCLBrightly opinedthattherecouldbenofettersontherightofa shareholdertotransferhis/hershares.Wehavealready notedthatthereisnosuchprovisiongivingpreemptory right to other promoters in the Articles of Association. Even if there was such a provision in the Articles of Association,itwouldhavebeenultravirestheprovisions oftheAct,asnocompanycanprovideintheArticlesof 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 promotedthecompanyandtheirintentionwastomake 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 wouldfirstofferthesametootherpromoters.However, atthesametime,whileincorporatingthiscompany,the promotersdecidedtohaveapubliccompanylimitedby sharesratherthanaprivatecompany.Theyshouldhave understoodtheimplicationandconsequencesofgetting apubliccompanyincorporated.Iftheywantedsuchan

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arrangement,asrecordedintheminutesofthemeeting dated16th March1994andtheMemorandumofFamily 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 daytothinkofsuchanarrangementandrecordingthe same in the Board meeting or the family settlement, whichcouldnothaveanylegalbasis.

ASpecialLeavePetitionagainst thejudgment oftheDelhiHigh CourtwasdismissedbytheSupremeCourton7thApril2006.Iam in respectful agreement with the view of the Delhi High Court whichreflectsthecorrectpositioninlaw.

56.

Counsel appearing on behalf of the Respondent

submittedthatSection111Ahasnoapplicationtocontractsforthe transfer of particular shares between particular shareholders whenincorporatedintheArticlesofAssociation.Thesubmissionis thatrestrictionswhichbindthirdpartiesarebad. Section111A was intended to curb the power of the Board of Directors to obstruct transfers and clearer words would be required to destabilizebargainswhicharetheheartofcommerce.

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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 alreadynotedearlier,theSupremeCourtnotedthattheKararwas an agreement between particular shareholders relating to the transfer of the specified shares. What is significant is that the CompanyinthatcasewasaprivateCompany.TheSupremeCourt notedwithsomeemphasisthatinthecaseofaprivateCompany, theArticlesofAssociationwouldrestricttherightofshareholders totransfersharesandprohibitinvitationtothepublictosubscribe forsharesordebenturesoftheCompany.Thepositioninlawofa PublicCompanyismateriallydifferent. Bytheprovisionsofthe CompaniesAct,1956,restrictionsonthetransferabilityofshares whicharecontemplatedbythedefinitionofaprivatecompany under Section 3(1)(iii) are expressly made impermissible in the caseofapubliccompanybytheprovisionsofSection111A.Once that be the position, the submission urged on behalf of the Respondentcannotbeaccepted.Inessence,thesubmissionofthe RespondentisthattheprovisionsofSection111Ashouldberead

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asbeingsubjecttoacontracttothecontrary.Arestrictiontothat 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;andthirdly,thecontextinwhichtheprovisionhasbeen introduced,issusceptibletotheinferencethatitshouldbegivena wide meaning. Where the language of the statute is plain and unambiguous,neithertheconsequencenortheconductofparties wouldbeofrelevance. Reliancewassoughttobe placedona notificationthatwasissuedon27thJune1961bywhich,inexercise ofpowers conferredbySection28(2)oftheSecuritiesContracts (Regulation)Act,1956,theCentralGovernmentspecifiedcontracts of preemption as contained in promotion or collaboration agreementsorintheArticlesofAssociationofaLimitedCompany as contracts to which the said Act shall not apply. That notification,ithastobenoted,relatedtoanexemptionfromthe provisionsoftheSCRAandcannotoverridetheplainmandateof Section 111A. Besides, Section 111A was introduced in the Companies Act, 1956 by the Depositories Act, 1996 with effect from20thSeptember1995.Theplainintendmentandmeaningof

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Section111Amustprevail.

58.

The arbitral award on this aspect of the matter, is

completelycontrarytothegoverningprinciplesoflaw.Theaward iscontrarytosubstantiveprovisionsoflawandispatentlyillegal. Theillegalityinthepresentcase,issomethingthatgoestotheroot ofthematterandiscertainlynotonewhichcanbetermedasofa trivialnature.Theawardmust,inthecircumstances,beheldtobe contrarytopublicpolicy.TheArbitratorcitedthejudgmentofthe Supreme Court in Madhusoodhanans case and held that the principlewhichwaslaiddownintheearlierjudgmentinRangaraj wasinapplicableinasmuchastherestrictioncreatingapreemptive right was incorporated in the Articles of Association. The Arbitrator proceeded on the basis that the presence of a clause conferringarightofpreemptionintheArticlesofAssociationwas sufficienttodisposeofthechallengetothelegalityoftheprovision. Inthis,theArbitratorhasfallenintoapatentillegality. Thefact thattherestrictioniscontainedintheArticlesofAssociationwould dealwiththesubmissionbasedontheapplicationoftheRangaraj principle. Butthatisnotdispositiveofthelegalityofaprovision

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bywhicharightofpreemptioniscreatedinthecaseofaPublic Limited Company. The Arbitrator has ignored the express and specificprovisionsoftheCompaniesAct,1956;lost sightofthe veryconceptoffreetransferabilityofthesharesofaPublicLimited Company and failed to apply the provisions of Section 9 under which overriding force is given to the Act notwithstanding anythingtothecontrarycontainedintheMemorandum,Articlesor agreement.

59.

Forallthesereasons,theawardoftheLearnedArbitrator

would have to be set aside. The Petition is accordingly made absoluteintermsofprayerclause(a)bysettingasidetheaward. Thereshallbenoorderastocosts. ......