Bajaj Auto Ltd vs Western Maharashtra Development Corporation Ltd

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CORAM :- MOHIT S. SHAH, C.J. &

B. P. COLABAWALLA, J.

RESERVED ON :- March 10, 2015. PRONOUNCED ON :- May 8, 2015.

JUDGMENT :

- [Per B. P. Colabawalla, J]

1. By this Appeal, exception is taken to the order of the learned

Single Judge dated 15th February 2010, under which, the learned

Single Judge was pleased to set aside the arbitral award dated 14 th

January, 2006 passed by the Sole Arbitrator (Mr. Justice A. V.

Savant).

2. The arbitral award passed by the Arbitrator was in favour of

the Appellant. In a nutshell, the Arbitrator held that the 27%

shareholding of the Respondent (30,85,712 equity shares) in a

company called Maharashtra Scooters Ltd. ("MSL"), are to be

valued, for the purposes of sale to the Appellant, at the rate of

Rs.151.63 per share as on 3rd May, 2003. MSL is jointly promoted

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by the Appellant and the Respondent and is a public company whose

shares are listed on the Bombay Stock Exchange (BSE) and the

National Stock Exchange (NSE).

3. Being dissatisfied with the arbitral award, the Respondent

before us (original Petitioners) challenged the same before the

learned Single Judge under the provisions of section 34 of the

Arbitration and Conciliation Act, 1996 ("Arbitration Act") on

various grounds as set out in the Arbitration Petition. After hearing

the parties, the learned Single Judge, by an elaborate and reasoned

order, negated all the contentions of the Respondent, save and except

one, on the basis of which the award was set aside. In a nutshell, the

ground on which the award was set aside by the learned Judge was

that Clause 7 of the Protocol Agreement entered into between the

parties and which gave the right of first refusal to the Appellant to

purchase the shareholding of the Respondent, was contrary to

section 111A of the Companies Act, 1956 ("the Companies Act").

The learned Judge held that the effect of Clause 7 of the said

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Agreement was to create a right of pre-emption between the

Appellant and the Respondent for the purchase of each others shares

in MSL. The learned Judge held that MSL being a public company,

the Appellant and the Respondent (being shareholders), could not

have a pre-emption clause inter-se between themselves as the same

was violative of section 111A(2) of the Companies Act. On that

count alone the learned Judge set aside the arbitral award. Being

aggrieved by this portion of the impugned order, the Appellant is in

Appeal before us.

4. The Cross Objections have been filed by the Respondent

herein (original Petitioners) being aggrieved by the impugned order

insofar as the learned Judge negated the other contentions raised by

the Respondent to challenge the arbitral award. As the arguments in

the Appeal as well as the Cross Objections have been heard by us at

length, we will deal with the Appeal as well as the Cross Objections

in this judgment. We shall first take up the contentions raised in

Appeal No.153 of 2010.

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APPEAL NO.153 OF 2010

5. The brief facts that give rise to the controversy are that the

Respondent (original Petitioner before the learned Single Judge) is a

State Government Corporation and a wholly owned undertaking of

the State of Maharashtra. As stated earlier, MSL is a listed public

company incorporated and registered under the provisions of

Companies Act, 1956. The equity shares of MSL are listed on the

Bombay Stock Exchange (BSE) and the National Stock Exchange

(NSE).

6. MSL was incorporated pursuant to the Protocol Agreement

dated 2nd October, 1974 entered into between the Appellant and the

Respondent which interalia provided that the Appellant 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 as set out

therein. In accordance with the terms and conditions of the said

Agreement, the Respondent as of today continues to hold 27% of the

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equity shareholding of MSL and the Appellant continues to hold

24% thereof. The balance 49% of the equity shareholding of MSL is

held by the public. The controversy in this Appeal No.153 of 2010

revolves around Clause 7 of the Protocol Agreement which inter alia

provides 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. The procedure to be followed in such

a situation is also set out in the said clause.

7. It is the case of the Respondent that the Appellant had for the

last 20 odd years repeatedly been requesting the Respondent to

divest/transfer its 27% shareholding to the Appellant. On 30th June

2002, Mr. Raghuram of CRISIL carried out a valuation of the

shareholding of the Respondent in MSL. It is the case of the

Respondent that this valuation was done on the joint request of the

Appellant and the Respondent. This of course has been disputed by

the Appellant. Be that as it may, ultimately, some time in April Aswale 6/120 ::: Downloaded on - 09/05/2015 00:00:20 ::: appeal.153.10.doc

2003, the Respondent considered selling and transferring its 27%

shareholding to the Appellant and in furtherance thereof, addressed a

letter dated 9th April, 2003 offering to sell its 27% shareholding in

MSL (30,85,712 shares) to the Appellant at a price of Rs.232.20 per

share.

8. In reply thereto, by their letter dated 3 rd May, 2003, the

Appellant, 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 Appellant 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.

9. In response thereto, the Respondent addressed a letter dated 7 th

May, 2003 calling upon the Appellant to confirm whether their letter

dated 3rd May, 2003 was in response to the buy back by the

Appellant. By their letter dated 10 th May, 2003, the Appellant

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confirmed that their letter dated 3 rd May, 2003 was a response to the

offer made by the Respondent under clause 7 of the Protocol

Agreement. It was stated that in the letter dated 3 rd May, 2003 they

had confirmed their intention to purchase the shares but the price

offered was not acceptable to the Appellant and therefore, requested

that a meeting be called for by the High Level Committee to

negotiate the price. Thereafter, by their letter dated 6 th June 2003, the

Appellant reiterated that they were not agreeable to the price of

Rs.232.20 per share as demanded by the Respondent and offered to

purchase the 27% shareholding of the Respondent at the rate of

Rs.75/- per equity share. Again, by their letter dated 31 st July, 2003

the Appellant informed the Respondent that if their offer of Rs.75/-

per share was not acceptable to the Respondent then arbitration be

initiated in terms of clause 7 of the Protocol Agreement. It is the

case of the Respondent that this correspondence clearly indicates

that there was no concluded contract arrived at between the parties in

respect of sale of the said shares. We will deal with this argument

later in this judgment, when we deal with the Cross Objections.

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10. Be that as it may, as there was no agreement on the rate at

which the shareholding of the Respondent would be sold to the

Appellant, in terms of clause 7 of the Protocol Agreement, the

Respondent addressed a letter dated 27th October, 2003 to the

Arbitrator requesting him to accept his appointment as a Sole

Arbitrator for the assignment to determine the value of the shares.

Paragraphs 2 & 4 of the said letter read as under :-

"As per the Protocol Agreement, the Corporation has to make the first offer to Bajaj Auto Ltd. And in turn Bajaj Auto Ltd. has

to accept or reject that offer. This process has been completed and since no agreement has been reached on the value of the share, as per the Agreement, the parties involved have to proceed to appoint a Sole Arbitrator for the purpose. ...............

You are, therefore, requested to be kind enough to kindly forward

your acceptance to be appointed as the Sole Arbitrator for this assignment and also communicate the retainership charges and venue suitable to you for the purpose of Arbitration. The detail Terms of Reference would be communicated to you later."

(emphasis supplied)

11. Pursuant thereto, on 29th December, 2003 a joint reference was

made to the Arbitrator to decide the rate at which the shares of the

Respondent would be sold to the Appellant. This joint reference has

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been signed by the Appellant as well as the Respondent. The said

letter reads as under :-

"Dear Sir,

We thank you for consenting to be appointed as the 'Sole Arbitrator' in the MSL arbitration assignment. We are outlining

below the terms of reference, in this matter.

1. The appointment of 'Sole Arbitrator' is made jointly by BAL and WMDC, in terms of the Clause No.7 of the 'Protocol Agreement' dated 2 October 1974, between WMDC and BAL, the

co-promoters of MSL.

2. BAL had expressed its willingness to buy the stake held by WMDC in MSL. WMDC had indicated its desire to sell its shareholding in MSL. However, price per share remained in

dispute and hence in accordance with clause no.7 of the protocol agreement, 'the question of rate' for the purchase by BAL of equity shares in MSL held by WMDC is hereby referred to the Sole Arbitrator.

3. The Arbitrator shall take into account the Protocol Agreement covenants and all other concerned factors which may have

impact on the share price of MSL shares, while giving his arbitral award.

4. The arbitral award will be final and binding on both parties.

5. The Arbitrator is requested to give his award within a period of 3 months from the date of this terms of reference.

6. Arbitration proceedings will be held in Mumbai.

7. 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 BAL and WMDC.

8. BAL and WMDC will be happy to provide any information as may be required by the Arbitrator."

(emphasis supplied)

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12. Pursuant to the aforesaid joint reference, parties appeared

before the Arbitrator and led the necessary evidence. The

Respondent had also challenged the jurisdiction of the Arbitrator.

The Arbitrator, after considering the challenges and the evidence, by

a detailed award, held in favour of the Appellant and declared that

the 30,85,712 equity shares of MSL held by the Respondent (its 27%

shareholding) and valued as on 3rd May 2003, are to be sold to the

Appellant at a price of Rs.151.63 per share.

13. Being aggrieved by the aforesaid award, the Respondent

challenged the same before this Court under the provisions of

section 34 of the Arbitration and Conciliation Act, 1996. As stated

earlier, the learned Single Judge negated all the contentions of the

Respondent herein save and except one, on the basis of which the

award was set aside. Before the learned Single Judge, there was a

challenge to the legality of clause 7 of the Protocol Agreement. The

submission of the Respondent before the learned Single Judge was

that clause 7 created a right of pre-emption, and MSL being a listed

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public company, section 111A of the Companies Act 1956 was

thereby violated. It was the submission of the Respondent that

section 111A provides that the shares or debentures of a public

company and any interest therein shall be freely transferable. It was

the further submission of the Respondent that 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

recognised 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. In other

words, it was submitted that clause 7 of the Protocol Agreement

being contrary to the provisions of the Companies Act, was

unenforceable. The learned Single Judge, after hearing the parties,

upheld this contention of the Respondent and set aside the arbitral

award on this sole ground. Being aggrieved by this part of the

impugned order, the Appellant has filed the present Appeal (Appeal

No.153 of 2010) before us.

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14. In this Appeal, the real controversy revolves around clause 7

of the Protocol Agreement and whether it impinges on the free

transferability of shares of a public company as contemplated under

section 111A of the Companies Act. Mr Chinoy, learned Senior

Counsel appearing on behalf of the Appellant, submitted that clause

7 of the Protocol Agreement did not in any way impinge on the free

transferability of shares as contemplated under section 111A of the

Companies Act. According to Mr Chinoy, the provisions of section

111A were not directed against and did not restrict or affect a

shareholder's right to deal with his own shares and enter into

consensual arrangements in relation thereto by way of sale, pledge or

pre-emption. The provisions of section 111A were really speaking,

to ensure that the Board of Directors of a public company cannot

refuse transfer of shares except as specified in the section. He

submitted that an agreement voluntarily entered into by a

shareholder of a public company regarding its own shares, was not

within the purview of nor affected by section 111A(2) of the

Companies Act or its predecessor viz. section 22A(2) [as it then Aswale 13/120 ::: Downloaded on - 09/05/2015 00:00:20 ::: appeal.153.10.doc

stood before its deletion] of the Securities Contracts (Regulation)

Act 1956. In support of the aforesaid submissions, Mr Chinoy placed

heavy reliance on a Division Bench judgment of this Court in the

case of Messer Holdings Ltd. v/s S.M. Ruia and others.1 He

submitted that in the aforesaid judgment, the order impugned in this

Appeal, has been specifically considered and the Division Bench has

expressly disagreed with / overruled the view expressed by the

learned Single Judge in the order impugned before us. He therefore

submitted that the impugned order was clearly erroneous and

requires interference in appeal in so far as it sets aside the award on

the ground that clause 7 of the Protocol Agreement impinges upon

the principles of free transferability of shares as contemplated under

section 111A of the Companies Act.

15. On the other hand, Mr Khambatta, learned Senior Counsel

appearing on behalf of the Respondent, submitted that clause 7 of

the Protocol Agreement and which was thereafter incorporated in the

Articles of Association of MSL, was a highly restrictive pre-emptive

1 2010 (59) Company Cases 29 (Bom).

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clause that caused great fetters on the right of free transferability

found in any ordinary pre-emption clause. He submitted that (i)

clause 7 fetters the right of the Respondent to sell its shares to any

other person including any other existing member of MSL, without

offering the same to the Appellant; (ii) allows the Appellant to

purchase the shares of the Respondent without accepting the price at

which the shares were offered but at a price to be determined or

fixed by arbitration. Such a provision, according to Mr. Khambatta,

was therefore undoubtedly a fetter on the right of the Respondent to

freely transfer its shares to a person of its choice and at a price of its

choice and therefore clearly impinged upon the provisions of section

111A(2) of the Companies Act, which contemplated free

transferability of shares.

16. Mr. Khambatta further submitted that since the Protocol

Agreement was incorporated in the Articles of Association of MSL,

upon incorporation of MSL and registration of its Articles of

Association, the Protocol Agreement stood subsumed in its Articles.

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Hence, on 29th December 2003, which is the date of reference to

arbitration, clause 7 of the Protocol Agreement was nothing but a

part and parcel of Articles of Association of MSL. He submitted

that Indian law has always prohibited restrictions on free

transferability of shares of a public company. In support of this

argument, Mr Khambatta placed reliance on sections 3(1)(iii), 3(1)

(iv) and section 43A of the Companies Act. He also placed reliance

on the following judgments:-

1. Needle Industries (India) Ltd. and others v/s Needle Industries Newey (India) Holding Ltd. and others;2

2. Darius Rutton Kavasmaneck v/s Gharda Chemicals Ltd. and others;3

3. V.B. Rangaraj v/s V.B. Gopalkrishnan and others; 4

and

4. Pushpa Katoch v/s Manu Maharani Hotels Ltd. and others.5 (Delhi High Court).

17. Mr Khambatta submitted that the above provisions of the

Companies Act, as interpreted by the Supreme Court, would reveal

that:-

2 (1981) 3 SCC 333 3 Judgement of the Supreme Court dated 28.10.2014 in Civil Appeal No.2481 of 2014) 4 (1992) 1 SCC 160 5 2005 (83) DRJ 246 (Delhi High Court).

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(i) the Articles of a private company must contain a

restriction on free transferability of its shares, a section 43A company may contain such a

restriction in its Articles, whereas the Articles of a public company cannot contain any restriction on

free transferability;

(ii) unless restrictions on transferability are incorporated into the Articles, shares by their very

nature remain freely transferable;

(iii)

no extraneous restrictions such as restrictions in a separate / private agreement is valid or enforceable

even in a private company, let alone a public company;

(iv) a public company is prohibited from incorporating

any restriction on transferability of its shares in its Articles, and the said shares must necessarily remain freely transferable and cannot be subjected

to any restriction.

18. Mr Khambatta additionally submitted that a pre-emption

clause or what is some time known as a right of first refusal (ROFR

clauses), is a classic restriction on transferability. He submitted that

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a pre-emption clause is one of the most common restrictions found

in the Articles of a private company and since such a clause qualifies

as a "restriction" on transferability for the purpose of validly

incorporating a private company, it must necessarily amount to a

"restriction" in the context of a public company. If this be the case,

once a pre-emption clause is held to be a restriction on

transferability, it would clearly impinge on the provisions of section

111A(2), was the submission of Mr Khambatta. In light of the

above, Mr Khambatta submitted that clause 7 of the Protocol

Agreement and which was subsequently incorporated in the Articles

of MSL, restricts the shareholders of MSL to sell its shares to buyers

of its choice, and at a price of its choice, and thereby would

undoubtedly be a restriction on its transferability. This being the

case, he submitted that the said clause was invalid and

unenforceable.

19. In the alternative, Mr Khambatta submitted that even assuming

that the Protocol Agreement survived as an independent contract

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after it was incorporated in the Articles of MSL, it would make no

difference to his submissions. He submitted that if something cannot

be done directly, it also cannot be done indirectly. Once a restriction

on transferability of shares in the Articles of a public company is

invalid and unenforceable, the identical restriction cannot be

permitted to re-emerge in a different avatar. Whether clause 7 is held

as a part of the Articles of MSL, or a part of a free standing

agreement, it remains equally restrictive and hence invalid and

unenforceable. For all the aforesaid reasons, Mr Khambatta

submitted that the order of the learned Single Judge cannot be

faulted and the same requires no interference by us in Appeal.

20. As stated earlier, the real controversy in this Appeal revolves

around clause 7 of the Protocol Agreement and whether it impinges

on "free transferability" under section 111A of the Companies Act.

Clause 7 of the Protocol Agreement reads as under :-

"7. If either party desires to part with or transfer its share- holding or any part thereof in the equity share capital of Maharashtra Scooters Ltd., such party shall give first option to the other party for the purchase of such shares at such rates as may be agreed to between the parties or decided upon by

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arbitration. The party desiring to part with or transfer its shares or any part thereof shall give to the other party a written notice

of such intention specifying the number of shares and the rate at which it is willing to sell the same and if the other party within 30 days of the receipt of such notice, agrees, to such proposal for

purchase of such shares, the party giving the notice shall be bound to sell and transfer such shares to the other party at the rate specified in such notice. If the other party is willing to purchase the shares but considers the rate proposed to be too

high or unacceptable, it shall within 30 days from the receipt of the notice, give written intimation to the party giving notice of its intention to purchase the shares and the question of rate shall be referred to arbitration of a sole arbitrator if agreed to by both the parties or two arbitrators one to be appointed by each party

in accordance with the provisions of the Indian Arbitration Act. If the party receiving a notice within 30 days of its receipt, fails

to accept the proposal for purchase of the shares, the party giving the notice will be free to sell the shares to any other party but only at a rate not less than the rate specified in such notice."

(emphasis supplied)

21. Clause 7 of the Protocol Agreement inter alia provides 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 the

agreed price, or in the absence of such agreement, decided upon by

arbitration. The party desiring to part with or transfer its

shareholding or any part thereof, is required to give written notice to

the other party specifying its intention to do so and the rates at which

it is willing to transfer / part with the same. Once this is done, clause

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7 envisages 3 scenarios. (1) If the other party within 30 days of

receipt of such notice agrees to such proposal, the party giving the

notice is bound to sell such shares at the rate specified in the notice.

(2) If the other party is willing to purchase the shares but considers

the rate proposed in the notice as too high or unacceptable, it would

communicate its intention to purchase the shares within 30 days

from receipt of the notice and the question of rate is to be referred to

arbitration. (3) If the other party, on receiving the notice to purchase

the shares, fails to accept the said proposal within 30 days of its

receipt, the party giving the notice is free to sell the shares to any

other person, but only at a rate not less than the rate specified in such

notice.

22. Having said this, we shall now turn our attention to certain

statutory provisions. Before we deal with the provisions of section

111A, we must make a note of the provisions of section 22A of the

Securities Contracts (Regulation) Act, 1956 which was inserted in

the said Act by the Securities Contracts (Regulation) (Amendment)

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Bill, 1985 and was a predecessor to section 111A of the Companies

Act. Section 22A as introduced by the said Amendment Bill read as

under:-

"22-A. Free transferability and registration of transfers of listed securities of companies.--(1) In this section, unless the

context otherwise requires,--

(a) "company" means a company whose securities are listed on a recognised stock exchange;

(b) "security" means security of a company, being a

security listed on a recognised stock exchange but not being a security which is not fully paid up or on which the

company has a lien;

(c) all other words and expressions used in this section

and not defined in this Act but defined in the Companies Act, 1956 (1 of 1956) shall have the same meanings as are assigned to them in that Act.

(2) Subject to the provisions of this section, securities of

companies shall be freely transferable.

(3) Notwithstanding anything contained in its articles or in

Section 82 or Section 111 of the Companies Act, 1956 (1 of 1956), but subject to the other provisions of this section, a company may refuse to register the transfer of any of its securities in the name of the transferee on any one or more of the

following grounds and on no other ground, namely:--

(a) that the instrument of transfer is not proper or has not been duly stamped and executed or that the certificate relating to the security has not been delivered to the company or that any other requirement under the law

relating to registration of such transfer has not been complied with;

(b) that the transfer of the security is in contravention of any law;

(c) that the transfer of the security is likely to result in such change in the composition of the Board of Directors as would be prejudicial to the interests of the company or

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to the public interest;

(d) that the transfer of the security is prohibited by any

order of any court, tribunal or other authority under any law for the time being in force.

(4) A company shall, before the expiry of two months from the date on which the instrument of transfer of any of its securities is lodged with it for the purposes of registration of such transfer, not only form, in good faith, its opinion as to whether such

registration ought not or ought to be refused on any of the grounds mentioned in sub-section (3) but also--

(a) if it has formed the opinion that such registration ought not to be so refused, effect such registration;

(b) if it has formed the opinion that such registration ought to be refused on the ground mentioned in clause (a)

of sub-section (3), intimate the transferor and the transferee by notice in the prescribed form about the requirements under the law which has or which have to be

complied with for securing such registration; and

(c) in any other case, make a reference to the Company Law Board and forward copies of such reference to the transferor and the transferee.

(5) Every reference under clause (c) of sub-section (4), shall be

in the prescribed form and contain the prescribed particulars and shall be accompanied by the instrument of transfer of the securities to which it relates, the documentary evidence, if any, furnished to the company along with the instrument of transfer,

and evidence of such other nature and such fees as may be prescribed.

(6) On receipt of a reference under sub-section (4), the Company Law Board shall, after causing reasonable notice to be given to the company and also to the transferor and the transferee

concerned and giving them a reasonable opportunity to make their representations, if any, in writing by order direct either that the transfer shall be registered by the company or that it need not be registered by it.

(7) Where on a reference under sub-section (4) the Company Law Board directs that the transfer of the securities to which it relates--

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(a) shall be registered by the company, the company shall give effect to the direction within ten days of the receipt of

the order as if it were an order made on appeal by the Company Law Board in exercise of the powers under Section 111 of the Companies Act, 1956 (1 of 1956);

(b) need not be registered by the company, the company shall, within ten days from the date of such direction, intimate the transferor and the transferee accordingly.

(8) If default is made in complying with the provisions of this section, the company and every officer of the company who is in default shall be punishable with fine which may extend to five thousand rupees.

(9) If in any reference made under clause (c) of sub-section (4) of this section, any person makes any statement--

(a) which is false in any material particular, knowing it to be false; or

(b) which omits any material fact knowing it to be material, he shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to fine.

(10) For the removal of doubts, it is hereby provided that nothing in this section shall apply in relation to any securities the

instrument of transfer in respect whereof has been lodged with the company before the commencement of the Securities Contracts (Regulation) Amendment Act, 1985."

(emphasis supplied)

23. The statement of objects and reasons indicate that the purpose

for incorporating section 22A in the Securities Contracts

(Regulation) Act, 1956 was that at the said time, sections 82 and 111

of the Companies Act, 1956 permitted the Board of Directors of

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companies to assume powers under the Articles of Association to

refuse registration of transfer of securities without assigning any

reason. Though there was a provision for an appeal to the Company

Law Board against such refusal, it placed an undue burden on an

aggrieved person who often happened to be a small investor. The

Legislature also felt that the position at that time was not conducive

to free marketability of listed securities and healthy growth of the

capital markets. In view thereof, the Legislature felt that unrestricted

transferability was particularly necessary for securities of public

companies which are listed on the Stock Exchanges. It was in this

context that the Legislature proposed the amendment to the

Securities Contracts (Regulation) Act, 1956 by insertion of section

22A, to ensure free transferability of securities of public companies

whose securities were listed on the Stock Exchanges.

24. On a reading of section 22A as it stood then, it is clear that the

provisions therein applied only to public companies whose shares

were listed on the recognised Stock Exchanges. The provision in

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section 22A(2) that securities of public companies shall be freely

transferable, was made only as the basis for the consequential

provisions in sections 22A(3) to (9) to provide for free transferability

by restricting the entitlement of public companies (through their

Board of Directors) to refuse registration of transfers only in four

stipulated circumstances [section 22A sub-section (3)]. This is also

borne out by the statement of objects and reasons discussed above.

In other words, section 22A(2) provided for free transferability and

the actual steps taken to provide for the same were set out in sections

22A(3) to (9).

25. The wordings of section 22A as well as the objects and

reasons discussed above make it clear that section 22A was

introduced to ensure that the Board of Directors of public companies

exercising powers under its Articles of Association, do not place an

undue burden on small investors by refusing to transfer shares

without assigning any reason. In light of the language of section 22A

as well as the statement of objects and reasons, we do not read

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section 22A(2) to mean that it would affect the right of individual

shareholders to deal with their own shares on such terms and

conditions as they deem fit or to enter into any consensual

arrangement / agreement regarding their own shares by way of sale,

pledge, pre-emption or otherwise.

26. Once the context in which section 22A had been inserted is

understood, it cannot be said that two individual shareholders

entering into a consensual agreement to deal with their shares in a

particular manner, either in presenti or at a future date, would

impinge or violate the concept of free transferability as contemplated

under section 22A(2). The purpose of the said provision, as we

understand it, was to ensure that the Board of Directors of the

company cannot refuse transfer of shares except on the grounds

specified in the said section. This does not mean that if an individual

shareholder enters into a separate agreement with another

shareholder to deal with his specified shares in a particular manner,

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the same would violate the concept of free transferability as

envisaged under section 22A.

27. We have come to this conclusion because we find that shares

of a company are movable property and the right of the shareholder

to deal with his shares and / or to enter into contracts in relation

thereto (either by way of sale, pledge, pre-emption etc.), is nothing

but a shareholder exercising his property rights. Such contracts

voluntarily entered into by a shareholder for his own shares giving

rights of pre-emption to a third party / another shareholder, cannot

constitute a restriction on free transferability as contemplated under

section 22A. In fact, such contracts (either by way of sale, pledge or

pre-emption ) are entered into by a shareholder in exercise of his

right to freely deal with and / or transfer his own shares.

28. Having said this, we now turn our attention to section 111A of

the Companies Act. By the Depositories Act, 1996 the entire

scheme/provisions of section 22A of the Securities Contracts

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(Regulation) Act, 1956 were deleted and simultaneously section

111A was inserted in the Companies Act. For ready reference,

section 111A as it stood prior to its amendment in 2003, reads thus:-

111-A. Rectification of register on transfer.--(1) In this section, unless the context otherwise requires, "company" means a

company other than a company referred to in sub-section (14) of Section 111 of this Act.

(2) Subject to the provisions of this section, the shares or debentures and any interest therein of a company shall be freely

transferable:

Provided that if a company without sufficient cause refuses to

register transfer of shares within two months from the date on which the instrument of transfer or the intimation of transfer, as the case may be, is delivered to the company, the transferee may

appeal to the Company Law Board and it shall direct such company to register the transfer of shares. (3) The Company Law Board may, on an application made by a depository, company, participant or investor or the Securities

Exchange Board of India, if the transfer of shares or debentures is in contravention of any of the provisions of the Securities and

Exchange Board of India Act, 1992 (15 of 1992) or regulations made thereunder, or the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986), or any other law for the time being in force, within two months from the date of transfer of any

shares or debentures held by a depository or from the date on which the instrument of transfer or the intimation of the transmission was delivered to the company, as the case may be, after such inquiry as it thinks fit, direct any depository or company to rectify its register or records.

(4) The Company Law Board while acting under sub-section (3), may at its discretion make such interim order as to suspend the voting rights before making or completing such enquiry. (5) The provisions of this section shall not restrict the right of a holder of shares or debentures, to transfer such shares or debentures and any person acquiring such shares or debentures

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shall be entitled to voting rights unless the voting rights have been suspended by an order of the Company Law Board.

(6) Notwithstanding anything contained in this section, any further transfer, during the pendency of the application with the

Company Law Board, of shares or debentures shall entitle the transferee to voting rights unless the voting rights in respect of such transferee have also been suspended. (7) The provisions of sub-sections (5), (7), (9), (10) and (12) of

Section 111 shall, so far as may be, apply to the proceedings before the Company Law Board under this section as they apply to the proceedings under that section.

(emphasis supplied)

By the amendment in 2003, the words "Company Law Board"

appearing in section 111A were substituted with the word

"Tribunal". However, this amendment is not germane for the

purposes of the present Appeal.

29. On reading section 111A four things become clear. Firstly,

unless the context otherwise requires, it applies only to public

companies [sub-section (1) read with section 111(14)]. Secondly,

subject to the other provisions of section 111A, the shares or

debentures and any interest therein of a company shall be freely

transferable [sub-section (2)]. Thirdly, if a company, without

sufficient cause, refuses to register transfer of shares within two

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months from the date on which the instrument of transfer or the

intimation of transfer, as the case may be, is delivered to the

company, the transferee may appeal to the Company Law Board and

the Company Law Board shall thereafter direct such company to

register the transfer of shares [proviso to sub-section (2)]. In other

words, the company cannot refuse transfer of shares without

sufficient cause. Fourthly, if the transfer of shares or debentures is in

contravention of any of the provisions of SEBI Act, 1992 or SICA,

1985 or any other law for the time being in force, then the Company

Law Board may, after such inquiry as it thinks fit, on an application

made by the depository or company or participant or investor or the

Security Exchange Board of India, direct any depository or company

to rectify its register of records [sub-section (3)]. Sub-sections (4),

(5), (6) and (7) are not really germane to the issue involved in this

Appeal.

30. As stated earlier, section 22A was inserted in the Securities

Contract (Regulation) Act, 1956 which inter alia provided that

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subject to the provisions of that section, the securities of public

companies would be freely transferable and the company could

refuse the transfer only on four specific grounds as set out in sub-

section (3) thereof. It thus follows that the provisions of section 22A

were intended to regulate the right of the Board of Directors of

public companies whose securities were listed on the stock exchange

to refuse transfer of shares. The provisions of the said section was

not to restrict the rights of the shareholders to deal with their shares

or to enter into consensual agreements/arrangements regarding their

shares either by way of pledge, sale, pre-emption or otherwise. We

find that even the sweep of section 111A of the Companies Act is

the same as section 22A of the Securities Contracts (Regulation)

Act, 1956. Sub-section (2) opens with the expression "subject to the

provisions of this section". In other words, it is a provision re-stating

that the shares or debentures and any interest therein of a company

shall be freely transferable subject, however, to the other provisions

of section 111A. The proviso to sub-section (2) reinforces that

section 111A is to regulate the powers of the Board of Directors of

the company regarding transfer of shares or debentures or any

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interest therein of a company. As set out in the proviso to sub-

section (2), the Board of Directors can refuse to register transfer of

shares only if sufficient cause to do so is made out. Section 111A

and more particularly sub-section (2) thereof, is not a provision to

curtail the rights of the shareholders to enter into a consensual

agreement/arrangement with a purchaser in relation to their specific

shares. The right to enter into a consensual agreement/arrangement

must prevail so long as it is in conformity with the Articles of

Association, the provisions of the Companies Act and Rules, and

other governing laws. Therefore, the expression "freely transferable"

appearing in sub-section (2) of section 111A cannot be construed to

mean that it also intends to take away the right of shareholders to

enter into consensual agreements/arrangements with the purchaser in

relation to their specific shares.

31. We are of the view that if the legislature intended to take away

that right, it would have made an express provision in that regard. It

is now quite well settled by the Supreme Court that the Legislature

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does not interfere with the freedom of contract generally except

when warranted by public policy and the Legislative intent in that

regard is expressly made manifest. [See Byram Pestonji Gariwala

Vs. Union Bank of India - (1992) 1 SCC 31]. The Supreme Court

has also further expounded that while enacting a statute, Parliament

cannot be presumed to have taken away the right in property and

deprivation of a legal right existing in favour of a person. [See

ICICI Bank Ltd. Vs. SIDCO Leathers Ltd - (2006) 10 SCC 452].

32. The concept of free transferability would mean that a

shareholder has the freedom to transfer his shares on terms defined

by him, provided the terms are consistent with the Articles of

Association as well as the Companies Act and Rules and other

governing laws. The fact that the shares of a public company can be

subscribed to by the public, unlike in the case of a private company,

does not in any way whittle down the right of a shareholder of a

public company to arrive at a consensual agreement/arrangement

(either by way of sale, pledge, pre-emption etc.) with a third party

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or another shareholder, which is otherwise in conformity with the

Articles of Association, the Companies Act and Rules, and any other

governing laws.

33. Whilst taking this view, we are supported by a judgment of the

Division Bench of this Court in the case of Messer Holdings Ltd.1 In

the facts of that case also there was a similar clause (clause 6.1) as

the one in the present case (clause 7) and the shares under dispute

were of a public company. Clause 6.1 in the facts of that case also

provided that neither party shall sell any shares in the company held

or acquired by it without first offering the shares to the other party.

The offer was to be in writing and was to set out the price and other

terms and conditions. In the event the offeree did not agree to

purchase the shares so offered, the offerer was free to sell the shares

to any person (other than a competitor of the offeree), but at the

same price and on the same terms and conditions as offered to the

offeree. The identical argument that was made before us was also

1 Supra

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made before the Division Bench in Messer Holdings Ltd.1 It was

contended before the Division Bench that by virtue of section 111A

of the Companies Act, clause 6.1 itself was illegal and void, as it

infracted the principle of free transferability of shares as set out in

section 111A(2). After considering the provisions of section 22A of

the Securities Contracts (Regulation) Act, 1956 (as it stood prior to

its deletion), as well as the provisions of section 111A of the

Companies Act, the Division Bench of this Court negated the

aforesaid contention. In paragraph 51 of the judgment, after

reproducing section 111A, the Division Bench held as under:-

"Even the sweep of Section 111 A is the same as Section 22 A of the Securities Contracts Act. In that, it is a provision regarding

rectification of register on transfer. Sub-Section (2) opens with the expression "subject to the provisions of this section" In other words, it is a provision restating that the shares or debentures and any interest therein of a company shall be freely transferable

subject, however, to the stipulation provided in the other part of Section 111 A of the Act. The proviso to subsection (2) reinforces the position that Section 111 A is to regulate the powers of the Board of Directors of the company regarding transfer of shares or debentures and any interest therein of a company. The Board of Directors cannot refuse to register transfer of shares unless

there is sufficient cause to do so. In other words, the setting in which Section 111A is placed in part IV of the Act under heading "transfer of shares and debentures" it is not a provision to curtail the rights of the shareholders to enter into consensual arrangement with the purchaser of their specific shares. The right to enter into consensual arrangement must prevail so long

1 Supra

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as it is in conformity with the terms of Articles of Association and other provisions of the Act and the Rules. Whereas, Section 111A

is a provision mandating the Board of Directors of the company to transfer shares in the name of the transferee, subject to the stipulations in Section 111A of the Act. The expression "freely

transferable" therein is in the context of the mandate against the Board of Directors to register the transfer of specified shares of the members in the name of the transferee, unless there is sufficient cause for not doing so. The said provision cannot be

construed to mean that it also intends to take away the right of the shareholder to enter into consensual arrangement/agreement with the purchaser of their specific shares. If the legislature intended to take away that right of the shareholder, it would have made an express provision in that regard. Reliance has been

rightly placed on the decision of the Apex Court in the case of Byram Pestonji Gariwala (supra) which takes the view that the

freedom of contract generally, the legislature does not interfere except when warranted by public policy, and the "legislative intent is expressly made manifest" Even in the case of ICICI

Bank Ltd. (supra), the Apex Court has in unmistakable terms expounded that while enacting a Statute, Parliament cannot be presumed to have taken away a right in property and deprivation of legal right existing in favour of a person. That cannot be

presumed in construing the Statute. In fact, it is the other way round and a contrary presumption must be raised. The concept of

free transferability of shares of a public company is not affected in any manner if the shareholder expresses his willingness to sell the shares held by him to another party with right of first purchase (preemption) at the prevailing market price at the relevant time. So long as the member agrees to pay such

prevailing market price and abides by other stipulations in the Act, Rules and Articles of Association there can be no violation. For the sake of free transferability both the seller and purchaser must agree to the terms of sale. Freedom to purchase cannot mean obligation on the shareholder to sell his shares. The

shareholder has freedom to transfer his shares on terms defined by him, such as right of first refusal, provided the terms are consistent with other regulations including to repurchase the shares at the prevailing market price when such offer is made. The fact that shares of public company can be subscribed and there is no prohibition for invitation to the public to subscribe to shares, unlike in the case of private company, does not whittle down the right of the shareholder of a public company to arrive

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at consensual agreement which is otherwise in conformity with the extant regulations and the governing laws."

(emphasis supplied)

We are in full agreement with the aforesaid reasoning of the

Division Bench.

34. It is important to note that the judgment and order impugned

before us was also relied upon by one of the parties before the

Division Bench in Messer Holdings Ltd.1 After dealing with the

same in great detail, the Division Bench at paragraph 57 expressly

disagreed with the reasoning given in the judgment and order

impugned before us. The relevant portion reads thus:-

"57. The Learned Single Judge has then distinguished the exposition in Madhusoodhanan's case on the basis that the Karar referred to therein was an agreement between

particular shareholders relating to the transfer of the specified shares. It is noted that in that case the company was a private company and restriction on the right of the shareholders to transfer shares and prohibit invitation to the public to subscribe for shares and debentures of the company is materially different.

The main thrust is that in case of public company there can be no restriction whatsoever and if any other argument was to be accepted, it would mean that Section 111 A is being read as being subject to a contract to the contrary. The notification dated June 27, 1961 has been discarded on the opinion that, that cannot have any bearing in relation to Section 111 A of the Companies Act as it is issued in exercise of powers under 1 Supra

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Depositories Act, 1996. With utmost humility at our command, we do not agree with this reasoning of the Learned Single Judge

in the case of WMD Corporation Ltd. (supra) for the reasons recorded hitherto."

(emphasis supplied)

35. Faced with the judgment in Messer Holdings Ltd., Mr.

Khambatta, the learned senior counsel appearing on behalf of the

Respondent, submitted that whether a particular clause was a

restriction on transferability of shares had to be necessarily decided

on a case to case basis. He submitted that the facts in the case of

Messer Holdings Ltd.1 were materially different than the ones before

us. The first distinguishing feature he pointed out was that, under

Clause 6.1 in Messer Holdings Ltd., there was no restriction on

price whereas Clause 7 of the Protocol Agreement before us

compelled the Respondent to sell the shares at a price not determined

by the Respondent but determined through the process of arbitration.

According to Mr Khambatta, this was a very significant

distinguishing feature. We cannot agree. We do not think that this

distinguishing feature can make any difference to the ratio laid down

in Messer Holdings Ltd. Once it is held that consensual

1 Supra

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agreements/arrangements entered into by the shareholders of a

public company with a third party regarding his own specified shares

(either by way of sale, pre-emption or otherwise), do not impinge on

free transferability of shares as contemplated under section 111A,

this so called distinction pails into insignificance. If the parties are

free to enter into a consensual arrangement which does not infract

free transferability as contemplated under section 111A, we see no

reason to hold that merely because the price of the shares is to be

determined by the process of arbitration, the same would to be in

violation of section 111A. The fact that the price of the shares is to

be determined by the process of arbitration is also a term of the very

same consensual arrangement which is not violative of the

provisions of section 111A(2). We, therefore, find no substance in

this argument.

36. The second distinguishing feature that Mr. Khambatta sought

to highlight is that in the facts of our case, this consensual

arrangement as set out in clause 7 of the Protocol Agreement was

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also incorporated in Articles of Association of MSL whereas that

was not the case before the Division Bench in the case of Messer

Holdings Ltd. In furtherance of this argument, Mr. Khambatta

submitted that the Protocol Agreement and more particularly Clause

7 thereof, was incorporated into the Articles of MSL and was

therefore subsumed therein and did not independently survive. Once

it was subsumed in the Articles and the same could not be

incorporated the Articles of a public company, the same could not

re-emerge in a different avatar, was the submission. We cannot agree

with this argument. Merely because the Protocol Agreement was

incorporated into the Articles of MSL, does not mean that the

Protocol Agreement by itself (or clause 7 thereof) ceased to exist.

The Protocol Agreement governs the rights and liabilities of the

parties thereto and would continue notwithstanding the fact that they

were incorporated in the Articles of MSL. Therefore, even if we are

to assume that such a clause was not permissible in the Articles of a

public company, that would not in any way destroy the rights created

under the said Agreement inter-se between the parties. The rights

and liabilities created under the said Protocol Agreement would

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continue to bind the parties thereto. Even if we are to hold that the

company (namely MSL) was not bound by the terms of the Protocol

Agreement, it would only mean that if the Respondent sought to sell

their shareholding in breach of Clause 7 of the Protocol Agreement,

the company (MSL) would not be in a position to refuse such

transfer, in the absence of any Court or other judicial authority

granting an injunction restraining it from doing so. This does not

mean that the parties to the Protocol Agreement cannot, in

appropriate proceedings, seek to enforce its terms. It is one thing to

say that the said clause will not bind the company and it is wholly

another to contend that the said clause would not bind the parties

thereto. We are, therefore, of the view that notwithstanding the fact

that the Protocol Agreement was incorporated in the Articles of

Association of MSL, the same would not change the nature of that

agreement namely being a consensual agreement/arrangement

entered into between the parties determining the manner in which

each party is allowed to dispose of its particular shareholding. At the

highest and assuming everything in favour of the Respondent, it

could be only be held that such a clause would not bind the

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company. However, it would certainly bind the parties to the

Protocol Agreement. We, therefore, find no substance in this

argument.

37. Even otherwise, we find force in the argument of Mr. Chinoy

that such a clause (clause 7), even if incorporated in the Articles of

Association of a public company, would not in any way violate the

principles of free transferability of shares as contemplated under

section 111A of the Companies Act. Clause 7 of the Protocol

Agreement and which finds place in the Articles of MSL by virtue of

incorporation of the Protocol Agreement in its Articles, only sets out

how the Respondent and the Appellant are to deal with their

respective shareholdings. It is not a blanket pre-emption clause

which binds all the shareholders of MSL to sell their shares only to

other members of MSL, which clauses are incorporated in the

Articles of Association of a private company. Pre-emption clauses in

the Articles of a private company are in the nature of a blanket

restriction on all its members, and such clauses if incorporated in the

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Articles of a public company would certainly amount to a restriction

on free transferability of shares as envisaged under section 111A.

However, that is not the case before us. Clause 7 of the Protocol

Agreement and which has been incorporated in the Articles of

Association of MSL, only relates to the shareholding of the

Appellant and the Respondent and their rights and liabilities in

relation thereto. It does not in any way affect the rights and/or

liabilities of the other members of MSL. In this view of the matter,

we are of the view that merely because Clause 7 of the Protocol

Agreement was incorporated in the Articles of MSL, would not

invalidate the same. We are also persuaded to take this view because

we find that in todays global reality, joint ventures are extremely

common and clauses similar to Clause 7 of the Protocol Agreement

may become necessary to ensure that a joint promotor of a company

does not sell his shareholding to a competitor who then possibly

could get control of his rival. In this view of the matter and looking

to the totality of the facts and circumstances of the case, we are

clearly of the view that Clause 7 of the Protocol Agreement does not

in any way impinge upon the principle of free transferability of

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shares as contemplated under section 111A of the Companies Act,

1956.

38. We must also mention here that agreements like the one

contained in clause 7 of the Protocol Agreement before us, have now

been expressly made a part of section 58 of the Companies Act,

2013. Section 58 of the Companies Act, 2013 reads as under:-

"58. Refusal of registration and appeal against refusal.--(1) If a private company limited by shares refuses, whether in

pursuance of any power of the company under its articles or otherwise, to register the transfer of, or the transmission by operation of law of the right to, any securities or interest of a member in the company, it shall within a period of thirty days from the date on which the instrument of transfer, or the

intimation of such transmission, as the case may be, was delivered to the company, send notice of the refusal to the

transferor and the transferee or to the person giving intimation of such transmission, as the case may be, giving reasons for such refusal.

(2) Without prejudice to sub-section (1), the securities or other interest of any member in a public company shall be freely transferable:

Provided that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable

as a contract.

(3) The transferee may appeal to the Tribunal against the refusal within a period of thirty days from the date of receipt of the notice or in case no notice has been sent by the company, within a period of sixty days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, was delivered to the company.

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(4) If a public company without sufficient cause refuses to register the transfer of securities within a period of thirty days

from the date on which the instrument of transfer or the intimation of transmission, as the case may be, is delivered to the company, the transferee may, within a period of sixty days of

such refusal or where no intimation has been received from the company, within ninety days of the delivery of the instrument of transfer or intimation of transmission, appeal to the Tribunal. (5) The Tribunal, while dealing with an appeal made under sub-

section (3) or sub-section (4), may, after hearing the parties, either dismiss the appeal, or by order--

(a) direct that the transfer or transmission shall be registered by the company and the company shall comply with such order

within a period of ten days of the receipt of the order; or

(b) direct rectification of the register and also direct the company to pay damages, if any, sustained by any party aggrieved.

(6) If a person contravenes the order of the Tribunal under this section, he shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to three years and with fine which shall not be less than one lakh

rupees but which may extend to five lakh rupees."

(emphasis supplied)

39. Sub-section (2) of section 58 specifically provides that without

prejudice to sub-section (1), the securities or other interest of any

member in a public company shall be freely transferable. However,

the proviso to the said section stipulates that any contract or

arrangement between two or more persons in respect of transfer of

securities shall be enforceable as a contract. Before the Companies

Act, 2013 came into force, the 57th Report of the Parliamentary

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Standing Committee on the Companies Bill 2011, at pg. 86 thereof,

noted that the proviso to section 58 "simply seeks to codify the

pronouncements made by various Courts holding that contracts

relating to transferability of shares of a company entered into by

one or more shareholders of a company (which may include

promoter or promoter group as a shareholder) shall be enforceable

under law." Keeping in line with the proviso to section 58(2) of the

Companies Act 2013, the Securities And Exchange Board of India

has also issued a notification dated 3 October 2013 being

Notification No.LAD-NRO/GN/2013-14/26/6667 which declares

that no person in the territory to which the Securities Contracts

(Regulation) Act, 1956 extends, shall save with the permission of the

Board, enter into any contract for sale or purchase of securities other

than a contract falling under any one or more of the following

namely:

(a) Spot delivery contract;

(b) contracts for sale or purchase of securities or contracts in derivatives, as are permissible under the said Act or the Securities and Exchange Board of India Act, 1992 (15 of

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1992) and the rules and regulations made under such

Acts and rules, regulations and bye-laws of a recognised stock exchange;

(c) contracts for pre-emption including right of first refusal, or tag-along or drag-along rights contained in

shareholders agreements or articles of association of companies or other body corporate;

(d) ...............................

40. On reading section 58 and the above Notification issued by the

Securities and Exchange Board of India, we are of the view that

section 58 merely clarifies and codifies the existing legal position

regarding such pre-emption agreements. In other words, what was

implicit in the provisions of section 111A of the Companies Act,

1956 has now been made explicit in section 58 of the Companies

Act, 2013.

41. For all the reasons set out earlier in this judgement, and

coupled with the fact that the reasoning given in the impugned order

before us has been specifically disagreed with by another Division

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Bench of this Court in the case of Messer Holdings Ltd.,1 we are

unable to uphold the order of the learned Single Judge insofar as it

set aside the impugned award on the ground that Clause 7 of the

Protocol Agreement imposed a restriction on free transferability of

shares as contemplated under section 111A of the Companies Act,

1956.

42.

Having held so, we shall now deal with the judgments relied

upon by Mr. Khambatta. The first two judgments of the Supreme

Court relied upon by Mr. Khambatta are in the case of Needle

Industries Ltd2 and Darius Kavasmaneck3. On going through the

aforesaid judgments, we do not find anything therein that supports

the contentions of the Respondent as raised herein. Neither of these

judgements decide the issue that an agreement voluntarily entered

into by an individual shareholder giving a right of pre-emption to a

third person regarding his own shares, constitutes a restriction

imposed on the right of a shareholder to transfer his shares and is

1 Supra 2 Supra 3 Supra

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therefore accordingly impermissible by virtue of section 111A of the

Companies Act. The said two judgments hold that a private

company, by virtue of section 3(1)(iii), must contain provisions in its

Articles of Association placing a restriction on the right of

shareholders to transfer their shares, whilst a public company cannot

have such a general restriction on transfer of shares by its members.

We do not see how these judgments can be of any assistance in

deciding the issue raised before us.

43. The next judgment relied upon by Mr. Khambatta was of the

Supreme Court in the case of V. B. Rangaraj.4 On perusing the said

judgment, we find that the facts in that case were totally different

than the facts before us. In fact Ranagraj's judgment has been

considered by the Division Bench of this Court in Messer Holdings

Ltd.1 We must mention here that Rangaraj's judgement also came

up for consideration before another bench of the Supreme Court in

the case of M. S. Madhusoodhanan v/s Kerala Kaumudi (P) Ltd. 6

4 Supra 1 Supra 6 (2004) 9 SCC 909 : AIR 2004 SC 909

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In Madhusoodhanan's case, the Supreme Court considered a case

where specific performance was sought of an Agreement / Karar

dated 16th January, 1986 which provided for the division of shares of

the late parents (Sukumaran and Madhavi) in the percentage of

50:25:25 between the sons Madhusoodhanan, Ravi and Srinivasan.

This division of shares was to take place on Madhavi's death.

Madhavi died on 2nd December, 1987 and Madhusoodhanan filed a

suit in October 1988 for specific performance of the terms in the

Karar. Thus, the Karar dated 16th January, 1986 was an agreement

to transfer the parents shares in the percentages set out above, at a

subsequent date (i.e. after Madhavi's death). When specific

performance of this agreement was sought by Madhusoodhanan,

enforcement thereof was resisted by relying upon the judgment of

the Supreme Court in the case of V. B. Ranagraj.4 Distinguishing

the judgment in Ranagraj's case, the Supreme Court pointed out that

an agreement between particular shareholders relating to transfer of

specified shares did not impose a restriction on the transferability of

shares. The Supreme Court in Madhusoodhanan's case held as

4 Supra

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under:-

"139. The respondents cited Article 29 of the Articles of the Company in support of their argument that Exhibits R-59 and R-

60 overrode the Karar insofar as it required that 50% of the shares of the late K. Sukumaran and Madhavi had to be transferred to Madhusoodhanan on Madhavi's death. Article 29 says that the executors or administrators of the deceased sole holder of a share shall be the only persons recognised by the

Company as having any title to the share. It was the contention of the respondents that insofar as the Karar provided for the transfer of the shares of the late Sukumaran and Madhavi to Madhusoodhanan, it was contrary to Article 29 of the Articles of

Association of the Company and could not be enforced. This submission is made on the basis of the decision of this Court

in V.B. Rangaraj v. V.B. Gopalkrishnan [(1992) 1 SCC 160 : AIR 1992 SC 453] .

140. That decision must be understood and read after

enunciating certain basic principles relating to the transfer of shares and in the background of earlier decisions on the subject. It is settled law that shares are movable properties and are transferable. As far as private companies like Kerala Kaumudi

are concerned, the Articles of Association restrict the shareholder's right to transfer shares and prohibit any

invitations to the public to subscribe for any shares in, or debentures of, the Company. This is how a "private company" is now defined in Section 3(1)(iii) of the Companies Act, 1956 and how it was defined in Section 2(13) of the 1913 Act.

141. Subject to this restriction, a holder of shares in a private company may agree to sell his shares to a person of his choice. Such agreements are specifically enforceable under Section 10 of the Specific Relief Act, 1963, which corresponds to Section 12 of the Specific Relief Act, 1877. The section provides that specific

performance of such contracts may be enforced when there exists no standard for ascertaining the actual damage caused by the non-performance of the act agreed to be done, or when the act agreed to be done is such that compensation in money for its non-performance would not afford adequate relief. In the case of a contract to transfer movable property, normally specific performance is not granted except in circumstances specified in the explanation to Section 10. One of the exceptions is where the

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property is "of special value or interest to the plaintiff, or consists of goods which are not easily obtainable in the market".

It has been held by a long line of authority that shares in a private limited company would come within the phrase "not easily obtainable in the market" (see Jainarain Ram

Lundia v. Surajmull Sagarmull[AIR 1949 FC 211 : 1949 FCR 379] , AIR at p. 218). The Privy Council in Bank of India Ltd. v. Jamsetji A.H. Chinoy [AIR 1950 PC 90 : 77 IA 76] (AIR p. 96, para 21) said:

"It is also the opinion of the Board that, having regard to the nature of the Company and the limited market for its shares, damages would not be an adequate remedy."

The specific performance of a contract for transfers of shares in a private limited company could be granted.

145. In Rangaraj case [(1992) 1 SCC 160 : AIR 1992 SC 453] relied upon by the respondents, an agreement was entered into between the members of the family who were the only

shareholders of a private company. The agreement was that for all times to come each of the branches of the family would always continue to hold equal number of shares and that if any member in either of the branches wished to sell his share/shares,

he would give the first option of purchase to the members of that branch and only if the offer so made was not accepted, the shares

would be sold to others. This was a blanket restriction on all the shareholders, present and future. Contrary to the agreement, one of the shareholders of one branch sold his shares to members of the second branch. Such sale was challenged in a suit as being

void and not binding on the other shareholders. This Court rejected the challenge holding that the agreement imposed a restriction on shareholders' rights to transfer shares which was contrary to the Articles of Association of the Company. It was, therefore, held that such a restriction was not binding on the Company or its shareholders. The decision is entirely

distinguishable on facts. There is no such restriction on the transferability of shares in the Karar. It was an agreement between particular shareholders relating to the transfer of specified shares, namely, those inherited from the late Sukumaran and Madhavi, inter se. It was unnecessary for the Company or the other shareholders to be a party to the agreement. As provided in clause 10 of the Karar, Exhibits R-59 and R-60 did not obviate compliance with the Karar. Both Exts.

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R-59 and R-60 were executed on 15-7-1985, several months prior to the Karar. The parties who had consciously entered into

the agreement regarding the transfer of their parents' shares are, therefore, obliged to act in terms of the Karar. The defence of Ravi and Srinivasan based on Exts. R-59 and R-60 should not, in

the circumstances, have been accepted by the Division Bench. Having regard to the nature of the shareholding, on the basis of the law as enunciated by the Federal Court and the Privy Council in the decisions noted above, it must be held that

the Karar was specifically performable.

(emphasis supplied)

44. We must mention here that the Division Bench of this Court in

Messer Holdings Ltd.1 has relied upon the judgment of the Supreme

Court in Madhusoodhanan's case to come to the conclusions that it

did.

45. We must also make note of the fact that the view expressed in

Rangaraj's case has not been subscribed to by a three Judge Bench

of the Supreme Court in the case of Vodafone International

Holdings BV vs. Union of India and Another.7 Though the issue

before us did not directly arise before the Supreme Court in

Vodafone's case, at paragraphs 261 and 262 of the said judgement,

the Supreme Court opined as under:-

1 Supra 7 (2012) 6 SCC 613

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"Shareholders' agreement

261. Shareholders' Agreement (for short "SHA") is essentially a

contract between some or all other shareholders in a company, the purpose of which is to confer rights and impose obligations over and above those provided by the company law. SHA is a

private contract between the shareholders compared to the articles of association of the company, which is a public document. Being a private document it binds parties thereof and not the other remaining shareholders in the company . Advantage

of SHA is that it gives greater flexibility, unlike the articles of association. It also makes provisions for resolution of any dispute between the shareholders and also how the future capital contributions have to be made. Provisions of the SHA may also

go contrary to the provisions of the articles of association, in that event, naturally provisions of the articles of association would govern and not the provisions made in SHA.

262. The nature of SHA was considered by a two-Judge Bench of this Court in V.B. Rangaraj v. V.B. Gopalakrishnan [(1992) 1 SCC 160]. In that case, an agreement was entered into between

shareholders of a private company wherein a restriction was imposed on a living member of the company to transfer his shares only to a member of his own branch of the family, such restrictions were, however, not envisaged or provided for within

the articles of association. This Court has taken the view that provisions of the shareholders' agreement imposing restrictions

even when consistent with company legislation, are to be authorised only when they are incorporated in the articles of association, a view we do not subscribe to."

(emphasis supplied)

In view of the above discussion, we find that the reliance

placed by the Respondent on the judgement of the Supreme Court in

Rangaraj's case is wholly misplaced.

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46. In this view of the matter, we are clearly of the view that the

order of the learned Single Judge is unsustainable, insofar as it set

aside the impugned award on the ground that the effect of Clause 7

of the Protocol Agreement was to impose a restriction on the free

transferability of shares as contemplated under section 111A of the

Companies Act. This is more so since the reasoning given by the

learned Single Judge has been specifically disapproved by another

Division Bench of this Court in the case of Messer Holdings Ltd.1

Appeal No.153 of 2010 will therefore have to allowed.

CROSS OBJECTIONS LODG NO.13 OF 2010

47. Having held so, we will now have to examine the Cross

Objections that have been filed by the Respondent. In a nutshell the

Cross Objections were filed because the learned Single Judge

negated all the other contentions raised by the Respondent (original

Petitioner) in the section 34 Petition filed by it to challenge the

arbitral award.

1 Supra

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48. In the Cross Objections, the Respondent has challenged the

award mainly on two grounds. The first ground of challenge to the

impugned award is on the issue of jurisdiction and the scope of

reference. The second ground of challenge is on merits regarding the

valuation of the Respondent's 27% shareholding in MSL.

JURISDICTION / SCOPE OF REFERENCE :-

49. Before the Sole Arbitrator, the Respondent had filed an interim

application raising mainly two objections. The first objection raised

was that the joint reference made by the Appellant and the

Respondent to the Arbitrator on 29 th December 2003, was illegal and

hence the Arbitrator had no jurisdiction. The second objection raised

before the Arbitrator was that the Protocol Agreement dated 2 nd

October, 1974 was illegal and void in view of the provisions of (a)

section 16 of the Securities Contracts (Regulation) Act 1956; (b)

section 111A and section 9 of the Companies Act 1956; (c) section

23 of the Indian Contract Act, 1872 and (d) section 10(1) of the Sale

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of Goods Act 1930. To decide these objections the Arbitrator in

paragraph 13 of the award framed five points for consideration

which were as under :-

"13. In the light of the submissions advanced before me, the following points arise for my consideration :

i) Whether the joint reference made to this Tribunal by the parties by their letter dated 29th December 2003 is illegal, and whether this Tribunal has jurisdiction ?

ii) Whether the Protocol Agreement dated 2 nd October 1974

executed between WMDC and BAL is illegal and/or void on account of violation of section 16 of the Securities Contract

(Regulations) Act 1956 (SCRA);

iii) Whether the said Protocol Agreement is illegal on account of violation of the provisions of Section 111A read with Section 9 of

the Companies Act 1956 ?

iv) Whether the said Protocol Agreement is illegal on account of violation of the provisions of section 23 of the Indian Contract Act 1872 ?

v) Whether the said Protocol Agreement is illegal on account of

violation of the provisions of section 10 of the Sale of Goods Act 1930?"

50. For the reasons that followed in paragraphs 14 to 29 of the

award, all the aforesaid five points were answered in the negative

and against the Respondent.

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51. Be that as it may, when the award was challenged by filing a

petition under section 34 of the Arbitration and Conciliation Act

1996, on the issue of jurisdiction, the arguments canvassed before

the learned Single Judge were that (i) the Arbitrator had exceeded

his jurisdiction in deciding the "date" for valuation of shares of

MSL, proposed to be transferred by the Respondent to the Appellant

[paragraph 13(i) of the impugned order]; (ii) the fixation of the

"date" for valuation by the Arbitrator was beyond the scope of the

submission [paragraph 13(viii) of the impugned order]; and (iii) the

Protocol Agreement was illegal and any determination under the

Agreement was void. This argument was canvassed on the basis that

the shares of a public company by virtue of section 111A of the

Companies Act are to be freely transferable and the Articles of

Association of MSL must yield to the principle of free transferability

embodied in section 111A. [paragraph 13(ix) of the impugned

order]. As far as the objection relating to section 111A is concerned,

we have already given detailed findings in that respect, earlier in this

judgment. As noted earlier, this last objection regarding section

111A appealed to the learned Single Judge on the basis of which the

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award was set aside. As set out earlier, we have set aside the

impugned order in so far as it set aside the arbitral award on the

ground that clause 7 of the Protocol Agreement imposed a restriction

on free transferability of shares as contemplated under section 111A

of the Companies Act. As far as the other contentions raised by the

Respondent, regarding the jurisdiction of the Arbitrator on the aspect

of the "date" on which the shares are to be valued, the learned Single

Judge negated the contentions of the Respondent. Being aggrieved

by these findings (amongst others), the Respondent has filed the

above Cross Objections.

52. Mr Samdani, learned Senior Counsel appearing on behalf of

the Respondent, in support of the Cross Objections, submitted that

the Arbitral Tribunal had exceeded its jurisdiction by embarking

upon an inquiry and adjudicating on a "date" with reference to which

the valuation was to be undertaken. He submitted that a combined

reading of the joint reference dated 29th December, 2003 and clause

7 of the Protocol Agreement left no manner of doubt that the length

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and breadth of the Arbitrator's jurisdiction was limited only to the

determination of the "rate". Clause 7 of the Protocol Agreement

alongwith the joint reference, did not empower the Arbitrator to

decide any incidental question, especially in view of the fact that

clause 7 of the Protocol Agreement was limited in its sphere, was the

submission of Mr Samdani. He submitted that the scope of clause 7

of the Protocol Agreement being limited, is also borne out from the

fact that the Protocol Agreement itself contained another arbitration

clause (i.e. clause 19) that conferred a much wider jurisdiction on the

Arbitrator and which was admittedly not invoked by any of the

parties.

53. Mr Samdani submitted that valuation, being a matter of

contract between the parties, requires that they be at ad-idem on the

"date" with respect to which the valuation was required to be done.

According to him, the parties undisputedly were not at ad-idem

inasmuch as the Respondent had taken a stand that no "date" has

been agreed, and therefore there was no concluded contract. In

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addition thereto, he submitted that the Appellant had taken a stand

before the Arbitrator that the date of valuation should be as on 30 th

June, 2002 and in the alternative 3 rd May, 2003. In light of the stand

taken by the Appellant as well as the Respondent, it was clear that

there was no agreed "date" and therefore the Arbitrator, under

Clause 7 of the Protocol Agreement read with the joint reference

dated 29th December 2003, did not possess jurisdiction to adjudicate

the said issue. He submitted that this contention is further fortified

by the fact that the Arbitrator had to direct the Appellant and the

Respondent to file their respective pleadings in reference to what

would be the "relevant date" for the purposes of valuing the

Respondent's 27% shareholding in MSL. According to Mr Samdani,

it was also the Appellant's own case before the Arbitrator that

without an agreed "relevant date" for valuation, the Respondent

could not have made its offer and the Appellant could not have

accepted the said offer. All these facts, according to Mr. Samdani,

therefore clearly indicated that parties were not ad-idem on the

"date" on which the shareholding of the Respondent was to be

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valued, and this exercise of determining the "date" was outside the

scope of the joint reference made to the Arbitrator.

54. Additionally, it was the submission of Mr Samdani that the

correspondence exchanged between the parties in relation to the sale

of the said shares of the Respondent, viz. letters dated 9 th April 2003,

3rd May 2003, 10th May 2003 and 6th June 2003 established that there

was no concluded contract between the parties as on 3 rd May, 2003.

For all the aforesaid reasons, Mr Samdani submitted that there was

no concluded contract between the parties and the Arbitrator had

exceeded his jurisdiction by embarking on an inquiry and

adjudicating on the "date" with reference to which valuation was to

be undertaken by him.

55. Clause 7 of the Protocol Agreement contemplated a situation

where if either party thereto desired to part with or transfer its

shareholding or any part thereof in MSL, such party was to give first

option to the other party for the purchase of such shares at such rates

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as may be agreed to between the parties, or decided upon by

arbitration. In the present case, admittedly the Respondent offered its

shares for sale to the Appellant by its letter dated 9th April, 2003.

Clause 7 further contemplated that on receiving notice from the

party desiring to sell its shareholding (or any part thereof), the other

party was required within 30 days of receipt of such notice (i) either

agree to such proposal and purchase the shares or (ii) give written

intimation of its intention to purchase the shares and the question of

rate at which the said shares would be sold, be referred to arbitration

or (iii) decline/fail to accept the proposal made by the party selling

the shares, in which event that party was free to sell the shares to

anyone else but only at a rate not less than the rate offered to the

other party. In the present case, the Appellant by their letter dated 3 rd

May, 2003 clearly stated their intention to purchase the shareholding

of the Respondent in MSL, but considered the rate at which the said

shareholding was to be purchased, as too high and/or unacceptable.

By their letter dated 10th May, 2003, the Appellant confirmed that

their letter dated 3rd May, 2003 was under Clause 7 of the Protocol

Agreement and was their confirmation to purchase the shares

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offered, though the price at which they were offered was not

acceptable to them. This was again reiterated by their letters dated 6 th

June 2003 and 31st July, 2003. On reading this correspondence, it is

clear that there was a concluded contract between the parties as

contemplated under Clause 7 of the Protocol Agreement. This is in

fact how the parties also understood it. It is for this very reason that

the Respondent by their letter dated 27th October, 2003 initiated the

arbitral process by addressing a letter to the Sole Arbitrator stating

therein as under :-

"As per the Protocol Agreement, the Corporation has to make the first offer to Bajaj Auto Ltd. and in turn Bajaj Auto Ltd. has to

accept or reject that offer. This process has been completed and since no agreement has been reached on the value of the share,

as per the Agreement, the parties involved have to proceed to appoint a Sole Arbitrator for the purpose.

The Govt. of Maharashtra, Industries, Energy and Labour

Department has suggested to appoint your goodself as the Sole Arbitrator and this has well been received and agreed to by M/s Bajaj Auto Ltd. and this Corporation.

You are, therefore, requested to be kind enough to 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. The detail Terms of Reference would be communicated to you later."

(emphasis supplied)

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56. Thereafter, a joint reference was made to the Arbitrator on 29 th

December, 2003 wherein it was stated thus :-

"2. BAL had expressed its willingness to buy the stake held by WMDC in MSL. WMDC had indicated its desire to sell its shareholding in MSL. However, price per share remained in

dispute and hence in accordance with clause no.7 of the protocol agreement, "the question of rate" for the purchase by BAL of equity shares in MSL held by WMDC, is hereby referred to the Sole Arbitrator.

3. The Arbitrator shall take into account the Protocol Agreement

covenants and all other concerned factors which may have impact on the share price of MSL shares, while giving his arbitral award."

(emphasis supplied)

57. All this correspondence clearly establishes that the Respondent

have to first make an offer to the Appellant who, in turn, have to

accept or reject that offer. This process (as recorded by the

Respondent in their letter dated 27th October, 2003) "has been

completed and since no agreement has been reached on the value of

the share, as per the Agreement, the parties involved have to appoint

a Sole Arbitrator for the purpose."

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58. Following the letter of 27th October 2003, a joint reference to

arbitration was made on 29th December, 2003. The terms of

reference contained an express statement of fact that the Appellant

had expressed its willingness to buy the stake held by the

Respondent in MSL and that the Respondent indicated its desire to

sell its stake in MSL. However, what remained in dispute was the

price per share to be determined, and hence, in accordance with

Clause 7 of the Protocol Agreement, the "question of rate" at which

the Appellant was to purchase the equity shares held by the

Respondent in MSL, was being referred. All this material would

clearly indicate that there was a concluded contract between the

parties as on 3rd May, 2003 and looking at the letter dated 27 th

October, 2003 as well as the joint reference dated 29 th December

2003, clearly establishes that even the parties understood it to be so.

If according to the Respondent there was no concluded contract, then

there would have been no occasion to either address the letter dated

27th October, 2003 to the Arbitrator or make a joint reference to him

under clause 7 of the Protocol Agreement for determining the "rate"

at which the shareholding of the Respondent would be sold to the

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Appellant. It is only for the first time in the application filed by the

Respondent before the Arbitrator on 6th April 2004, that the

Respondent sought to question as to whether a concluded contract

had been arrived at. This to our mind was obviously an after-thought

and was a clear deviation from the manner in which the Respondent

had understood the course of dealings between the parties. We

therefore have no hesitation in holding that on the basis of the

correspondence exchanged between the parties and the Arbitrator,

there was a concluded contract for sale of the Respondent's 27%

shareholding in MSL to the Appellant. The only question that the

Arbitrator had to decide was the "rate" at which the said shares were

to be sold as contemplated under Clause 7 of the Protocol

Agreement and it was on this basis that a joint reference was made to

the Arbitrator. We, therefore, are unable to agree with the

submission of Mr Samdani that on reading the correspondence

between the parties viz. the letters dated 9 th April 2003, 3rd May

2003, 10th May, 2003 and 6th June, 2003 it was established that there

was no concluded contract as on 3rd May, 2003.

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59. We are also unable to agree with the submission of Mr

Samdani that because the parties were not ad-idem with respect to

the "date" on which the valuation was required to be done, there was

no concluded contract or that determining the same was outside the

scope of the joint reference made to the Arbitrator. It may be noted

that the joint reference was made to the Arbitrator on the basis that

there was a concluded contract between the parties with reference to

the sale of the Respondent's 27% shareholding in MSL to the

Appellant. The only question that the Arbitrator was required to

decide was the "rate" at which the said shareholding ought to be

sold. In deciding this question, necessarily as a matter of fact, the

Arbitrator had to ascertain the "date" on which the shares of the

Respondent were to be valued. A decision on the "date" was an

integral part of deciding the "rate" at which the Respondent's 27%

shareholding was to be sold to the Appellant.

60. To our mind, this is also contemplated in the joint reference

dated 29th December, 2003 which specifically states that the

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Arbitrator shall take into account the Protocol Agreement covenants

and all other concerned factors which may have an impact on the

share price of MSL shares while giving the arbitral award. It cannot

seriously be disputed that the "date" of valuation would certainly be

one of the factors which would have an impact on the share price of

MSL shares.

61.

The Arbitrator held that the relevant date of valuation would

be 3rd May 2003, which was the date on which the concluded

contract was arrived at between the parties. In our view, in holding

so, the Arbitrator had not transgressed and / or exceeded his

jurisdiction, and the determination of the "date" on which the

valuation was to be done, was very much within the scope of the

joint reference dated 29th December, 2003. We find that the

Arbitrator has correctly taken the "date" as 3 rd May, 2003 being the

date when a concluded contract was arrived at between the parties

for the sale of the Respondent's 27% shareholding in MSL to the

Appellant. We find that the Arbitrator has dealt with this issue in

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detail from paragraphs 30 to 36 of the award. We do not find any

perversity in the same. Similarly, we find that the learned Single

Judge has dealt with this issue in paragraphs 16 to 19 of the

impugned order and we are in full agreement with the reasoning

contained therein. This contention, therefore, of Mr Samdani will

also have to be rejected.

CHALLENGE TO VALUATION ON MERITS

62. This brings us to the next objection of Mr Samdani regarding

the valuation of the shares of MSL. Mr Samdani submitted that MSL

has been wrongly valued on a "liquidation basis" although

admittedly MSL was a profit making "going concern" and was not

ripe for winding up.

63. In support of the above submission, Mr Samdani adverted to

the fact that Mr Raghuram of CRISIL, as on 30th June, 2002 valued

the shares of MSL on the "Net Asset Value" (NAV) method on a

"going concern" basis (hereinafter referred to as "the first report").

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He submitted that after examining different scenarios, Mr Raghuram

accepted the historical break-even level of sales (Scenario III in the

first report) and carried out the valuation on that basis. Mr

Raghuram did not apply any discounts and valued the MSL shares at

Rs.227/- per share. Whilst doing so, Mr Raghuram also stated that in

case the "going concern" assumption did not remain valid, then MSL

could be valued on the "liquidation basis". On this liquidation basis,

Mr Raghuram gave discounts only on workmen's dues and

contingent liability and accordingly, valued the MSL shares at

Rs.204/- per share, was the submission. Mr. Samdani submitted that

on the basis of this valuation, the offer dated 9 th April, 2003 was

made by the Respondent to the Appellant. As the said offer was not

accepted, a joint reference dated 29th December, 2003 was made to

the learned Arbitrator for determining the rate at which the

Respondent's shareholding would be sold to the Appellant.

64. Mr. Samdani submitted that in the course of arbitral

proceedings, the Respondent obtained another valuation from Mr

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Raghuram as on 3rd May, 2003 (hereinafter referred to as the

"second report"). Similarly, the Appellant also obtained the

valuation of one Mr Bansi Mehta for the purposes of valuing the

27% shareholding of the Respondent in MSL as on 3 rd May, 2003.

Mr Samdani submitted that Mr Raghuram's second report, which

was prepared after the commencement of arbitration, valued the

shares of MSL on the NAV method on a "going concern" basis.

According to Mr Samdani, Mr Raghuram based his "going concern"

assumption on the relevant accounting standards followed by MSL.

On the other hand, Mr Bansi Mehta valued the MSL shares on the

NAV method on a "liquidation basis". Mr Samdani submitted that

Mr Bansi Mehta's report did not contain any explanation as to why

the "going concern" basis was discarded and the "liquidation basis"

was followed. He submitted that this was more so when it was not

even in the contemplation of the parties that MSL was liable to be

wound up or was ripe for winding up. He submitted that the

Arbitrator himself had held and accepted that the NAV method had

two streams, viz. (1) valuation on a "going concern" basis and (2)

valuation on a "liquidation basis". Mr Samdani submitted that the

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Arbitrator, without applying his mind and without any material on

record, held that MSL is a loss making company and the valuation of

MSL on "liquidation basis" was therefore justified. According to Mr

Samdani, the aforesaid findings were totally perverse and revealed a

complete non-application of mind disregarding the material on

record. He submitted that the Arbitrator committed a fundamental

error by ignoring the fact that MSL was in fact a profit making

company. This in itself takes away the very foundation of the

Arbitrator's decision for valuing MSL on a "liquidation basis", was

the submission of Mr. Samdani. He submitted that while one

segment of MSL (Operating Segment) was making operating losses,

the Investment Segment was extremely profitable and MSL was

thereby making profits. This fact has been ignored by the Arbitrator

which makes the award vulnerable to challenge, was the submission

of Mr Samdani. For all the aforesaid reasons, Mr Samdani submitted

that the Arbitrator was in fundamental error in accepting Mr Bansi

Mehta's valuation that valued the MSL shares using the NAV

method on a "liquidation basis".

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65. From what has been argued at the bar, it appears that the real

grievance of the Respondent is that though the valuers viz. Mr

Raghuram and Mr Bansi Mehta both adopted the NAV method, Mr

Bansi Mehta in his report had taken into account certain discounts

whilst arriving at his valuation. Mr Samdani submitted that when the

shares of a company are valued on the NAV method on a "going

concern" basis, there is no question of giving any discounts whereas

if it is valued on a "liquidation basis", the only discounts that can be

given are workmen's dues, contingent liabilities and capital gains tax

liability. The real dispute therefore really revolves around the

discounts given by Bansi Mehta whilst arriving at his valuation, and

which have been accepted by the Arbitrator (with certain

modifications).

66. Before proceeding further, we will first briefly deal with the

judgements cited before us on the subject of valuation. In

Commissioner of Wealth Tax v/s Mahadeo Jalan and Mahabir

Prasad Jalan and others8, the question of valuation of shares held

8 (1973) 3 SCC 157

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by the assessee in a company under section 7 of the Wealth Tax Act,

1957 came up for consideration. The Supreme Court, after

discussing several different scenarios and referring to several

judgements, summed up its conclusion as under:-

"11. ................

An examination of the various aspects of valuation of shares in a limited company would lead us to the following conclusion:

(1) Where the shares in a public limited company are quoted on the stock exchange and there are dealings in

them, the price prevailing on the valuation date is the value of the shares.

(2) Where the shares are of a public limited company which are not quoted on a stock exchange or of a private limited company the value is determined by reference to the dividends if any reflecting the profit-earning capacity on a reasonable commercial basis. But where they do not

then the amount of yield on that basis will determine the value of the shares. In other words, the profits which the

company has been making and should be making will ordinarily determine the value, the dividend and earning method or yield method are not mutually exclusive; both should help in ascertaining the profit-earning capacity as

indicated above. If the results of the two methods differ, an intermediate figure may have to be computed by adjustment of unreasonable expenses and adopting a reasonable proportion of profits.

(3) In the case of a private limited company also where

the expenses are incurred out of all proportion to the Commercial venture, they will be added back to the profits of the company in computing the yield. In such companies the restriction on share transfers will also be taken into consideration as earlier indicated in arriving at a valuation.

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(4) Where the dividend yield and earning method break down by reason of the company's inability to earn profits

and declare dividends, if the set back is temporary then it is perhaps possible to take the estimate of the value of the shares before set back and discount it by a percentage

corresponding to the proportionate fall in the price of quoted shares of companies which have suffered similar reverses.

(5) Where the company is ripe for winding up then the break-up value method determines what would be realised by that process.

(6) As in Attorney-General of Ceylon v. Mackie (supra),

a valuation of reference to the assets would be justified where as in that case the fluctuations of profits and

uncertainty of the conditions at the date of the valuation prevented any reasonable estimation of prospective profits and dividends.

12. In setting out the above principles, we have not tried to lay down any hard and fast rule because ultimately the facts and circumstances of each case, the nature of the business, the prospects of profitability and such other considerations will have to be taken into account as will be applicable to the facts of each

case. But one thing is clear, the market value unless in

exceptional circumstances to which we have referred, cannot be determined on the hypotheses that because in a private limited company one holder can bring it into liquidation, it should be valued as on liquidation by the break-up method. The yield method is the generally applicable method while the break-up

method is the one resorted to in exceptional circumstances or where the company is ripe for liquidation but nonetheless is one of the methods."

(emphasis supplied)

67. What can be discerned from the aforesaid judgment is that

where the shares in a public company are quoted on the Stock

Exchange and there are dealings in them, the price prevailing on the

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valuation date is the value of the shares. Admittedly, MSL is a listed

Company whose shares are quoted on the Stock Exchange. Despite

this, both the valuers viz. Mr Raghuram as well as Mr Bansi Mehta

did not adopt this method of valuation because the average quoted

price of MSL shares in 2003 was approx Rs.65/- per share which did

not reflect its true value. It is for this reason that both the valuers

adopted the NAV method with one distinction viz. Mr Raghuram

valued it on a "going concern" basis without giving any discounts

whereas Mr Bansi Mehta valued it on a "liquidation basis" and for

the purposes of valuation, took into account certain discounts. In the

aforesaid judgment, the Supreme Court has also stated that where the

company is ripe for winding up, then the break up value method

would determine what would be realized by that process. The

Supreme Court has further stated that a valuation with reference to

the assets of a company would be justified where the fluctuation of

profits and uncertainty of the conditions on the date of the valuation,

prevented any reasonable estimation of prospective profits and

dividends. Therefore, the Supreme Court in the aforesaid judgment

has inter alia laid down that the NAV method can be adopted either

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where a company is ripe for winding up or where the fluctuation of

profits and uncertainty of conditions on the date of valuation prevent

any reasonable estimation of prospective profits and dividends.

68. The other leading decision on valuation is the judgment of the

Supreme Court in the case of Commissioner of Gift Tax, Bombay

v/s Smt Kusumben D. Mahadevia.9 After referring to the principles

laid down in Mahadeo Jalan's case, the Supreme Court in

Kusumben's case at paragraph 5 summed up as under :-

"5. The Revenue then pointed out that the principles of valuation set out by the Court in Mahadeo Jalan case [(1973) 3 SCC 157 :

1973 SCC (Tax) 103 : (1972) 86 ITR 621] were merely broad guide-lines and they did not obviate the necessity of considering

each case on its own facts and circumstances and in support of this contention the Revenue relied on the observation made by the Court that in setting out these principles, the Court had not "tried to lay down any hard and fast rule because ultimately the

facts and circumstances of each case, the nature of the business, the prospects of profitability and such other considerations will have to be taken into account as will be applicable to the facts of each case". Now it is true, as observed by the Court, that there cannot be any hard and fast rule in the matter of valuation of

shares in a limited company and ultimately the valuation must depend upon the facts and circumstances of each case, but that does not mean that there are no well-settled principles of valuation applicable in specific fact-situations and whenever a question of valuation of shares arises, the taxing authority is in an uncharted sea and it has to innovate new methods of valuation according to the facts and circumstances of each case. The 9 (1980) 2 SCC 238

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principles of valuation as formulated by the Court are clear and well-defined and it is only in deciding which particular principle

must be applied in a given situation that the facts and circumstances of the case become material. It is significant to note that immediately after making the above observation the

Court hastened to make it clear, as if in answer to a possible argument which might be advanced on behalf of the Revenue on the basis of that observation that the yield method is the generally applicable method while the break-up method is the

one resorted to in exceptional circumstances or where the company is ripe for liquidation."

(emphasis supplied)

69. The Supreme Court, in Kusumben's judgment, lays down that

though there cannot be any hard and fast rule in the matter of

valuation of shares in a limited company and ultimately the

valuation must depend upon the facts and circumstances of each

case, that does not mean that there are no well settled principles of

valuation applicable in specific fact situations. The principles of

valuation formulated by the Supreme Court are clear and well

defined and it is only in deciding which particular principle must be

applied in a given situation that the facts and circumstances of the

case become material.

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70. In the facts of the present case, as stated earlier, Mr Raghuram

as well as Mr Bansi Mehta both preferred to adopt the NAV method

(which is really speaking the break-up value method, or valuation

with reference to the assets of the company) subject to one

distinction, viz. that Mr Raghuram adopted the NAV method on a

"going concern" basis without taking into account any discounts,

whereas Mr Bansi Mehta adopted the NAV method on a "liquidation

basis" and took into account certain discounts for the purposes of

valuation. This was done by Mr. Bansi Mehta in view of the peculiar

circumstances of MSL's functioning and the fact that its operating

segment was not only making repeated losses over the years but that

admittedly it was incapable of making any profits. Both the aforesaid

reports were considered in detail by the Arbitrator. In doing so, the

Arbitrator firstly adverted to certain admitted facts which were as

follows :-

(i) The principal activity of MSL involved the assembly of

scooters for which completely knocked down kits were

received from the Appellant;

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(ii) The Appellant and the Respondent had entered into a

technical know-how agreement under which MSL was

assembling Bajaj Chetak Scooters;

(iii) Admittedly, under the provisions of the Protocol

Agreement, the management of MSL was with the

Appellant. Five persons on the Board of Directors were

to be nominated by the Respondent and four by the

Appellant. The Chairman and Managing Director of the

Appellant was to be the Chairman of MSL. Even under

the Articles of Association of MSL, several important

decisions to be taken by MSL, were subject to approval

of the Appellant. Moreover, the Chief Executive of MSL

was to be appointed by the Board out of a panel of

names suggested by the Appellant. Furthermore, key

management functions of MSL were virtually integrated

with the Appellant and MSL only had an assembly plant

by which it could not manufacture, but only assemble

scooters;

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(iv) As a result of customer preference for motorcycles, the

market for scooters had shown a declining trend,

adversely affecting the operations of MSL. MSL had

suffered operating losses for financial years 2001-02,

2002-03 and 2003-04;

(v) The market share of geared scooters with which MSL is

concerned, had gone down from 23.5% in 1999-2000 to

4.9% in 2003-04.

(vi) To achieve a break-even position, MSL required sales of

about 62,000 scooters per year whereas the business plan

for the period 2004-09 indicated production and sale of

Chetak scooters of only 12,000 units per year. This

clearly showed that the core business of MSL was not

even in a position to break-even, let alone make any

profits;

(vii) It was an admitted fact that the non-core business assets

of MSL consisting of unquoted and quoted investments

constituted 96.2% of the business assets of MSL.

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Though the main business of MSL was supposed to be

assembling scooters (the core business), the same

constituted only a negligible portion of 3.8% and

therefore the core business activity of MSL of

assembling scooters was insignificant.

71. After adverting to these admitted facts, the Arbitrator for the

reasons recorded in the impugned award discarded the second

valuation report of Mr Raghuram. On perusing the impugned award,

we find that the Arbitrator has taken into consideration all the

evidence that was led by the parties from paragraphs 54 to 74 of the

impugned award and thereafter discarded the valuation of Mr

Raghuram given in his second report. The Arbitrator in paragraph 75

of the arbitral award held as under :-

"75. It is interesting to note that the market value of MSL shares as on 2nd May 2003 (since 3rd May 2003 was Saturday and a

holiday) was Rs.62.35 per share as stated by Mr Raghuram in answer to Q. 145. However, in his second report at pages 30 to 32, Mr Raghuram talks of a control premium of 84.85 % and adds it, not to market value of Rs.62,35, but to the fair value of Rs.227/- as calculated by him. It is difficult to appreciate this inconsistent and contradictory approach. When confronted with this, he gives inconsistent and evasive answers as to what is

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meant by equity value and market value. Further, when he was asked about minimum alternate tax which WMDC will have to

pay on the gain that it would make on the sale of shares to BAL, he concedes that he was not sure of the position as to the liability to pay minimum alternate tax and/or capital gains tax since he

was not a tax expert. In view of the severe criticism leveled by Mr J.J. Bhatt and the glaring inconsistencies and contradictions in the evidence of Mr Raghuram, it is not possible for me to accept the evidence of Mr Raghuram for more than one reason. I may

mention some of them as under :

(i) the extent to which Mr Raghuram can be called an independent and objective expert is extremely doubtful. Without

meaning any disrespect to the professional, it is not possible to accept that he is an independent expert witness in the facts of the

present case.

(ii) he had already four different assignments in which, he

undoubtedly represented the interests of WMDC.

(a) he was a member of the State Govt. Committee to

advise the State Govt. on disinvestment of WMDC shares in MSL.

(b) he prepared the first report regarding valuation as on 30th June 2002.

(c) he advised WMDC regarding BAL's attempted purchase of MSL shares.

(d) he gave the second report regarding valuation as on 3rd May 2003.

(iii) In his evidence, Mr Raghuram admits that he was jointly

advising both WMDC and BAL in the 3 rd assignment mentioned above namely item (c) - advising WMDC regarding BAL's purchase of MSL shares.

(iv) There are glaring inconsistencies in the two reports of Mr Raghuram. The inconsistencies and contradictions are so glaring and so many that it is difficult to reconcile the two reports.

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(v) While in his first report, the witness has categorically

discarded the valuation of shares on the net asset value method on a going concern, in his second report, he has precisely

adopted the very same basis without any change in the information on the basis of which both the reports are made.

(vi) In his first report, he recommends the net asset value method

on liquidation basis. He has discarded the said liquidation basis in the second report.

(vii) In the first report, he has discarded the element of any

control premium being added to the market value of the shares and in fact, suggested a discount of 20 % to 40 % on the market

value. In his second report, he had added a control premium of 84.85% and that too not on the market value but on the fair value.

(viii) Both the reports of Mr Raghuram are based on the same memorandum of information supplied by MSL, save and except, for the balance sheet and annual report for 2002-03, which was

the only additional factor when the second report was prepared. This was obviously due to the intervening gap between the two

reports.

(ix) The concept of MSL being a going concern on the

assumption that the production of 62,000 scooter units per year was the breakeven requirement, is admittedly a non existent assumption since the production had been brought down to 12,000 scooter units per year.

(x) The question of payment of capital gain tax and minimum alternate tax has been conveniently glossed over by the witness in his second report and also in his unconvincing answers in the course of his cross-examination.

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(xi) The factor of VRS has been totally ignored by Mr Raghuram though admittedly, on a prior occasion, VRS was offered by MSL

in 2001-02.

These are some of the reasons, which I am mentioning for discarding the evidence of Mr Raghuram. In view of the same, it is not possible to accept the contentions raised by Mr Rohit Kapadia for accepting the said evidence."

72. After rejecting the report and evidence of Mr Raghuram, the

Arbitrator, from paragraph 76 onwards, analyzed the valuation

report and evidence led by Mr Bansi Mehta and came to the

conclusion that the evidence of Mr Bansi Mehta ought to be

accepted subject to two changes. In paragraphs 100 & 101 of the

arbitral award, the Arbitrator has held as under :-

"100. In the light of the above, I think interests of justice would

be met by fixing the rate on the basis of the calculations made by Mr Bansi Mehta in Appendix-8 and 9 to his report subject, however, to two changes. In Appendix 9, he has calculated discount of 60% on the six monthly average rate on National

Stock Exchange, namely discount of Rs.296.40 on the rate of Rs.494/- per share. This results in the value of a share being Rs.102.46. In Appendix-8, he has calculated 45% discount on the six monthly average rate on National Stock Exchange namely discount of Rs.222.30 on the rate of Rs.494/- per share. This

results in the value of a share being Rs.124.42. As reiterated above, Mr Raghuram himself has indicated a discount of 20% to 40% in his first report. In the facts of the case, I think that fixing 30 % discount would be just, fair and reasonable and would meet the ends of justice in Appendices 8 and 9, VRS payment has been taken at Rs.6 lacs per employee. I am of the opinion that it would be just, fair and reasonable to consider the VRS payment at Rs.5 lacs per employee. This would also be consistent with the limits

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under the Income Tax Law (though an employer may offer and pay more than Rs.5 lacs in a given case). In this view of the

matter, taking VRS payment at Rs.5 lacs per employee and fixing 30% discount on the six monthly average rate on National Stock Exchange, would result in the following changes in Appendices -

8 and 9.

"APPENDIX-8 (See para 6.3)

OS

Particulars Amount (Rs.in Lakhs)

----------------------------------------------------------------------------

Fixed Assets at

Realisable value 2,328.00

Current Assets 3512 Less: Current Liab. 4043

(531.00) ----------- 1,797.00 Less: Loan Fund 937.00

----------- 840.00

Less: VRS Payment 3,000.00 ----------- (A) (2,160.00) ===========

IS Particulars Amount (Rs.in Lakhs)

--------------------------------------------------------------------------

1. Investment in 33,87,036 BAL shares

6 monthly average rate on NSE 494.00 Less: 30% discounting 148.20

--------

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345.80 11,712.37

2. Other Treasury investments (at book value) 7,776.00

--------------

(B) 19,488.37 ========= Total (A+B) 17,328.37

No. of Shares 114.28

Value per Share 151.63

101. In view of the above, I declare that the rate at which

30,85,712 equity shares of MSL held by WMDC are to be valued as on 3rd May 2003 for the purpose of sale to BAL, should be Rs.151.63 per share."

(emphasis supplied)

73. The abbreviations "OS" stand for operating segment and "IS"

stand for investment segment. After going through the arbitral award

in great detail, we find that the learned Arbitrator has given cogent

and plausible reasons for rejecting Mr. Raghuram's second valuation

report and accepting the valuation report of Mr. Bansi Mehta. After

taking into consideration the totality of the facts of the case and the

peculiar circumstances of MSL's functioning and the fact that its

operating segment (core business) was not only making repeated

losses over the years, but admittedly it was incapable of making any

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profits, the Arbitrator accepted the valuation of Mr. Bansi Mehta,

which valued the shares of MSL on the NAV method on "liquidation

basis". It has come on record that the net profit of a company of this

magnitude for the financial year 2003, was merely Rs. 34 lacs after

adjusting the operating loss of Rs.5 Crores against the income

received from the investments. As stated earlier, the core business of

MSL (assembling scooters) was not only suffering repeated losses

over the years but was not even in a position to break-even, let alone

make any profits. We, therefore, find that the learned Arbitrator

committed no error in accepting Mr. Bansi Mehta's valuation report

which values the shares of MSL on the NAV method on a

"liquidation basis". The Arbitrator has accepted said report of Mr.

Bansi Mehta after carefully taking into consideration the evidence of

Mr. Bansi Mehta as well as his cross examination. Looking to the

reasoning and the analysis of the evidence done by the Arbitrator,

we do not think that the arbitral award suffers from any patent

illegality or perversity either entitling the learned single judge (under

section 34) or us (under section 37) to interfere with the same. We

therefore find that the learned Single Judge rightly declined to

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interfere with the arbitral award on this issue. We must also mention

here that the only distinction that was sought to be made by Mr

Samdani between the "going concern" valuation and the "liquidation

basis" valuation was that when the valuation was done on the NAV

method on a "going concern" basis, there was no question of taking

into account any discounts, whilst arriving at the valuation.

However, Mr Samdani was unable to make good this submission.

We fail to see on what basis this submission is made. To our mind

discounts are to be applied on the market value of the assets because

what has to be worked out is what a shareholder can expect to get

after all the assets of the Company are notionally sold and in abstract

theory the entire sale proceeds are distributed to the shareholders.

Whatever dues the Company would have to pay (statutory or

otherwise) whilst selling its assets would have to be taken into

account whilst arriving at the market value of the assets being sold.

This to our mind, would be the position whether you value the

Company on the NAV method on a "going concern" basis or on the

NAV method on a "liquidation basis". We therefore fail to see on

what basis it is submitted that when a Company is valued on the

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NAV method on a "going concern" basis, there is no question of any

discounts.

74. Mr Samdani next submitted that even if the NAV method on a

"liquidation basis" was to be accepted, even then the impugned

award was liable to be interfered with as Mr Bansi Mehta (in his

valuation report) had taken into account certain discounts which

were contrary to law. According to Mr Samdani, the only discounts

that could be taken into consideration were (a) workmen's

compensation; (b) contingent liabilities if any; and (c) liability

towards capital gains tax. He submitted that the discounts that were

taken into account by Mr Bansi Mehta and which were accepted by

the Arbitrator, were not in consonance with the discounts that were

permissible under a valuation on the NAV method on a "liquidation

basis". The first discount that was assailed by Mr. Samdani was with

reference to an amount of Rs.30 crores towards VRS (Voluntary

Retirement Scheme). The second discount which was assailed by Mr

Samdani was a discount of 30% on the sale value of BAL (Bajaj

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Auto Ltd) shares held by MSL. Mr Samdani also took exception to

the fact that Mr Bansi Mehta had valued the non-BAL

shares/investments on a book value basis and not on their market

value. He submitted that all these were errors apparent on the face of

the award and therefore the award was liable to be set aside under

section 34 of the Arbitration and Conciliation Act 1996.

75.

Before we deal with these points separately, it would be

apposite to refer to a judgment of the Supreme Court in the case of

G.L. Sultania and another v/s Securities and Exchange Board of

India and others.10 In the said judgment, the Supreme Court has

inter alia laid down the principle that valuation of shares is not only

a question of fact but also raises technical and complex issues which

may appropriately be left to the wisdom of experts, having regard to

the many imponderables which enter into the process of valuation of

shares. If the valuer adopts the method of valuation prescribed, or in

the absence of any prescribed method, adopts any recognised

method of valuation, his valuation cannot be assailed unless it is

10 (2007) 5 SCC 133

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shown that the valuation was made on a fundamentally erroneous

basis or that a patent mistake had been committed, or the valuer

adopted a demonstrably wrong approach or a fundamental error

going to the root of the matter. The Supreme Court further opined

that it must therefore follow that the weight-age to be given to the

different factors that go into the process of valuation must be left to

the wisdom, experience and knowledge of the experts in the field of

share valuation. Such being the method of share valuation involving

subjective and objective considerations, there is considerable scope

for difference of opinion even amongst experts. Even if the correct

principles are applied, different valuers may arrive at different

valuations. Each one of them may be right in their approach and yet

the valuations may differ. In a nutshell, mathematical precision and

exactitude are not the attributes of share valuation, for at best the

valuation arrived at by an expert is only his opinion as to what the

value of the share should be. These principles have been clearly laid

down in paragraphs 32 and 37 of the said judgment and read thus :-

"32. These decisions clearly lay down the principle that valuation of shares is not only a question of fact, but also raises technical and complex issues which may be appropriately left to

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the wisdom of the experts, having regard to the many imponderables which enter into the process of valuation of

shares. If the valuer adopts the method of valuation prescribed, or in the absence of any prescribed method, adopts any recognised method of valuation, his valuation cannot be assailed

unless it is shown that the valuation was made on a fundamentally erroneous basis, or that a patent mistake had been committed, or the valuer adopted a demonstrably wrong approach or a fundamental error going to the root of the matter.

Where a method of valuation is prescribed the valuation must be made by adopting scrupulously the method prescribed, taking into account all relevant factors which may be enumerated as relevant for arriving at the valuation.

37. It may also be observed that not any one of the parameters is in itself decisive. All the factors have to be considered and the

valuation arrived at. The Regulation itself does not prescribe the weightage to be assigned to different enumerated parameters. As noticed earlier, many imponderables enter into the exercise of

share valuation. It must therefore follow that the weightage to be given to the different factors that go into the process of valuation, must be left to the wisdom, experience and knowledge of the experts in the field of share valuation. Such being the method of share valuation which involves subjective and objective

considerations, there is considerable scope for difference of opinion even amongst experts. Even if the correct principles are

applied, different valuers may arrive at different valuations. Each one of them may be right, yet the valuations may differ. Mathematical precision and exactitude are not the attributes of share valuation, for at best the valuation arrived at by an expert

is only his opinion as to what the value of the share should be. No doubt the variation may not be very wide between two valuations prepared honestly by two valuers applying the correct approach and the correct principles, but some variation is unavoidable."

(emphasis supplied)

76. In the facts of the present case, we have already found that Mr

Bansi Mehta adopted a recognised method of valuation which was

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accepted by the Arbitrator and did not proceed on a fundamentally

erroneous basis so that the said valuation could be assailed. As stated

earlier, Mr Bansi Mehta chose to value the shares of MSL by

adopting the NAV method on a "liquidation basis" looking to the

peculiar functioning of MSL and the facts and circumstances of the

case. Furthermore, it is not as if Mr Bansi Mehta's valuation report

was treated as gospel truth and accepted by the Arbitrator. The

Arbitrator took into account the first and the second valuation

reports of Mr Raghuram as well as the valuation report of Mr Bansi

Mehta and after analyzing the detailed evidence led by the parties in

relation to the said reports, sought to accept Mr Bansi Mehta's report

subject to two changes as indicated earlier. Valuation being a

question of fact as laid down by the Supreme Court in G.L.

Sultania's case, coupled with the fact that the scope of interference

with an arbitral award under section 34 of the Act is in any case only

on certain limited parameters, we would be entitled to interfere with

the award only if it is demonstrated that by accepting the discounts

taken into consideration by Mr. Bansi Mehta in his valuation report,

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the Arbitrator committed any patent illegality or the award suffered

from the vice of perversity.

77. Having said this, we shall now deal with each of the discounts

independently. The first discount taken into account was an amount

of Rs.30 crores towards VRS (Voluntary Retirement Scheme).

Before we deal with this discount on merits, we must mention here

that as rightly submitted by Mr Chinoy, no such ground is taken in

section 34 petition and neither was the said contention urged before

the learned Single Judge. In fact the contentions raised before the

learned Single Judge have been listed at paragraph 13 of the

impugned order and there is no mention of this contention. This is

probably why we find no discussion on this issue in the impugned

judgment. We would therefore be justified in not allowing Mr

Samdani to urge this contention for the first time before us.

However, lest it be said that we have not dealt with the argument of

Mr Samdani, we proceed to deal with this contention.

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78. As stated earlier, the valuation of MSL shares was done on the

NAV method (also known as the break-up method) on a "liquidation

basis". This means that the assets of MSL would be broken up and

notionally sold. In doing so, disbursement and paying of the labour

dues would be a necessary condition for any notional sale of its plant

and fixed assets. Accordingly, expenditure incurred on such labour

dues / VRS would necessarily have to be adjusted / deducted from

the current market value of the assets. This is in fact the reasoning

given by by Mr Bansi Mehta in his cross-examination in answer to

Question no.27 as well as in answer to Question no.93. In answer to

Question no.27, Mr Bansi Mehta has stated as follows :-

"........... Likewise, I have considered that if the plant and machinery etc. are to be sold, then the workers have to be paid out and another adjustment that I have made is about an estimated sum that would be required for settling the matter with

workers. ......."

In answer to Question no.93, Mr Bansi Mehta has once again

stated thus:-

"For the purposes of valuation, we have to proceed on the basis that hard assets are to be encashed, which can only be done if the workforce is disbanded. ........."

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79. We therefore find credible evidence on record of Mr Bansi

Mehta as to why this adjustment / discount was required to be made

and/or taken into consideration.

80. In addition to the aforesaid, we may also note that Mr

Raghuram himself in his first report (as on 30 th June 2002),

considering the value of MSL shares on the NAV method on a

"liquidation basis", had also provided for an adjustment of

Rs.222.44 million towards VRS costs. This in fact has been taken

note of even by the Arbitrator in paragraph 60 of the arbitral award.

We therefore do not find any illegality or perversity in the arbitral

award when this adjustment towards VRS was taken into account for

the purpose of arriving at the valuation of MSL shares. This

argument of Mr Samdani will therefore have to be rejected.

81. The second discount which was assailed by Mr. Samdani was

the discount of 30% on the sale value of BAL shares held by MSL.

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He submitted that Mr. Bansi Mehta's report suggests a discount of

30% on the sale value of BAL shares on account of three heads:- (I)

Capital Gains, (II) Reserves and Surplus and (III) Dividend Tax. He

submitted that there was no question of any adjustment on account

of Reserves and Surplus as well as Dividend Tax when MSL was

valued on the NAV method on a "liquidation basis". He submitted

that in "liquidation" there is no question of any Reserves and

Surplus and dividend is paid to the shareholders only after all the

liabilities, workmen's dues and other statutory dues, if any, are paid.

He therefore submitted that by accepting the 30% discount on the

sale value of BAL shares the Arbitrator committed a fundamental

error and this was an error apparent on the face of award which

rendered it vulnerable to challenge.

82. In this regard, we must note what Mr. Bansi Mehta has stated

in his valuation report as well as his evidence before the Arbitrator.

Mr Bansi Mehta has pointed out that in valuing the shares of MSL

on the basis of the break-up value of its assets on a notional

liquidation, what has to be worked out is what a shareholder can

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expect to get if the investee company (in this case, MSL) were to

realize its investment, and in abstract theory distribute the entire

proceeds of such asset sale to its shareholders.

83. In this regard, it would be appropriate to note the contents of

paragraph 5.4 of the valuation report of Mr. Bansi Mehta and his

answer to Question No.147 in cross examination. Paragraph 5.4

reads thus:-

"5.4 On a conceptual basis, we have set out in Appendix-7 what a shareholder can expect to get if the Investee Company were to realize its investment and, in abstract theory, distributes the entire proceeds to the shareholders, from which it will be evident what a shareholder can hope to achieve is no more than 72% of

the gain. This to our view, reinforces what is stated earlier that the fair market value must allow for a discount of about 30%.

Accordingly, in our view, MSL's shareholding in BAL valued at the six-monthly average rate set out in Appendix-5 should be further discounted by no less than 30%."

(emphasis supplied)

Question No.147 and the answer thereto reads thus:-

"Q.147. Please see paragraph 5.3 of your Report. Could you explain the relevance of Appendices 6A, 6B and 6C ?

A. We call it the "CDE" approach. 'C' deals with Constraint 'D' deals with Distance and 'E' deals with Empirical Data. Some time 'C' is also understood as 'common sense', which tell us that

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a bird in hand is worth two in the bush. In other words, if I am offered that I will get two birds, which are not down on earth but

some where in the bush, it would be unrealistic to expect that I would consider the prospect of having access to two birds as equivalent to one bird that I may have to part with on earth. The

second thing about "C" is constraint. Constraint is what exists in a Company is not necessarily what its owner will hope to receive. To illustrate this case, if MSL were to sell BAL's shares on May 3, 2003, they will have to pay capital gains tax, which

roughly was about 10.5% then. Besides, the companies Act requires that before declaring any dividend, at least 10% of the profit has to be transferred to reserves and only the balance can be distributed as dividend. Even while declaring a dividend, the Company has first to pay 12.5% plus surcharge as the dividend

tax. I have myself given this conceptual or common sense calculation in Appendix 7, which shows that the "process loss" is

around 28%. Now, that is as far as Constraint. Distance is an economic concept in which there is universal recognition about the time value of money. In a simple terms, a Rupee one year

hence cannot be equivalent to a Rupee today. It would be less than a Rupee. Also, the distance causes factors which may be considered as giving rise to uncertainties like statutory changes, etc. These two factors, what Lord Keynes said "liquidity

preference and fear of uncertainties" require, that what is in the bush needs to be discounted. Finally, let me deal with 'E', i.e.

Empirical Examples. You referred to Appendices 6A, 6B and 6C. Now, these three Appendices are working that focus on the 'E' aspect. Let me explain, since you have asked me to explain. In Appendix 6A, we have dealt with two investment Companies, namely TATA Investment and Industrial Investment Trust. These

are two very large companies. We tried to work out as as to whether the market value of the shares of these two Companies reflect the appreciation in the value of the Company's shareholding in other Companies. According to our workings, the discount in the case of TATA Investment is 82.58% of the

market value of shares in other Companies. Similar percentage for IIT is 91.41%. Let me now go to Appendix 6B, which deals with the workings for TISCO. As is known, TISCO holds very significant investments in other Companies. On a similar exercise, we find that for TISCO, the market places a discount of 56% on the market value of the shareholdings of TISCO in other Companies. Appendix 6C by some coincidence, deals with BAL itself, BAL also holds a very substantial shareholding in another

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Company called 'Bajaj Tempo Ltd.'. On a similar exercise, we are somewhat surprised that nothing is reflected in BAL's share

values quoted on the Stock Exchange which can be related to the appreciation in respect of its shareholding in Bajaj Tempo Ltd. It is after this CDE analysis, that we have stated in paragraph

6.1 that one discount factor that suggests itself is 45%. However, as you will observe, we have also worked the value if the discount was 60% which is closer to TISCO's case."

84. The Arbitrator, after taking note of all the material on record,

held that if MSL was to sell the BAL shares held by it, MSL would

have to pay 10.5% towards capital gains tax, would have to transfer

10% of the receipt to Reserves and would have to pay 12.5% plus

surcharge as the dividend tax. It is on this basis, and after carefully

considering the evidence of Mr. Bansi Mehta, that the Arbitrator has

discounted sale value of BAL shares by 30%. We also find that if

the shares of MSL were required to be valued on the basis of the

NAV method on a notional sale / liquidation basis, the value amount

realized by a notional sale of its assets, would necessarily have to be

discounted/reduced by the costs which would have to be statutorily

incurred on such notional sale.

85. Whilst taking this view, we are supported by a judgment of the

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Single Judge of the Delhi High Court in the case of Kidarsons

Industries Pvt Ltd V/s Hansa Industries Pvt Ltd. 11 The Delhi High

Court, after referring to the judgement of the Supreme Court in

Mahadeo Jalan's case, held as under:-

"37. The valuers have for purposes of the report taken into consideration the value of the assets of the company as on 1st July, 1988. The valuers have further determined the liabilities of the company whether actual or notional. The fixed assets of the

company have been taken at market value as against their book value which was much lower. Similarly market value of the stock

in trade has been taken into consideration as against the book value which was much lower. Therefore, the valuers have taken into consideration the liability on account of capital gains tax (notional). The valuers have also taken into consideration the

cost of realisation of market value i.e. expenses in the event of sale or transfer of assets. These items are inherent in market value and cannot be ignored whenever one talks of market value of assets for purpose of valuation of shares of a company.

38. The main objection on behalf of the objector in this connection is regarding deduction on account of capital gains

tax. According to him there is no sale or purchase of any fixed asset or immovable properties of the company. Therefore, the question of payment of capital gains tax does not arise. According to the learned counsel no deduction ought to have

been made on this account from the market value of the properties. It is true that there is no actual sale or transfer of the immovable assets of the company involved, yet the question remains when the market value of the fixed assets is taken into consideration as against their book value, whether the concept of

capital gains tax automatically comes into play or not. According to the learned counsel for the objector since there is no sale or transfer of the fixed assets of the company, there is no occasion to take notional liability on account of capital gains tax into consideration. In support of this submission he has made reference to provisions under the Income Tax Act, particularly sections 45 and 46 of the said Act and has cited certain 11 ILR (1993) 2 DELHI 109.

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judgments to the effect that in case of distribution of assets of a company in liquidation to the shareholders, there is no sale or

transfer of the assets of the company and, therefore, capital gains tax does not become payable by the company. These judgments are CIT v. RM. Amin, 106 ITR 368(10) CIT v. Madurai Mills Co.

Ltd., 89 ITR 45(11) and Madurai Mills Co. Ltd. v. CIT 74 ITR

623.(12)

39. The objector has approached the question of capital gains fax from the angle of distribution of assets of a company in

liquidation to its members. He has not considered or adverted to the other aspect of the matter which is as stated before, when market value of the assets is considered as against their book value, does the liability on account of capital gains tax gets

automatically involved or not? I do not consider necessary to discuss the aforesaid authorities because I am in agreement with

the objector that no actual sale or transfer of the assets of the company is involved. However, I find myself unable to ignore the question of capital gains tax getting impregnated in the market

value of the property the moment the same as taken into consideration as against the book value of the assets of the company. Counsel for the plaintiff has strongly urged that the moment market value of any asset is taken into consideration, the cost of realisation of the market value and the tax liability get

attracted and the true market value of the asset will be ascertainable only after deductions on this account. According to

the learned counsel these things are an essential element of the market value. The moment one talks of market value of a property these elements cannot be left out or ignored. In other words they are impregnated in the market value. To

illustrate, the moment one talks of sale or transfer of a lease hold plot, the charges payable to the superior lessor for obtaining its permission to transfer are automatically understood as payable. The market value of such a property cannot be considered de hors these charges. The use of the words "market value" would

be understood to mean the price plus or minus, as the case may be, such charges. Thus in the context of market value of the properties under consideration, liabilities on account of capital gains tax and cost of realisation of the market value have to be provided for. The market value will be minus such liabilities. The value of assets of the company has been raised from book value to market value. When the objector wants to have the benefit of market value of assets being taken into consideration, he must

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provide for the basic elements of market value, i.e. the elements which form part of the market value.

40. In "A Study on Share Valuation" a booklet published by the Institute of Chartered Accountants of India while dealing with

the subject of Valuation of Assets, it has been said:--

"In these times of changing price levels, it is unrealistic to take book values of different assets of a company -- particularly fixed assets--if the values have changed

materially since the date of their acquisition. In such cases, therefore, realisable value of the assets should be ascertained, if necessary, with the help of expert valuers. Normally, such value of assets would be taken after taking into account the cost of realisation, as well as the capital

gains and other taxes which the company may have to pay on such realisation."

Therefore, even when there is no actual sale or transfer of assets of a company, for purposes of arriving at market value of its

assets such notional deduction have to be made.

41. For all these reasons I find nothing wrong in the deduction made by the valuers on account of liability towards capital gains tax and realisation charges of the assets, though notional. All the

objections in this connection are rejected."

(emphasis supplied)

86. Looking to the valuation report and the evidence of Mr. Bansi

Mehta, as well as the detailed reasoning of the Arbitrator on this

aspect, we are unable to agree with Mr. Samdani that the Arbitrator

committed any fundamental error whilst accepting the discount of

30% on the sale value of BAL shares. We do not find any perversity

or patent illegality or any error apparent on the face of the award that

makes it vulnerable to challenge on this aspect. This argument of

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Mr. Samdani would therefore also have to be rejected.

87. Mr. Samdani next submitted that the arbitral award is in

violation of Section 28(2) of the Arbitration and Conciliation Act,

1996, as the Arbitrator was not empowered under the Protocol

Agreement to base his award on any equitable considerations and/or

on what he thought was just, fair and reasonable. He submitted that

looking at paragraph 100 of the arbitral award, it was clear that

fixing the 30% discount on the sale value of BAL shares was done

on the basis that it would be "just, fair and reasonable and would

meet the ends of justice.............", in the opinion of the Arbitrator.

He submitted that the Arbitrator had to decide the dispute as per the

contract between the parties and there was no question of any just

and equitable considerations being taken into account whilst fixing

the 30% discount on the sale value of BAL shares.

88. Section 28(2) of the Arbitration and Conciliation Act, 1996

reads as under:-

"28. Rules applicable to substance of dispute -

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(1) ...........

(2) The arbitral tribunal shall decide ex aequo et bono or as amiable compositeur only if the parties have expressly

authorised it to do so.

(3) ........."

89. On reading Section 28(2), it is ex-facie apparent that unless

expressly authorised by the parties, the Arbitral Tribunal cannot

decide any matter "ex aequo et bono" or as "amiable compositeur".

It would therefore follow that the Arbitral Tribunal cannot decide the

matter on the notions of fair and equitable principles alone. It is

bound by the contract between the parties.

90. However, in the facts of the present case, we find the reliance

placed on the aforesaid provisions as wholly misplaced. As noted

earlier, Mr. Bansi Mehta in his evidence clearly stipulated in

paragraph 5.4 of his report that the fair market value of BAL shares

must allow for a discount of about 30% and that the BAL shares

held by MSL valued at the six monthly average rate set out in

Appendix - 5 of his valuation report should be further discounted by

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no less than the 30%. It is on the basis of this evidence that the

Arbitrator had applied the discount of 30% to the value of BAL

shares. This figure of 30% is directly traceable to the evidence of

Mr. Bansi Mehta, who has in categorical terms stated that the

discount should be no less than the 30%. The observations of the

Arbitrator in paragraph 100 of the arbitral award fixing the 30%

discount on the ground that it should be just, fair and reasonable and

would meet the ends of justice, cannot be read in isolation or be

utilized to suggest that the Arbitrator was applying his own notion of

what was fair, equitable and just. We, therefore, do not find any

substance in this argument.

91. However, whilst we are dealing with paragraph 100 of the

arbitral award, it would be important to mention that in one area,

there is an error of fact on the part of the Arbitrator where he refers

to the first report of Raghuram as having indicated a discount of

30% to 40%. Admittedly, the discount that was referred to in the

first report of Raghuram dealt with the discount on MSL's shares and

not BAL shares. On this aspect, the Arbitrator has clearly made a

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mistake. However, we do not think that the mistake is such that

would vitiate the entire arbitral award. As discussed earlier, there

was a wealth of evidence before the Arbitrator and which was

accepted by him, to demonstrate that a discount of 30% on the sale

value of BAL shares was sustainable, both on a conceptual as well as

an empirical basis. On this aspect, it would be apposite to refer to

the judgment of the Supreme Court in the case of Madhya Pradesh

Housing Board V/s Progressive Writers and Publishers 12 and more

particularly paragraphs 43 and 44 thereof which read as under:-

"43. It is true that the arbitrator took judicial note of certain facts which were in the realm of conjectures and surmises to conclude that the second agreement dated 4-5-1977 was entered

into under political pressure and the depositor was compelled to execute the said agreement under such pressure. But the question

is what is the effect of the same. In our considered opinion even this surmise and conjecture is ignored and not taken into consideration, the award of the arbitrator continues to be valid and binding on the parties.

44. The findings recorded by the arbitrator that the specific performance of the second agreement is barred by limitation; that the agreement is itself unconscionable; that the agreement ceases to subsist after the 1980 agreement and was not revived

are not based on the sole ground that the second agreement came to be executed under political pressure. There is enough material available on record to arrive at such conclusion as the one arrived at by the arbitrator. All the said conclusions were not arrived at solely on the basis of conjectures and surmises."

12 (2009) 5 SCC 678

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(emphasis supplied)

We, therefore, do not find that this mistake committed by the

Arbitrator would have the effect of vitiating the arbitral award.

92. Mr Samdani next submitted that Mr. Bansi Mehta in his

valuation report had valued the non-BAL shares / investments on

their book value as opposed to their market value. According to Mr.

Samdani, this too was a fundamental error in the valuation report of

Mr. Bansi Mehta, and which was accepted by the Arbitrator whilst

determining the valuation of the share price of MSL.

93. On this point, Mr. Bansi Mehta was cross examined by the

Respondent herein. It would be pertinent to note his answers to

Question Nos.121, 128 and 129 which read as under:-

"121. Q. Would it be correct to say that the valuation of IS done by you is on a break up method with adjustments?

A. I cannot give a one word answer of yes or no. If you will see Appendix 8 of my report, you will find that I have segregated MSL's holding of shares in BAL, which I have valued keeping in view the

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average market value of BAL's shares. As far as other assets comprised in IS are concerned, I have

taken the book value as at March 31, 2003 since I believe that there may not be any material difference between the market value and the

carrying value of these pure financial assets. However, I would also like to invite your attention to Appendix 8 in which as far as MSL's holding in BAL is concerned, I have taken a certain

percentage of the full market value. I thought that because of the negative valuation of the operating segment, any realization of IS attributable to non BAL share holding would be eaten up within the company so as not to attract the timing and tax

consequences that would apply to amounts that are in the nature of surplus.

128. Q. In the 2nd sentence in paragraph 5.1 of your report, you have stated "Adopting the book value as the

realisable value, the value of that component would correspond to such book value". What exactly do you mean by this?

A. This is a normal practice for assets that are in the nature of liquid instruments since they are

presumed to have been acquired to earn a recurring rather than the maturity return.

129. Q. Please see the Appendix 4 of your report. The mutual fund units mentioned in your appendix,

would they be liquid instruments presumed to have been acquired to earn a recurring rather than a maturity return?

A. Yes. If you will please see Appendix 4, the mutual

fund units appear to be based on deriving recurring income. However, I would also like to invite your attention to the fact that the total market value at March 31, 2003 of all quoted investments which includes mutual fund units there is an appreciation of around Rs.90 Crores. If you will please refer to the earlier page of Appendix 4, MSL was holding 3.38 million shares of BAL. If you will please refer

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to Appendix 5, you will note that the average market rate as of March 31, 2003 was Rs. 481.5

per share. Prima facie, therefore, almost the entire appreciation may have arisen on account of MSL's shareholding in BAL, which we have considered

separately after considering the average market rate for BAL's shares."

(emphasis supplied)

94. Mr. Bansi Mehta, therefore, has stated his reasons for taking

the book value of the non-BAL shares/investments as opposed to

their market value. He has further stated that he has adopted this

approach since he believed that there may not be any material

difference between the market value and the book value of these

pure financial assets. He has further stated that prima facie almost

the entire appreciation may have arisen on account of MSL's share

holding in BAL which were considered separately in the valuation

report and have been valued on their market value. In answer to

Question No.164 also, Mr. Bansi Mehta has stated that the non-BAL

investments can be encashed easily and his own data indicated that

there was not much appreciation in these investments. As there was

no material appreciation on these investments, Mr. Bansi Mehta

thought that it was a fit case to value the non-BAL investments on

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their book value as opposed to their market value. Mr. Bansi Mehta,

in answer to Question No.173, has explained that if he had valued

these investments on the market value basis, he would have had to

apply a discount to that value as was done in the case of BAL shares

and in such an eventuality the market value of these investments

would have been lower than their book value. This is the

justification given by Mr. Bansi Mehta for valuing the non-BAL

shares/investments on their book value as opposed to their market

value.

95. On going through the evidence of Mr. Bansi Mehta as well as

the reasoning of the Arbitrator, we do not find any fundamental error

in the approach of Mr. Bansi Mehta in valuing the non-BAL

shares/investments on a book value basis as opposed to their market

value. There is cogent justification with evidence for valuing the

non-BAL shares/investments on their book value as opposed to their

market value. We also find that the learned Single Judge has

followed the same reasoning in paragraph 31 of the impugned order

and we fully agree with the reasoning contained therein. We,

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therefore, are unable to agree with the submissions of Mr. Samdani

that because the non-BAL shares/investments were valued at their

book value, the same was a fundamental error in the approach of

valuation that opened up the arbitral award to challenge. This

argument of Mr. Samdani would also therefore have to be rejected.

96. That brings us to the last point urged by Mr. Samdani on the

issue of control premium. Mr. Samdani submitted that Mr.

Raghuram in his second valuation report had added 84.85% to the

fair value of MSL's shares as on 03.05.2003 towards control

premium, and accordingly, valued MSL's shares at Rs.420.50 per

share. On the other hand, Mr. Bansi Mehta as well as the Arbitrator

ignored the aspect of control premium. Mr. Samdani submitted that

the fair value of the Respondent's share holding in MSL had to be

determined by taking into consideration that the Appellant, by

purchasing the Respondent's shareholding in MSL, effectively

gained full control of MSL (51%) and MSL would become a

subsidiary of the Appellant. He, therefore, submitted that the

Respondent's 27% stake in MSL was of special interest to the

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Appellant. This according to Mr. Samdani, would certainly have a

bearing on the price of MSL's shares being sold to the Appellant,

and therefore, the Arbitrator was in great error in coming to the

conclusion that control premium was not to be taken into account in

the facts of the present case.

97. On the aspect of control premium, we note that this issue has

been discussed in great detail by the Arbitrator in paragraphs 59, 65,

74 and 75 of the arbitral award. The Arbitrator, in paragraph 59 of

the arbitral award has referred to the first valuation report of Mr

Raghuram (as on 30th June, 2002) where he himself concluded that

though the sale of the Respondent's 27% shareholding to the

Appellant would give the Appellant 51% shareholding in MSL, the

nature of the shareholder's agreement between the Appellant and the

Respondent had already bestowed effective management control to

the Appellant without boardroom control. Mr Raghuram therefore

himself concluded that the peculiar nature of the shareholders

agreement between the Appellant and the Respondent "would imply

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conclusion of Mr Raghuram in the said first valuation report was that

taking into consideration the peculiar nature of the shareholders

agreement between the Appellant and the Respondent would result

in a market discount being offered to an alternative potential buyer

to compensate for the lack of effective control. The concluding

portion of paragraph 4.7 of Mr Raghuram's first report is as under :-

"These aspects of the shareholders agreement would result in a market discount being offered to an alternative potential buyer to

compensate the incumbent for the lack of effective control. The market discount as suggested by empirical studies is normally 20% - 40 % of the market value and can be decided only through

negotiations between WMDCL and BAL. We have accordingly not factored the control premium in our analysis."

98. Having opined in his first valuation report that instead of any

control premium being applied, the circumstances called for a

discount being given on account of the fact that the Appellant was

already having management control, Mr Raghuram in his second

report did a complete turn around and concluded that in the same

circumstances as stated above, a control premium to the extent of

84.85 % would be applicable and that too on the fair value of share

and not the market value thereof, which at that time was

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approximately Rs.65/- per share. The Arbitrator considered all these

factors (especially in paragraphs 59, 65, 70, 74 and 75 of the award)

and concluded that there was no basis for the inclusion / addition of

any control premium. We find that the Arbitrator has considered all

the relevant evidence placed before him and then come to the

conclusion that the rationale for control premium would, therefore,

not exist in the facts of this case. We do not think that the findings of

the Arbitrator on this aspect suffer from any perversity or patent

illegality, entitling us to interfere with the same under section 34 of

the Arbitration and Conciliation Act, 1996.

99. For the reasons stated earlier in this judgment, we do not find

any merit in the Cross Objections. We must mention here that under

the arbitral award, the Arbitrator directed that the 30,85,712 equity

shares of MSL held by the Respondent herein, are to be valued for

the purpose of sale to the Appellant at Rs.151.63/- per share. As per

the said direction, the amount that would have to be paid by the

Appellant to the Respondent for the purchase of the said 30,85,712

equity shares would come to Rs.46,78,86,510.56. In the peculiar

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facts and circumstances of the case, and considering the fact that this

amount has admittedly not been paid till date by the Appellant to the

Respondent herein, we think that the interests of justice would be

served, if this amount is paid by the Appellant to the Respondent

together with simple interest @ 18% per annum from the date of the

Award (14th January, 2006) till payment.

100. In conclusion, we hold that Appeal No.153 of 2010 is allowed

and the impugned order dated 15th February 2010 is set aside insofar

as it set aside the arbitral award on the ground that Clause 7 of the

Protocol Agreement was in the nature of a restriction on free

transferability of the shares and was therefore contrary to section

111A of the Companies Act, 1956. The Cross Objections (L) No.13

of 2010 filed by the Respondent have no merit and therefore stand

dismissed. The Appellant, for the purchase of the 30,85,712 equity

shares of MSL, shall pay to the Respondent a sum of Rs.

46,78,86,510.56/- together with simple interest @ 18% per annum

from 14th January, 2006 till payment. Appeal No.153 of 2010 and

Cross Objections (L) No.13 of 2010 are disposed of in the aforesaid

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terms. In the facts and circumstances of the case, we leave the

parties to bear their own costs.

CHIEF JUSTICE

(B. P. COLABAWALLA, J.)

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