Western Maharashtra Development Corporation Limited vs Bajaj Auto Limited

Shivaji Nagar, Pune-411 005. ...Petitioner. Vs. Bajaj Auto Limited, having its registered office at

Bombay Pune Road, Akurdi, Pune-411 035 and its office at Bajaj Bhavan, ig 11 Floor, 26, Nariman Point, Mumbai-400 021. ...Respondent. ....

Mr. Rohit Kapadia, Sr. Advocate with Mr.Pravin Samdani, Sr. Advocate and Ms.Bindi Dave, Mr.Kunal Vajani and Mr.Ankit Virmani i/b.M/s.Wadia Ghandy & Co. for the Petitioner. Mr. Aspi Chinoy, Sr.Advocate with Mr.J.J. Bhat, Sr.Advocate,

Mr.Snehal Shah, Mr.Shiraj Dhru, Mrs.Lata Dhru and Ms.Ranju Yadav i/b. Dhru & Co. for the Respondent.

..... CORAM : DR.D.Y.CHANDRACHUD, J.

February 15, 2010.

JUDGMENT :

The challenge in these proceedings under Section 34 of

the Arbitration and Conciliation Act, 1996 is to an arbitral award

dated 14th January 2006 of a sole Arbitrator, Mr.Justice A.V.Savant.

The Protocol Agreement :

::: Downloaded on - 09/06/2013 15:36:43 ::: 2 2. On 2nd October 1974, a Protocol Agreement was entered

into between the Petitioner and the Respondent pursuant to which

Maharashtra Scooters Ltd. (MSL) was incorporated and registered

under the provisions of the Companies' Act, 1956. MSL is a Public

Company and its shares are listed on the Bombay Stock Exchange

and the National Stock Exchange. The Petitioner is an undertaking

of the government of Maharashtra. In accordance with the terms

of the Protocol Agreement, the Petitioner holds 27% of

shareholding of MSL while the Respondent continues to hold

24%. The balance 49% is held by the public. The recitals to the

agreement state that the Petitioner was desirous of availing of the

experience and know how of the Respondent in the manufacture

of two wheeler scooters, for the installation of plant and machinery

and the establishment of a Scooter Project. The Respondent

agreed to participate in the equity capital of a new manufacturing

Company - MSL. The initial authorized capital of MSL was Rs.200

lakhs consisting of Rs.150 lakhs in equity shares and Rs.50 lakhs in

cumulative redeemable preference shares. By the agreement, it

was agreed that the shareholding of the Petitioner, the Respondent

and of the public shall be in the proportion set out earlier. Neither

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party to the agreement could allow the structure of MSL, the

number of shares or the rights, privileges, restrictions or

qualifications of any class of shares to be altered or any further

issue of capital to be made without the specific prior consent of the

other party. Any further issue of capital was to be made in a

manner that would ensure that the participation by the party in the

total issued equity share capital shall remain in the same

proportion. Neither party was entitled to increase or reduce

directly or indirectly its proportion of the shareholding in the

equity share capital of MSL or to deal with its shareholding so as

to lose its absolute control over voting rights. The intent was that

the parties to the agreement shall, between them, control at least

51% of the equity capital of MSL.

Clause 7 :

3. Clause 7 of the agreement upon which the dispute in the

present case centers, was to the following effect:

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

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the parties or decided upon by arbitration. The party desiring to part with or transfer its shares or any part

thereof shall give to the other party a written notice of such intention specifying the number of shares and the

rate at which it is willing to sell the same and if the other party within 30 days of the receipt of such notice, agrees, to such proposal for purchase of such shares, the party giving the notice shall be bound to sell and transfer such

shares to the other party at the rate specified in such notice. If the other party is willing to purchase the shares but considers the rate proposed to be too high or unacceptable, it shall, within 30 days from the receipt of

the notice, give written intimation to the party giving notice of its intention to purchase the shares and the

question of rate shall be referred to arbitration of a sole arbitrator if agreed to by both the parties or two arbitrators one to be appointed by each party in

accordance with the provisions of the Indian Arbitration act. If the party receiving a notice within 30 days of its receipt, fails to accept the proposal for purchase of the shares, the party giving the notice will be free to sell the

shares to any other party but only at a rate not less than the rate specified in such notice."

4. The agreement stipulated that of the seven signatories to

the Memorandum and Articles of Association, four would be

nominated by the Petitioner and three by the Respondent. The

Board of Directors was to consist of nine Directors, of which five

were to be nominees of the Petitioner and four of the Respondent.

The appointment of the Chairman of the Board had to be made

from the names suggested by the Respondent. Though the

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management of MSL was to vest in the Board, the day-to-day work

of the Company was to be carried out by the Chief Executive, to be

appointed by the Board of MSL. The selection of the Chief

Executive was to be made from a panel to be suggested by the

Respondent. The parties undertook to ensure that MSL would

enter into an agreement with the Respondent for obtaining

technical know how.

The 'offer' and 'acceptance':

5. Between 1986 and 2003, the Respondent had been

requesting the Petitioner to divest its shareholding in MSL in its

favour. By a letter dated 9th April 2003, the Petitioner offered to

sell its shares to the Respondent, at a price of Rs.232.20 per share.

By a reply dated 3rd May 2003, the Respondent confirmed its

interest in buying the shares, but stated that the price that was

offered by the Petitioner, was not acceptable. The Respondent

requested that a meeting be called of a High Level Committee to

carry forward the negotiations in order to reach a fair and amicable

settlement. On 7th May 2003, the Petitioner addressed a letter to

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the Respondent stating that the Respondent was required to

respond to an offer within one month of the receipt of the letter

and called upon the Respondent to confirm whether this

constituted a letter in response to a buy back by the Respondent.

If not, the Respondent was called upon to ensure that the requisite

response was submitted to the Petitioner by the appointed date. By

its response dated 10th May 2003, the Respondent confirmed that

its letter dated 3rd May 2003, was its response under Clause 7 of

the Protocol Agreement to the Petitioner's offer dated 9th April

2003. The Respondent confirmed that by its letter, it has

confirmed its intention to purchase the shares offered, but stated

that the price offered was not acceptable to the Respondent. The

Respondent once again renewed its request for a meeting of a

High Level Committee to negotiate upon and resolve the price. On

6th June 2003, the Respondent made a counter offer on the price of

Rs.75/- per equity share of MSL stating that it reflected a premium

of 5.6% over the prevailing market price as on 6th June 2003. By a

letter dated 31st July 2003, the Respondent stated that in the event

that the price offered of Rs.75/- per share was not acceptable to the

Petitioner, the next step in terms of clause 7 of the Protocol

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Agreement was to initiate the arbitral process.

Reference to Arbitration :

6. On 23rd September 2003, the Principal Secretary in the

Industries, Energy and Labour Department of the State

Government, forwarded a set of names of former Judges of this

Court for appointment of an Arbitrator. On 27th October 2003, the

Petitioner addressed a letter to Mr.Justice A.V.Savant, stating that

under the Protocol Agreement, the Petitioner had to make the first

offer to the Respondent and in turn, the Respondent had to accept

or reject the offer made by the Petitioner for divesting its holding

in MSL. The letter recorded that "this process has been completed

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

shares, as per the agreement, the parties involved have to proceed

to appoint a sole Arbitrator for the purpose". Accordingly,

Mr.Justice A.V.Savant was informed that the Government of

Maharashtra had suggested his appointment as a sole Arbitrator,

which had been agreed to, by the Respondent and by the

Petitioner. Correspondence ensued between the parties. On 29th

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December 2003, a joint reference to arbitration was made by the

Petitioner and by the Respondent to Mr.Justice A.V.Savant. The

terms of reference inter alia were as follows:

"1. The appointment of "Sole Arbitrator" is made jointly by BAL and WMDC, in terms of the Clause no.7 of

the "Protocol Agreement" dated 2 October 1974, between WMDC and BAL, the 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."

Arbitral Proceedings :

7. At the first meeting before the Arbitrator on 10th January

2004, directions were issued for filing pleadings. On 23rd January

2004, an application was filed by the Petitioner that the

Respondent should be treated as the claimant to the arbitral

proceedings and should be directed to file its statement of claim.

::: Downloaded on - 09/06/2013 15:36:43 ::: 9 At the second meeting before the Arbitrator, directions were issued

to the parties to file their statements regarding the valuation of

shares and the relevant date for valuation. The Petitioner by its

letter dated 3rd February 2004, sought a meeting with the

Respondent, on the ground that certain issues "need to be

clarified", while drafting the statement of claim. On 5th February

2004, the Petitioner, in a letter to the Respondent, claimed that

there was an agreement between the parties that the valuation of

the shares should be, as on the last quarter of 2003 and suggested

that a specific date, as opposed to the period of the last quarter,

should be agreed. The Respondent by its letter dated 13th February

2004 denied that there was any such agreement on the relevant

date for valuation of shares, as suggested and set up a case that the

relevant date for valuation would be 30th June 2002. The

Petitioner by its letter dated 13th February 2004, denied that there

was any agreement, by which the cut off date was to be 30 th June

2002. The Respondent in its letter dated 17th February 2004, once

again reiterated that the parties had agreed to 30th June 2002 as

the relevant date for valuation.

::: Downloaded on - 09/06/2013 15:36:43 ::: 10 8. At the third meeting before the Arbitrator on 6th March

2004, it was agreed that parties would urge their submissions on

the preliminary issue as to what should be the relevant date for

valuation.

The challenge to jurisdiction :

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

Petitioner, questioning the jurisdiction of the Arbitrator. The

contention of the Petitioner was that (i) The Protocol Agreement

dated 2nd October 1994 was illegal and void on the ground that (a)

the agreement was a forward contract prohibited by the Securities

Contract Regulation Act; and (b) The agreement contained

restrictions on the transferability of the shareholding of MSL which

were violative of the provisions of Section 111A read with Section

9 of the Companies' Act, 1956 and hence, void; (ii) The joint

reference dated 29th December 2003, was void inter alia on the

ground that it proceeded on the premise that a concluded contract

existed between the Petitioner and the Respondent though as a

matter of fact, no contract had been arrived at since neither of the

parties accepted the offer, nor had they agreed to a cut off date for

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valuation of shares. The Respondent filed a reply, opposing the

application and inter alia contended that by its letter dated 3rd May

2003, the offer of the Petitioner had been formally accepted, but

had clarified that the rate was not acceptable. The Respondent

contended that in fact and in law, an offer was made by the

Petitioner for the sale of its 27% stake and the Respondent had

accepted the offer to purchase the holding of the Petitioner. There

was, it was urged, a concluded contract with the rate to be

ascertained through the arbitral process. Hence, according to the

Respondent, a contract for the sale of the shareholding of the

Petitioner had been concluded and what remained to be

determined, was the rate at which the shares would be valued, in

terms of clause 7 of the Protocol Agreement.

Arbitral Meetings on (i) preliminary objection and (ii) date for valuation:

10. The Arbitrator ruled on the preliminary objection to his

jurisdiction, on 21st July 2004. While rejecting the application, the

Arbitrator stated that the reasons for the rejection would follow

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and form part of the award. On 10th August 2004, an application

was filed by the Petitioner seeking relief to the effect that the

Arbitral Tribunal should "determine and declare the date of 29th

December 2003, being the date of the joint reference made" by the

parties "as the relevant date for the purpose of valuation of the said

shares proposed to be sold" by the Petitioner to the Respondent.

By its reply, the Respondent submitted that the relevant date for

valuation should be, 30th June 2002 or, in the alternative, assuming

that there was no such agreement between the parties on that date,

the relevant date for valuation should be 3rd May 2003, which was

the date on which, the Respondent had accepted the offer of the

Petitioner, in terms of clause 7 of the Protocol Agreement. On 31st

August 2004, the Arbitrator held that the relevant date for

valuation of shares would be 3rd May 2003, when the contract was

concluded.

11. The Arbitrator has, in the course of the arbitral award

delivered on 29th December 2005, furnished reasons for accepting

3rd May 2003 as the date for valuation of shares. The Arbitrator

noted that on 9th April 2003, the Petitioner made a specific offer to

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the Respondent in terms of clause 7 of the Protocol Agreement and

in terms of the decision of the Government of Maharashtra to sell

its equity shareholding in MSL to the Respondent at Rs.232.20 per

share. The price of Rs.232.20 was based on a valuation report

submitted by Crisil Advisory Services on 3rd September 2002. In

response to the offer of the Petitioner, the Respondent conveyed its

acceptance on 3rd May 2003, clarifying at the same time that the

price was not acceptable. The Respondent's subsequent letter

dated 10th May 2003, once again confirmed that the earlier letter

of 3rd May 2003, was in response to the offer in terms of clause 7 of

the Protocol Agreement and that by its letter, the Respondent had

confirmed its intention to accept the offer though the price was not

acceptable. The Arbitrator held that the correspondence

exchanged between the parties, between 9th April and 6th June

2003, left no manner of doubt that there was a concluded contract

under which the Petitioner was to sell its shares to the Respondent

and the Respondent was to purchase those shares and the contract

was concluded on 3rd May 2003. The Arbitrator held

consequently, the relevant date for the purpose of valuation would

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

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concluded. At this stage, it may also be necessary to note that in

the Part-I Award, the Arbitrator referred to the provisions of

Sections 9 and 10 of the Sale of Goods Act and relied upon two

English judgments and upon a judgment of the Supreme Court in

support of his conclusion that the date of valuation would be the

date of the acceptance of the offer to purchase.

Award:

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

Arbitrator declared that the rate at which 30,85,712 equity shares

of MSL, held by the Petitioner are to be valued as on 3rd May 2003,

for the purposes of sale to the Respondent, is Rs.151.63 per share.

Challenge to the Award

Submissions of Petitioner:

13. In assailing the award under Section 34 of the

Arbitration and Conciliation Act, 1996, Counsel appearing on

behalf of the Petitioner urged the following submissions:

-(i) The Arbitrator exceeded his jurisdiction in deciding

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the date for valuation of the shares of MSL, proposed to be

transferred by the Petitioner to the Respondent; (ii) MSL held 3.4%

of the equity capital of Bajaj Auto Ltd. (the Respondent), Bajaj Auto

Finance Ltd. and Bajaj Hindustan Ltd. MSL also held investment in

fully paid bonds and mutual funds. In valuing the shares of MSL,

the Arbitrator applied a discount of 30% on the value of the shares

held by MSL in the Respondent ("the BAL shares"). The Arbitrator

neither adjudicated upon, nor decided why a discount should be

applied to the BAL shares. The Petitioner was selling 27% stake in

MSL to the Respondent as a result of which the Respondent would

obtain a majority holding in MSL and would also as a result obtain

3.4% of the equity capital in BAL. Hence, the value of the BAL

shares held by MSL cannot be subjected to a discount, particularly

since the Respondent had a special interest in the acquisition of a

27% stake in MSL; (iii) Neither the Arbitrator, nor the valuer

whose evidence is accepted by the Arbitrator, have decided why

only the book value of the non-BAL quoted investments, be taken

and not the market value; (iv) No adjudication or determination

has been rendered by the Arbitrator at all on valuation. The

Arbitrator merely stated that fixing of a 30% discount would be

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just, fair and reasonable and would meet the ends of justice. This

constitutes an error apparent on the face of the record, since the

Arbitrator has proceeded on a basis which is not permitted by

section 28(2); (v) The invocation of a rationale of a 20 to 40%

discount as a reason by the Arbitrator to apply a 30% discount

discloses a total non-application of mind or perversity, on the part

of the Arbitrator, considering the context in which the discount of

20 to 40% came to be stated. The fact that 20 to 40% of the

discounted price of MSL shares is translated to a percentage

discount in the holding of BAL shares is such as to shock the

conscience of the Court; (vi) The application of a discount to the

BAL holding and the use of only the book value in the non-BAL

holding affects the rights of the Petitioner and causes a direct

financial loss and injury. The value of the discount applied is Rs.50

crores in the shares of BAL alone; (vii) The evidence of Mr.Bansi

Mehta was liable to be considered irrelevant, non-germane and

extraneous to the reference after his answer to questions 14 to 16

in the course of his evidence. The Arbitrator has to decide a civil

dispute on a balance of probabilities and he must of necessity

decide on some evidence. If the evidence of one side is discarded

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and the evidence of the other side is admittedly not under Clause 7

of the Protocol Agreement, on which he is called upon to make a

valuation, the Arbitrator should have come to the conclusion that

on the evidence, he could not value at all; (viii) The fixation of the

date for valuation by the Arbitrator is beyond the scope of the

submission; and (ix) The Protocol Agreement is illegal and any

determination under the agreement is void. The effect of the

Protocol Agreement is to create a right and preemption in MSL

which is a listed Company. The Protocol Agreement is

incorporated in the Articles of Association of MSL. The shares of a

Public Company are declared by Section 111A of the Companies'

Act, 1956 to be freely transferable. The Articles of Association

must yield to the principle of free transferability embodied in

Section 111A and the preemptive right is inoperable. On this

defence, there was virtually no adjudication by the Arbitrator.

Submissions of Respondent :

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

Respondent that (i) In pursuance of the formal offer made by the

Petitioner under clause 7 of the Protocol Agreement to divest itself

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of its 27% holding in MSL and to transfer it to the Respondent, the

Respondent accepted the offer by its letter dated 3rd May 2003.

This was clarified by the Respondent by a letter dated 10 th May

2003, by which the Respondent stated that the earlier letter was in

terms of clause 7 of the Protocol Agreement but the price offered

by the Petitioner was not acceptable. In fact, the letter addressed

by the Petitioner to the Arbitrator on 27th October 2003 clearly

establishes that the process had been completed though there was

no agreement on the value of the shares to be sold. The joint

reference by the parties to the Arbitrator on 29th December 2003

postulates that a contract for the sale of the Petitioner's holding in

MSL to the Respondent existed though there was a dispute about

the rate. The Minutes of the Meeting before the Arbitrator show

that the date for valuation was regarded as an ingredient of the

rate and there was never any dispute about the date of the

contract. The tenor of the correspondence which was exchanged

between the parties also shows that all the letters related to the

date of valuation and there was no dispute about the date of the

contract. Until the reference was made to arbitration, the common

premise was that the agreement was arrived at, with reference to

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the offer dated 9th April 2003, on 3rd May 2003. This was the

position until January 2004. The Arbitrator directed the pleadings

to be filed on the valuation of the shares and the relevant date. It

was only in the application of 6th April 2004 that the Petitioner

sought to raise a dispute on whether a concluded contract has

come into existence. Hence, the question as regards the date of

valuation was raised not in the context of the contract not being

concluded, but as an ingredient of the rate and it was only in the

application of 6th April 2004 that the Petitioner sought to link the

date of valuation to the submission that the contract had not been

concluded; (ii) In so far as the question of valuation is concerned,

the only ground which has been raised in the Arbitration Petition

(Ground AA) relates to the discounting of the value of BAL shares

held by MSL; (iii) Considering the scope of Section 34 of the

Arbitration and Conciliation Act, 1996, an appellate review of an

arbitral award is not permissible in law. The decision of the

Supreme Court in ONGC Ltd. Vs. Saw Pipes Ltd.,1 does not

contemplate an appellate review or suggest a reappraisal of

evidence; (iv) The arbitral award furnishes a valid basis from the

1 (2003) 5 SCC 705

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evidence for applying a discount of 30% in the facts of the case.

The evidence of Mr.Bansi Mehta suggested that a discount

between 28 to 40% would have to be allowed on a conceptual basis

whereas on an empirical comparison based on market

capitalization, a discount between 56 to 91% would have to be

taken. The Arbitrator has held that the discount should be no less

than 30% in the facts of this case. The reference by the Arbitrator

to the report of Mr.Raghuram indicating a 20 to 40 % discount is

erroneous, because this was a reference to the valuation of MSL

shares. But merely because one ground which is relied upon by the

Arbitrator suffers from an error of fact, would not detract from the

validity of the award. There was a wealth of evidence before the

Arbitrator in support of the finding that the discount of 30% is

valid. The evidence is referred to in the arbitral award itself and

the award can be sustained on that basis. The realizable value of

an asset is less than the market value in a liquidation valuation; (v)

As regards the book value being taken of the non-BAL holding, the

evidence shows that there was no appreciation in the value of such

holding. If the market value was taken, it would have to be

discounted, which would then result in a figure even lower than

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the book value; (vi) The Arbitrator accepted the liquidation basis of

valuation from the report of Mr.Bansi Mehta and applied a

discount. There is both an adjudication and determination by the

Arbitrator. Clause 7 of the Protocol Agreement does not provide

any particular method of valuation. Mr.Bansi Mehta, therefore,

stated in his cross-examination that the classical method has been

followed. Clause 7 provides for a fixation of the rate at which the

shares would be sold, which lies in the domain of the Arbitrator. In

any event, this relates to an appreciation of the evidence; (vii)

Parties made a specific reference of a question of law by the

application dated 6th April 2004, which was responded to and

decided. The question as regards the legality of Clause 7 of the

Protocol Agreement vis-a-vis Section 111A of the Companies' Act,

1956, was not in the original reference. Yet, the question was

specifically referred to the Arbitrator during the pendency of the

reference. The decision of the Arbitrator was invited as a

jurisdictional issue, before the Arbitrator considered the merits of

the dispute. Hence, the determination of the Arbitrator is final and

cannot be enquired into; (viii) In any event, the Arbitrator has

followed the decision of the Supreme Court in

::: Downloaded on - 09/06/2013 15:36:43 ::: 22 M.S.Madhusoodhanan vs. Kerala Kaumudi Pvt.Ltd.2 9. The

restriction in the present case, imposed by Clause 7 of the Protocol

Agreement is valid, because it is not one that binds all

shareholders, but which binds two shareholders in a specified

contingency. The restriction is contained in the Articles of

Association. Section 111A of the Companies' Act, 1956 does not

prohibit agreements entered into between specific shareholders

regarding specific shares, particularly when incorporated in the

Articles of Association.

15. The challenge to the arbitral award can now be taken up

for consideration.

Did the Arbitrator exceed his jurisdiction :

16. The submission of the Petitioner is that the Arbitrator

acted in excess of his jurisdiction in deciding the date with

reference to which the valuation of the shares had to be

determined.

2 2003 Vol.117 Company Cases 19

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17. On 9th April 2003, the Petitioner addressed a letter to the

Respondent by which, it proposed to divest its shareholding of

30,85,712 equity shares in MSL at an offered price of Rs.232.20 per

equity share to the Respondent. The Petitioner stated that it was

making an offer in accordance with the provisions of Clause 7 of

the Protocol Agreement and in view of the decision of the

Government of Maharashtra. The Respondent in its reply dated 3rd

May 2003, confirmed its interest in buying shares offered, but

recorded that the price was not acceptable. The response of the

Respondent was in pursuance of Clause 7 of the Protocol

Agreement. By a further letter dated 10th May 2003, the

Respondent confirmed that its earlier response of 3rd May 2003

was to the offer made by the Petitioner on 9th April 2003 and was

in terms of clause 7 of the Protocol Agreement. The Respondent

stated that it has confirmed its intention to purchase the shares

offered, but the price offered was not acceptable.

18. The contention of the Petitioner is that the letter of the

Respondent dated 3rd May 2003, was not an unqualified acceptance

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since a meeting was sought for negotiation to explore a settlement.

In dealing with this submission, it is to be noted that on 31st July

2003, the Respondent sought the initiation of the arbitral process,

in the event that its offer of a price of Rs.75 per share was not

acceptable. The arbitral process was initiated and on 27th October

2003, the Petitioner addressed a letter to the Arbitrator, recording

that under the Protocol Agreement, the Petitioner had to first make

an offer to the Respondent and in turn, the Respondent had to

accept or reject that offer. This process, the Petitioner recorded,

"has been completed and since no agreement has been reached on

the value of the shares, as per the agreement, the parties involved

have to appoint a sole Arbitrator for the purpose". Following this

letter, a joint reference to arbitration was made on 29th December

2003. The terms of reference contain an express statement of fact

that the Respondent had expressed its willingness to buy the stake

held by the Petitioner in MSL and that the Petitioner indicated its

desire to sell its shareholding in MSL. However, what remained in

dispute was the price per share and hence, in accordance with

Clause 7 of the Protocol Agreement, the "question of rate" for the

purchase by the Respondent of the equity shares held by the

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Petitioner in MSL, was being referred. What emerges from the

material on record, therefore, is, that in terms of Clause 7 of the

Protocol Agreement, the Petitioner had made an offer to sell its

shares in MSL, to the Respondent. The Respondent by its letters

dated 3rd May and again 10th May 2003, accepted the offer to

purchase the shares, but indicated that the price suggested by the

Petitioner was not acceptable. Parties at that stage and, as would

be noted, even later were ad idem on the fact that the contract for

the sale of shares, stood concluded by the acceptance of the offer

made by the Petitioner. Clause 7 of the Protocol Agreement

contemplates that if the party, to whom an offer is made, "is willing

to purchase the shares, but considers the rate proposed, to be too

high or unacceptable", it shall, within thirty days from the receipt

of the notice, furnish a written intimation to the offerer of the

intention to purchase shares and the question as regards the rate at

which the shares are to be sold shall be referred to arbitration. In

the present case, the Petitioner by its letter to the Arbitrator dated

27th October 2003, clearly stated that the process of making of the

offer and its acceptance, had been completed and there was no

agreement on the value at which the shares would be sold. It is in

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this context, that the joint reference to the Arbitrator proceeded on

the basis that a concluded contract for the sale of shares did exist

but there was a dispute about the rate.

19. The Arbitrator, during the course of the second meeting

held on 27th January 2004, called upon the parties to file their

statements "regarding the valuation of shares and the relevant date

for valuation". The date for valuation was regarded as an

ingredient of the rate, at which the shares would be sold. There

was no dispute about the fact that the contract for the sale of the

shares had been concluded. Consequently, until the reference to

arbitration was made, parties proceeded on the basis that the

agreement for the sale of the shares, was founded on the letters

dated 9th April 2003 and 3rd /10th May 2003. This position held the

field until January 2004. The Arbitrator directed the parties to file

pleadings on the valuation of shares and the relevant date for

valuation. The correspondence exchanged between the parties in

February 2004, shows that the dispute was on the date of

valuation. It was for the first time, in the application filed by the

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

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Petitioner sought to question as to whether a concluded contract

had been arrived at. This was an obvious afterthought and was a

clear deviation from the manner in which the Petitioner had

understood the course of dealings between the parties. The

reference to the date of valuation was introduced by the Arbitrator,

when there was no dispute about the date of the contract or about

the existence of a concluded contract. When the Arbitrator raised

the question as regards the date of valuation, this was only as an

ingredient of the fixation of the rate and the premise of the

reference to arbitration was the existence of a concluded contract.

The Arbitrator was not deciding when the contract was concluded

or whether it was concluded. The Arbitrator has, as a matter of

fact, ascertained the date of valuation as an ingredient of the

fixation of the rate at which the shares held by the Petitioner would

be sold to the Respondent. The Arbitrator has held that the

relevant date of valuation would be 3rd May 2003, which was the

date on which a concluded contract was arrived at between the

parties. In Part-I of his Award, the Arbitrator has held that the date

of valuation would be the date on which the offer to purchase was

accepted. In holding thus, the Arbitrator has not transgressed his

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jurisdiction. The challenge to the arbitral award on this ground

must fail.

Scope of challenge under Section 34 of the Arbitration and

Conciliation Act, 1996:

Section 34 of the Arbitration and Conciliation Act, 1996,

20.

defines the parameters of a recourse to a Court against an abitral

award. This recourse is, by an application for setting aside the

award, in accordance with the provisions of sub-sections (2) and

(3) of the provision. For this case, the focus on the scope of

judicial intervention is on sub clause (iv) of clause (a) and on sub

clause (ii) of clause (b) of sub-section (2) of Section 34. Under

these provisions, an arbitral award may be set aside by the Court,

only if (i) The arbitral award deals with a dispute not

contemplated by or not falling within the terms of the submission

to arbitration or if it contains decisions on matters beyond the

scope of the submission to arbitration; and (ii) If the Court finds

that the arbitral award is in conflict with the public policy of India.

::: Downloaded on - 09/06/2013 15:36:43 ::: 29 21. Section 28(1)(a) mandates that the arbitral Tribunal

must decide the dispute in accordance with the substantive law in

India. Under sub-Section (3), the Tribunal has to decide the

dispute, in accordance with the terms of the contract and after

taking into consideration, the usage of the trade applicable to the

transaction. In ONGC vs. Saw Pipes (supra) the Supreme Court

held that if an award is in contravention of the provisions of the

Act, it is subject to judicial intervention and can be set aside. If the

arbitral Tribunal does not follow the mandatory procedure under

the Act, it would act in excess of its jurisdiction and the award

would be patently illegal. The ground for interference is elucidated

thus, by the Supreme Court:

"15. The result is - if the award is contrary to the substantive provisions of law or the provisions of the Act or against the terms of the contract, it would be patently

illegal, which could be interfered under Section 34. However, such failure of procedure should be patent affecting the rights of the parties."

The illegality, as the Supreme Court noted, must be such as "must

go to the root of the matter" for "if the illegality is of trivial nature,

it cannot be held that the award is against public policy". The

decision in Saw Pipes lays down that before an award can be set

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aside, it must be (i) Contrary to the fundamental policy of Indian

Law; or (ii) Contrary to the interest of India; or (iii) Contrary to

Justice or morality; or (iv) Patently illegal. An award which is so

unfair and unreasonable, that it shocks the conscience of the Court,

would be liable to be set aside because, then it would be contrary

to public policy. The Supreme Court, however, emphasized that if

the arbitral Tribunal commits a "mere error of fact or law in

reaching its conclusion on a disputed question referred to it for

adjudication", the Court would have no jurisdiction to interfere

with the award. This would depend upon the reference that was

made to the Arbitrator. If there is a general reference to the

Tribunal for deciding the dispute and if an award is based on an

erroneous and illegal proposition, the Court would interfere. In the

case of a reasoned award, the Court can set aside the award if on

the face of the award, there is an erroneous proposition of law or

on its application. However, if a specific question of law is

submitted to the Arbitrator an erroneous decision on a point of law

does not make the award bad, unless the Court is satisfied that the

Arbitrator has proceeded illegally. The decision of the Supreme

Court in Saw Pipes (supra) does not contemplate an appellate

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review of an arbitral award or a reappraisal of the evidence. The

Court cannot substitute a conclusion on evidence, which appears

to the Court to be just and proper for the conclusion that is arrived

at, by the arbitral forum. The emphasis in the judgment in Saw

Pipes, is that judicial intervention can be warranted where the

arbitral Tribunal has not followed the mandatory procedure

prescribed by Sections 24, 28 or 31(3), which affects the rights of

the parties or where the award is contrary to the substantive

provisions of law; to the provisions of the Act or to the terms of the

contract. The emphasis is on a patent illegality. Not every error of

law or fact makes an award subject to judicial intervention.

22. The subsequent judgment of the Supreme Court in Delhi

Development Authority vs. R.S.Sharma & Co.,3 makes a

reference to the earlier judgments of the Court including the

judgment in Hindustan Zinc Ltd. vs. Friends Coal

Carbibusatuib,4 which in turn has followed Saw Pipes (supra).

In the judgment in Delhi Development Authority (supra), the

Bench of two Learned Judges of the Supreme Court has

3 (2008) 13 SCC 80 4 (2006) 4 SCC 445

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summarized the principle for judicial intervention in arbitral

awards, as they emerge from the decided cases, thus:

"21. From the above decisions, the following principles emerge:

(a) An award, which is

(i) contrary to substantive provisions of law; or

(ii) the provisions of the Arbitration and Conciliation Act, 1996;

or

(iii) against the terms of the respective contract; or

(iv) patently illegal; or

(v) Prejudicial to the rights of the parties;

is open to interference by the Court under Section 34(2) of the Act.

(b) The award could be set aside if it is contrary to:

(a) fundamental policy of Indian law; or

(b) the interest of India; or

(c) justice or morality.

(c) The award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the court.

(d) It is open to the court to consider whether the award is against the specific terms of contract and if so, interfere with it on the ground that it is patently illegal and opposed to the public policy of India."

At this stage, it would, however, be necessary to note that an

arbitral award prejudicial to the rights of the parties is not an

independent head of challenge as such, and this is evident both

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from the decision in Saw Pipes and in the paraphrasing of the

principles laid down in that judgment in Hindustan Zinc. In

paragraph 13 of the judgment in Saw Pipes, the Supreme Court

addressed the issue as to whether an award could be set aside if the

arbitral Tribunal has not followed the mandatory procedure

prescribed under Sections 24, 28 or 31(3), which affects the rights

of parties. In Hindustan Zinc, the Supreme Court held that an

award contrary to the substantive provisions of law or the

provisions of the Act or the terms of the contract, would be

patently illegal and if it affects the rights of the parties would be

open to interference of the Court under Section 31(2).

23. The question as to whether a ground for the interference

of the Court has been established in the facts of this case, must now

be considered, in terms of the law laid down by the Supreme

Court.

The question of valuation :

24. MSL has an Operating Section and an Investment

Section. MSL's Assembly Plant was set up under technical know

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how from the Respondent. The assembly, the Court is informed,

was of the Chetak Scooters of Bajaj. The Investment Section of

MSL has holdings in the Bajaj Group of Companies and others.

MSL held 3.4% of the equity capital of the Respondent ("the BAL

shares"), Bajaj Hindustan Ltd. and Bajaj Auto Finance Ltd. The

non-Bajaj holding was in fully paid up bonds and Mutual Funds.

25.

Principally, two submissions have been urged on behalf

of the Petitioner. Firstly, the Arbitrator has selected a particular

method of valuation. Whether a valuation on a liquidation basis

could at all be adopted for a Company which has a going concern,

was sought to be placed in issue and it was urged that MSL is not a

Company which is unable to pay its debts. The Respondent had a

special interest in the acquisition of the stake held by the Petitioner

in MSL. By the acquisition of the equity holding of the Petitioner,

the Respondent would acquire a majority holding in MSL, besides

the acquisition of 3.4% of the holding in the BAL shares. The

second aspect relates to the discounting of the holding of BAL

shares.

::: Downloaded on - 09/06/2013 15:36:43 ::: 35 26. The Arbitrator culled out the principles for valuation of

shares from the judgments of the Supreme Court in Commissioner

of Wealth Tax vs. Mahadeo Jalan,5 and Commissioner of Gift

Tax vs. Kusumben D.Mahadevia.6 The judgment in Mahadeo

Jalan lays down that leaving aside a distress sale, the factors which

are likely to affect the value of shares are: (i) The profit earning

capacity of the Company; (ii)The capacity of the Company to

maintain those profits or a reasonable return for capital invested;

(iii) The prospects for capitalization of its earning by declaring

bonus shares and in a case of a financially sound Company, the

prospects for the issuance of a rights issue where existing

shareholders can obtain shares for a price less than the market

value, increasing the yield on investment. The Supreme Court,

after enunciating various methods of valuation of shares, namely,

(i) yield or profit earning method; (ii) the market value method if

profit is certain; and (iii) liquidity if profit is uncertain, laid down

the principles which emerge. In so far as it is relevant to this case,

the propositions (1), (4) and (5) are as follows:

"1) Where the shares in a public limited company are quoted on the stock exchange and there are dealings 5 (1972) 86 ITR 621 6 (1980) 122 ITR 38

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in them, the price prevailing on the valuation date is the value of the shares.

-4) Where the dividend yield and earning method

break down by reason of the company's inability to earn profits and declare dividends, if the 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

realized by that process."

The Arbitrator adverted to certain admitted facts, these being as

follows: (i) The principal activity of MSL involved the assembly of

scooters for which completely knocked down kits were received

from the Respondent. The Respondent and MSL had entered into

a technical know how agreement. MSL was assembling Bajaj

Chetak Scooters; (ii) Admittedly, the management of MSL was with

the Respondent. Five persons on the Board of Directors were to be

nominated by the Petitioner and four by the Respondent. The

Chairman and Managing Director of the Respondent was to be the

Chairman of MSL. Under Clause 154 of the Articles of Association,

several important decisions to be taken by MSL, were subject to the

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approval of the Respondent. Moreover, the Chief Executive of MSL

was to be appointed by the Board, out of a panel of names

suggested by the Respondent. Key management functions of MSL

were virtually integrated with the Respondent. MSL only has an

assembly plant by which it cannot manufacture, but can only

assemble scooters.; (iii) As a result of customer preference for

motorcycles, the market for scooters had shown a declining trend,

adversely affecting the operations of MSL. MSL had suffered

operating losses for financial years 2001-02, 2002-03 and 2003-04;

(iv) 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; (v) MSL requires sales of about 62,000 scooters per year

to achieve a break-even position, whereas the business plan for the

period 2004-09 indicates production and sale of Chetak Scooters of

only 12,000 units per year. The Arbitrator noted, while dealing

with the question of control premium, that even without the sale

of its 27% stake by the Petitioner, the Respondent already had

effective managerial control over MSL without boardroom control.

The rationale for a control premium would, therefore, not exist in

the facts of this case. Moreover, it is an admitted fact that the non-

::: Downloaded on - 09/06/2013 15:36:43 ::: 38 core business assets of MSL which consist of unquoted investments

and quoted investments, constitute 96.2% of the business assets of

MSL. Though the main business of MSL was supposed to be in the

operating segment, namely, in the core business assets, that

constituted only a negligible operation, namely, 3.8%. Hence, the

core business activity of MSL of assembling scooters was

insignificant. Having regard to these circumstances, the Arbitrator

declined to accept the theory propounded by Mr.Raghuram, the

witness for the Petitioner, that a control premium must be

accounted for in the facts of this case. The valuation made by

Mr.Raghuram was not accepted by the Arbitrator for valid reasons

which have been noted above. The reasons on the basis of which

the testimony of Mr.Raghuram and his valuation are discarded, are

inter alia contained in paragraph 75 of the award. In fairness, it

may be recorded here that Learned Senior Counsel appearing on

behalf of the Petitioner has not pressed that aspect of the matter.

27. Mr.Bansi Mehta was examined as an expert on valuation

by the Respondent. The Arbitrator noted that Mr. Bansi

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Mehta was cross-examined on behalf of the Petitioner, in order to

question his justification for adopting the net asset value on a

liquidation basis. The award notes that this method was also

recommended by the witness of the Petitioner in his first report.

Mr.Bansi Mehta worked out two different valuations: (i) A

valuation of Rs.125 per share was worked out by applying a 45%

discount on the six monthly average value on the National Stock

Exchange (NSE); and (ii) A value of Rs.102 per share was worked

out on the basis of a 60% discount on a six monthly average taken

from NSE. The Arbitrator considered it fit to apply a 30% discount

"in the facts of the case" and considered that this would be "just,

fair and reasonable and would meet the ends of justice". The six

monthly average on the NSE for 33.87 lakh BAL shares was Rs.494

per share on which a 30% discount was applied. Paragraph 100 of

the award which reads thus:

"In the light of the above, I think interests of justice

would be met by fixing the rate on the basis of the calculations made by Mr.Bansi Mehta in 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

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on the six monthly average rate on National Stock Exchange namely discount of Rs.222.30 on the rate of

Rs.494/- per share. This results in the value of a share being Rs.124.42. As reiterated above, Mr.Raghuram

himself has indicated a discount of 20% to 40% in his first report. In the facts of the case, I think that fixing 30% discount would be just, fair and reasonable and would meet the ends of justice."

28. The Award on valuation is questioned on the ground

that there is a violation of the provisions of Section 28(2) of the

Arbitration and Conciliation Act, 1996. Counsel for the Petitioner

submitted that Mr.Bansi Mehta applied a discount between 45% to

60% and arrived at the conclusion that the price of a share would

vary between Rs.102 to Rs.124. The Arbitrator took a discount of

30% in arriving at a valuation of Rs.151.63 per share on the

ground that he considered it just, fair and reasonable and to meet

the ends of justice. The submission is that the Arbitrator decided

what he thought is fair, just and equitable and this is not

permissible under Section 28(2) of the Act which mandates that

the decision has to be reasoned. The Arbitrator also furnished the

reason that Mr.Raghuram, the witness for the Petitioner, had

"himself ... indicated a discount of 20% to 40% in his first report".

::: Downloaded on - 09/06/2013 15:36:43 ::: 41 It was urged that the discount which Mr.Raghuram suggested in

his evidence was on the shares of MSL, whereas the Arbitrator

applied this to the valuation of BAL shares. It was urged that the

award, therefore, shows no reasoning at all and betrays a non-

application of mind. The factual basis on which the Arbitrator

concluded that a discount of 30% should be applied, was incorrect.

As a result of this process, it was submitted that the discount on

BAL shares of Rs.50.12 crores was wrongly granted by the

Arbitrator.

29. The Arbitrator, in paragraphs 80 and 81 of the Award,

considered the report of Mr.Bansi Mehta. The Arbitrator noted

that if a conceptual basis is adopted, the value of the investments

has to be discounted between 20 to 40%. On the other hand, on

an empirical comparison of data on actual valuations, based on

market capitalization, a discount of between 56 to 91% is required

to be adopted. In Appendix-6A of his report, Mr.Bansi Mehta

furnished details of his working in respect of (i) Tata Investments;

and (ii) Industrial Investment Trust, where the discounts were

82.85% and 91.4%. In Appendix-6B, where the example of TISCO

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Ltd. was considered, the discount applied was 56%. Appendix-6C

dealt with Bajaj Auto Ltd. Consequently, an empirical comparison

suggested that the discount which is to be applied while valuing

the shares held by an operating company, in other entities, would

vary between 56 to 91%. On the other hand, in Appendix-7,

Mr.Bansi Mehta applied a conceptual or common sense basis,

which showed that the discount on the shareholding held in other

Companies, would be approximately 28-40%. Mr.Bansi Mehta, in

his answer to Question 147 in the course of his cross-examination

explained the basis on which the discount had been calculated,

firstly, taking an empirical comparison and secondly, on a

conceptual analysis. While explaining paragraph 5.3 of his report,

Mr.Bansi Mehta makes a reference to what is described as the "C,

D, E" approache: The acronym stands for 'constraint', 'distance' and

'empirical data'. The Arbitrator has made a reference in his Award

to the answer to Question 147 and to paragraph 5.4 of the report

of Mr.Bansi Mehta, which reads as follows :

"5.4 On a conceptual basis, we have set out in 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 that what a

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shareholder can hope to achieve is no more than 72% of the gain. This, in our view, reinforces what is stated

earlier that the fair market value must allow for a discount of about 30%. Accordingly, in our view, MSL's

shareholding in BAL valued at the six-monthly average rate set out in Appendix-5 should be further discounted by no less than 30%." (emphasis supplied).

Mr.Bansi Mehta's evidence, which has been relied upon by the

Arbitrator, is, therefore, clear in stipulating that the holding of

MSL in the Respondent, valued on a six monthly average rate,

should be discounted "by no less than 30%". The underlying

principle is that, the realizable value of an asset is less than the

market value in a liquidation valuation. The Arbitrator adopted a

discount of 30% on the valuation of BAL shares. The submission

that the Arbitrator has done so, without any reason and in the

absence of any basis, is incorrect. The evidence of Mr.Bansi

Mehta, which the Arbitrator accepts, contains a detailed

elaboration of the rationale for making a discount on the valuation

of BAL shares. Mr.Mehta considered discounting both from an

empirical and a conceptual perspective. Empirically, the valuation

of the BAL shares would be susceptible to a discount of between 56

to 91%, whereas, conceptually, the discount would be, no less than

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30%. The Arbitrator in adopting the discount of 30%, cannot,

therefore, be faulted. The figure of 30% is traceable to the

evidence of Mr.Bansi Mehta who states that the discount should be

no less than 30%. The observations of the Arbitrator in paragraph

100 of the Award, also refer to Appendices 8 and 9, where

Mr.Bansi Mehta considered the empirical basis. The observations

of the Arbitrator in paragraph 100 that "in the facts of the case ..

fixing 30% discount would be just, fair and reasonable and would

meet the ends of justice", cannot be read in isolation or be utilized

to suggest that the Arbitrator was applying his own notion of what

is equitable, fair and just.

30. Section 28 of the Act postulates that the arbitral Tribunal

has to decide the dispute submitted to arbitration in accordance

with the substantive law for the time being in force, in India. The

arbitral Tribunal can decide ex aequo et bono or as amiable

compositeur only if the parties have expressly authorised it, to do

so, this being the mandate of sub-Section (2) of Section 28. The

arbitral Tribunal under sub-section (3), has to decide in

accordance with the terms of the contract and is required to take

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into account the usages of the trade. In the present case, the

discount of 30% that has been applied to the BAL holding, is not

adopted by the arbitral Tribunal as amiable compositeur or on

notions fairness and equity. The discount is founded upon

considerations which are germane and which were based on the

evidence on record. The sufficiency and quality of the evidence,

are matters for the arbitral Tribunal to determine. The arbitral

Tribunal accepted the evidence of Mr.Bansi Mehta for valid

reasons, recording that the cross-examination has not resulted in

any significant dilution of the evidence. In one area, there is an

error of fact on the part of the Arbitrator where he refers to the

report of Mr.Raghuram as having indicated a discount of 30 to

40%. Admittedly, the discount that was referred to in the report

of Mr.Raghuram dealt with the valuation of MSL shares (not the

BAL shares). On this aspect, the Arbitrator has misread the

evidence and one ground which weighed with him, would

constitute an error of fact. But, as already discussed earlier, there

was a wealth of evidence before the Arbitrator, which was accepted

by him to demonstrate that a discount of 30% was susceptible both

on a conceptual and an empirical basis. The challenge on this

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ground is, therefore, lacking in substance.

Book value of non-BAL holdings :

31. The submission is that the Arbitrator was not justified in

taking the book value of non-BAL quoted investments, as opposed

to the market value. A brief reference to the evidence of Mr.Bansi

Mehta, would be in order. Mr.Bansi Mehta was cross-examined

with reference to paragraph 5.1 of his report, where he has stated

that "adopting the book value, as a realizable value, the value for

that component would correspond to such book value". Mr.Mehta

stated that this is a normal practice for assets that are in the nature

of liquid instruments since they are presumed to have been

acquired to earn a recurring rather than the maturity return.7 In

answer to Question 164, Mr.Mehta stated that the non-BAL

investments can be encashed easily and that there was "not much

appreciation". The most proximate balancesheet of MSL as of 31st

March 2003, showed that almost 98% or more of the appreciation

in the quoted investments had come on account of MSL's

shareholding in BAL. Since the appreciation of other quoted

7 Vol.II Question 128 page 557

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investments, was not material, there was no need to apply a

discount to that value. Mr.Mehta explained that if he had taken

the realizable value of the other assets of the Investment Section of

MSL and had applied a discount to that value, the value of the

Investment Section, would have been even lower and not higher.

The evidence of Mr.Mehta, therefore, indicates that the reason why

he adopted the book value for non-BAL holdings was that there

was no significant appreciation in the value of those holdings. If the

market value were to be taken, it would have to be discounted,

which would result in a value even lower and not higher. In the

circumstances, there is a cogent justification on the evidence for

applying the book value for non-BAL quoted investments.

32. The Arbitrator accepted the liquidation basis from the

report of Mr.Bansi Mehta for valuation and applied a discount.

There is an adjudication and determination by the Arbitrator.

During the course of the submissions, a considerable degree of

emphasis was sought to be placed on the methodology adopted by

Mr.Mehta of determining the rate based on an objective fair

valuation. Paragraph 3.2 of the report states that the classical

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concept of valuation is the price, which would be fetched between

a willing buyer and willing seller. BAL being a listed Company,

whose shares are held by a wide body of investors, Mr.Mehta stated

that his approach to valuation was guided by the "concept of an

objective valuation between a willing buyer and a willing seller".

Mr.Mehta was asked, during the course of the cross-examination,

to demonstrate what part of Clause 7 of the Protocol Agreement

requires a determination of an objective fair valuation. In his

answer, he clarified that in the absence of any particular provision

concerning the method of valuation he would adhere to the

classical concept of an objective fair valuation between a willing

seller and a willing buyer. Mr.Mehta deposed that what he had

stated in the report about the approach to valuation, was not

inconsistent with Clause 7 of the Protocol Agreement. He stated

that he had not done the valuation under Clause 7 of the

Agreement. His evidence was that when a valuation is required,

and no specific formula or guideline has been prescribed, the

approach is to ascertain, what can be a fair value between a

willing, (but not over eager) buyer and a willing (but not a

distress) seller. The contention that the report of Mr.Mehta must

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be discarded because, he has not carried out the valuation under

Clause 7 lacks substance. Clause 7 of the Protocol Agreement does

not provide for any particular method of valuation. Consequently,

Mr.Mehta stated, in the course of his cross-examination, that the

classical method had been followed. Clause 7 of the Agreement

provides for a fixation of the rate, which lies in the domain of the

Arbitrator. That in any case lies in the realm of the appreciation of

evidence.

33. Section 4 of the Sale of Goods Act, 1930 provides that a

contract of the sale of goods is a contract whereby the seller

transfers or agrees to transfer the property in goods to the buyer

for a price. Under Section 5, a contract of sale is made by an offer

to buy or sell goods for a price and the acceptance of such offer.

The contract may provide for the immediate delivery of the goods

or immediate payment of the price or both, or for the delivery or

payment by instalments, or that the delivery or payment or both

shall be postponed. The price in a contract of sale can be fixed

under Section 9(1) by the contract or may be left to be fixed in a

manner thereby agreed or that may be determined by the course of

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dealing between the parties. Where the price is not determined in

accordance with the provisions of sub-section (1) of section 9, the

buyer shall pay the seller a reasonable price and what is reasonable

is a question of fact, determined on the circumstances of each case.

34. The challenge to the valuation must fail.

Section 111A of the Companies' Act, 1956 :

35. The challenge under this head, is to the legality of Clause

7 of the Protocol Agreement. The submission of the Petitioner is

that clause 7 creates a right of pre-emption. MSL is a listed public

Company. The Protocol Agreement is incorporated in the Articles

of Association. Section 111A of the Companies' Act, 1956 provides

that the shares or debentures of a Company and any interest

therein, shall be freely transferable. Section 9 stipulates that the

provisions of the Act shall have effect, notwithstanding anything to

the contrary contained in the Memorandum or Articles of

Association. Hence, the pre-emptive right recognized by Clause 7

of the Protocol Agreement and incorporated in the Articles of

Association, must yield to Section 111A. In the present case, it

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was submitted that on the challenge to the legality of the pre-

emptive right created by Clause 7 of the Protocol Agreement, as

incorporated in the Articles, there is virtually no adjudication by

the Arbitrator.

Was there a reference on a specific question of law?

36. On behalf of the Respondent, an objection was raised to

the maintainability of the challenge under Section 34, on the

ground that by an application dated 6th April 2004, the legality of

clause 7 was squarely placed in issue for a decision by the

Arbitrator. This, it was urged, would constitute a specific reference

of a question of law, on which the decision of the Arbitrator would

be final. The submission is that the application dated 6th April

2004, was responded to and decided: there was a reference of a

specific question of law and though this was not part of the

original reference to arbitration yet, during the pendency of the

reference, the question was sought to be raised. The decision of

the Arbitrator was, it was submitted, an adjudication on a

reference of a specific question of law upon which, finality must

vest in the decision of the Arbitrator.

::: Downloaded on - 09/06/2013 15:36:44 ::: 52 37. The position as it obtained under the Arbitration Act,

1940, was that the Arbitrator could decide an issue of jurisdiction

pro tem. Where, however, parties referred a specific question of

law and agreed to be bound by the decision of the Arbitrator, that

decision became final. This was a principle of judge made law.

The Arbitration and Conciliation Act, 1996, empowers the arbitral

Tribunal, by Section 16, to rule on its own jurisdiction, including

ruling on any objection with respect to the existence or validity of

the arbitration agreement. For that purpose, an arbitration clause,

which forms part of the contract is to be treated as an agreement

independent of the other terms of the contract and a decision of the

arbitral Tribunal that the contract is null and void shall not entail

ipso jure the invalidity of the arbitration clause. The arbitral

Tribunal has to decide on a plea that it does not have jurisdiction

and where the Tribunal takes a decision rejecting the plea, it has to

continue with the arbitral proceedings and make an arbitral award.

A party aggrieved by the arbitral award is empowered to make an

application for setting aside the award in accordance with the

provisions of Section 34. That is the scheme legislated upon by

::: Downloaded on - 09/06/2013 15:36:44 ::: 53 Parliament in the Arbitration and Conciliation Act, 1996, in regard

to the empowerment of an arbitral Tribunal to rule on its

jurisdiction.

38. In ONGC vs. Saw Pipes Ltd. (supra), the Supreme Court

recognized that "if a specific question of law is submitted to the

Arbitrator, an erroneous decision in point of law does not make

the award bad, so as to permit its being set aside, unless the Court

is satisfied that the Arbitrator had proceeded illegally."8

39. The issues which fall for determination are: (i) What are

the requirements that must be fulfilled in law in order to postulate

that parties have referred a specific question of law; and (ii)

Whether in the present case, the parties must be regarded as

having made a reference to the Arbitrator on a specific question of

law.

The specific question doctrine:

40. Since the judgment of the Supreme Court in Seth

8 para 54 page 736

::: Downloaded on - 09/06/2013 15:36:44 ::: 54 Thawardas Pherumal vs. Union of India,9 it is now a settled

principle of law that a distinction has to be made between those

cases in which a question of law is specifically referred for the

decision of the Arbitrator and those in which a question of law

incidentally arises while deciding the question that is actually

referred. If parties refer a question of law specifically to the

Arbitrator and it is manifest that they seek a decision from the

Arbitrator in preference to a decision of the Court, the decision of

the Arbitrator would be binding on the parties and the Court would

not impose its perspective on the law in supersession of the

decision of the Arbitrator. In Thawardas Pherumal, the Supreme

Court formulated the principle in the following terms:

"If a question of law is specifically referred and it is evident that the parties desire to have a decision from

the arbitrator about that rather than one from the Courts, then the Courts will not interfere, though even there, there is authority for the view that the courts will interfere if it is apparent that the arbitrator has acted illegally in reaching his decision, that is to say, if he has

decided on inadmissible evidence or on principles of construction that the law does not countenance or something of that nature."

Consequently, for the principle to be attracted, it must be evident

9 AIR 1955 SC 468

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that (i) a question of law is in issue; (ii) the parties have

specifically agreed to refer it to the Arbitrator; and (iii) parties have

agreed to be bound by the Arbitrator's decision. Otherwise, the

jurisdiction of the Court to determine the validity of an arbitral

award, on grounds contemplated by the statute, would not be

ousted. The submission of incidental arguments on a question of

law does not amount to a specific reference of a question of law.

41. In the subsequent judgment of the Supreme Court in

Tarapore and Co. vs. Cochin Shipyard Ltd.,10 Thawardas

Pherumal's case was regarded as being an authority for the

proposition that where the parties specifically agreed to refer a

specific question of law for the decision of the Arbitrator and

agreed to be bound by it, the Court cannot set aside the award on

the ground of an error of law apparent on the face of it even

though the decision of the Arbitrator may not be in accord with the

law as understood by the Court. In Tarapore, the principle was

formulated in the following terms by the Supreme Court:

"If a question of law is specifically referred and it becomes evident that the parties desired to have a

10 (1984) 2 SCC 680

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decision on the specific question from the arbitrator about that rather than one from court, then the court will

not interfere with the award of the arbitrator on the ground that there is an error of law apparent on the face

of the award even if the view of law taken by the arbitrator does not accord with the view of the court. This view of law taken in England was stated by this Court to be the same in this country and since the

decision in Seth Thawardas case (AIR 1955 SC 468) which follows earlier decisions in England and India, it has not been departed from."

In that case, the reference to the Arbitrator was on the following

questions: (i) Whether the claim for compensation fell within the

purview of the arbitration clause, clause 40 of the General

Conditions of the Contract; and (ii) If it did, whether the claimant

was entitled to compensation. The Supreme Court held that the

parties agreed to submit a specific question even with regard to

the scope, ambit, width and construction of the arbitration clause,

including the question as to whether the arbitration clause would

cover the dispute raised between the parties. The Arbitrator was

required to decide whether the dispute is arbitrable and, if it was,

to decide the extent of compensation. There was, therefore, held

to be a reference of a specific question of law.

::: Downloaded on - 09/06/2013 15:36:44 ::: 57 42. In a judgment of a Learned Single Judge of this Court, in

Lubrizol (India) Ltd. vs. Lubrizol Corporation U.S.A.,11 these

decisions were followed, and the Court held that there is a

distinction between a case where disputes are referred to an

arbitration in the decision of which, a question of law becomes

material from a case in which a specific question of law is referred

and parties agreed to be bound by the Arbitrator's decision. When

a question of law is a point at issue, unless both sides specifically

agree to refer it and agree to be bound by the Arbitrator's decision,

the jurisdiction of the Court to set things right, when an error is

apparent from the face of the record, is not ousted. The mere

submission of incidental arguments on a point of law, during the

course of proceedings, is not enough.

43. In the present case, an application was filed on 6th April

2004, by the Petitioner before the Arbitrator seeking a ruling that

the arbitral Tribunal had no jurisdiction to entertain and decide the

dispute inter alia on the ground that the Protocol Agreement was

void for several reasons, among them being, that it placed

11 1998(1) ALL MR 435

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restrictions on the transferability of the shareholding of MSL, in

violation of the provisions of Section 111A read with Section 9 of

the Companies' Act, 1956. The application was responded to by

the Respondent. That by itself cannot be regarded as amounting to

a reference of a specific question of law for the decision of the

Arbitrator. During the proceedings, the Petitioner questioned the

jurisdiction of the Arbitrator by presenting its application of 6th

April 2004. The Arbitrator was entitled to rule on his jurisdiction

in terms of the provisions of Section 16 of the Act. The application

was opposed by the Respondent. This cannot amount to a

reference of a specific question of law. Nor for that matter, is there

intrinsic material to lead the Court to the conclusion that the

parties intended to be bound by the decision of the Arbitrator, so as

to oust the jurisdiction of the Court under Section 34 of the

Arbitration and Conciliation Act, 1996. Clearly, there was no

reference on a specific question of law, so as to render the decision

of the Arbitrator binding, or beyond the pale of the reviewing Court

under Section 34.

The Section 111A challenge:

::: Downloaded on - 09/06/2013 15:36:44 ::: 59 44. That leads the Court to the decision of the Arbitrator on

the challenge grounded upon the provisions of Section 111A of the

Companies' Act, 1956. While dealing with the issue, the Arbitrator

has extracted the provisions of Section 111A of the Companies' Act,

1956, recorded the submission of the Petitioner, including a

reference to the decisions of the Supreme Court in (i) V.B.

Rangaraj vs. V.B.Gopalkrishnan,12 and (ii)

M.S.Madhusoodhanan vs. Kerala Kaumudi Pvt.Ltd.13 The

Arbitrator has, after citing the judgment of the Madhusoodanan's

case, held thus:

"In view of the above, it is clear that the ratio of the

decision in Rangaraj's case has no application to the facts of the present case which is governed by the Protocol

Agreement dated 2nd October 1974. In the present case, the so called restriction is in fact incorporated in the Articles of Association which is a feature of distinction

from the facts in Rangaraj's case."

45. Section 111A of the Companies' Act, 1956, provides that

subject to the provisions of the Section, "the shares or debentures

and any interest therein of a Company shall be freely transferable".

Section 9 provides that save as otherwise expressly provided in the

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

::: Downloaded on - 09/06/2013 15:36:44 ::: 60

Act, the provisions of the Act shall have effect notwithstanding

anything to the contrary contained in the Memorandum or Articles

of a Company or in any agreement executed by it, or in any

resolution passed by the Company in general meeting or by its

Board of Directors. Any provision contain in the Memorandum,

Articles, agreement or resolution shall, to the extent to which it is

repugnant to the provisions of the Act, become or be void, as the

case may be.

46. Originally, under the provisions of the Companies' Act,

1956, a transferor or a transferee seeking relief in respect of a

transfer/transmission of shares in a public or private Company

could either file an appeal under Section 111 or apply for

rectification of the Register of Members under Section 155. With

effect from 17th January 1986, Section 22A was inserted in the

Securities Contracts (Regulation) Act, 1956. Section 22A provided

that the shares of a registered Company shall be freely transferable.

A Company could refuse transfer only on four specified grounds.

On 20th September 1995, the Depositories Ordinance was

promulgated. The ordinance thereafter, was enacted into

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legislation by the Depositories Act, 1996.

47. Upon the enactment of the Depositories Act, 1996, sub-

section 14 was inserted into Section 111 of the Act by which it was

provided that a Company for the purposes of Section 111 of the

Companies' Act, 1956 means a private Company and includes a

private Company which has become a public Company under

Section 43A. Section 111A was introduced into the Companies'

Act, 1956 by the Depositories Act, 1996 with effect from 20th

September 1995. Sub-section (1) of Section 111A provides that a

company for the purpose of the Section means a company other

than a company as defined in sub-section (14) of Section 111.

Hence, Section 111A applies to public companies. Section 111A

has been inserted to provide for the free transferability of the

shares or debentures of a public company other than a private

company or a private company governed by Section 43A. The

Company Law Board has been empowered to direct a rectification

of the Register of Members if a transfer is made in contravention of

the SEBI Act, 1992; the Sick Industrial Companies (Special

Provisions) Act, 1985; or any other law, for the time being in force,

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on an application being made, inter alia by the Company or SEBI.

Simultaneously, the provisions of Section 22A of the Securities

Contracts (Regulation) Act, 1956, were omitted.

48. Section 3(1)(iii) of the Companies' Act, 1956 defines the

expression "private company" to mean, a company which has a

minimum paid up capital of one lakh rupees or such higher paid up

capital as may be prescribed, and by its articles: (a) restricts the

right to transfer its shares, if any; (b) limits its members to fifty not

including those who are or were formerly in the employment of the

Company and were members while in employment; (c) prohibits

any invitation to the public to subscribe for any shares or

debentures; and (d) prohibits any invitation or acceptance of

deposits from persons other than its members or directors or

relatives. A company which is not a private company, falls within

the definition of expression "public company" under Section 3(1)

(iv).

49. The Companies' Act, 1956 makes a clear distinction in its

governing provisions relating to private and public companies in

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regard to the transferability of shares. By definition, a "private

company" is a company, which restricts the right to transfer its

shares. Consequently, upon a refusal of a private company to

transfer its shares, a remedy is provided by the Act. In the case of a

public company, the Act provides that the shares or debentures and

any interest therein of a company shall be freely transferable.

50.

The expression "transfer" is defined in Webster as "to

convey or remove from one place, person etc. to another" or "to

make over the possession or control of".14 The expression

"transferable" is defined in Black's Law Dictionary,15 to mean,

"capable of being transferred, together with all rights of the

original holder". The expression "transfer" is defined to mean to

"convey or remove from one place or one person to another; to

pass or hand over from one to another especially to change over

the possession or control or; to sell or give". In Stroud's Judicial

Dictionary of Words and Phrases, 3rd Edition, page 3080 and in

P.Ramanatha Aiyar's Advanced Law Lexicon,16 the expression

"transferable" is defined as follows:

14 Webster's Encyclopedic Unabridged Dictionary page 2009 New Deluxe Edition 15 Seventh Edition page 1504 16 2005 Edition page 4751

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"Transferable. An interest which by statute or otherwise is made "not transferable" cannot be parted with either

by act of parties or by operation of law (Gathercole v.

Smith 17 Ch D 1). In that case, Lush L.J., said, "The

word 'transferable' is of the widest possible import, and includes 'every' means by which the property may be passed from one person to another."

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

the Privy Council dealt with a case, where the transfer of shares in

the Ontario Jockey Club Ltd. was refused on the ground inter alia

that the provisions of the Bye laws had not been observed. In

proceedings to enforce registration, the Supreme Court of Canada

ordered the Company to enter the name of the transferee on the

Register. In appeal, the Privy Council noted that Bye law 37 of the

Company provided that "no shares or interest in the Club shall, at

any time be transferred to any person not already a shareholder,

until the Club had an opportunity to find a purchaser for such

share or interest". At the material time, the relevant provisions of

Section 48 of the legislation in Ontario provided that the shares of

a company shall be deemed to be personal estate and shall be

transferable on the books of the Company, in such manner and

17 AIR 1928 Privy Council 291

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subject to such conditions and restrictions as may be imposed by

the Act or by the Bye-laws of the Company. Under Section 87A, the

Directors were empowered to make Bye-laws to regulate the

transfer of shares. In the context of a restriction contained in Bye-

law 87 and the provisions of the Ontario legislation, the Privy

Council held thus:

"That restrictions may be placed upon a shareholder's right of transfer of his shares cannot be questioned. The

cases are numerous in which such restrictions have been upheld. Shares are prima facie transferable. But there is no law which precludes the shareholders from

contracting for value that they shall each submit to any reasonable restriction which they choose to agree to. It may be for the benefit of the company that, for instance, shares shall not be transferred to rivals in the company's

trade. A restriction which precludes a shareholder altogether from transferring may be invalid, but a

restriction which does no more than give a right of pre- emption is valid."

The judgment of the Privy Council in Ontario Jockey Club's case,

therefore, involved a situation in which the legislation in Ontario,

authorised the Board of Directors to regulate the transfer of shares

and transferability of the shares of the Company. The Bye-laws

specifically contemplated a restriction on transferability otherwise

than to a member of the Company.

::: Downloaded on - 09/06/2013 15:36:44 ::: 66 52. In India, the Supreme Court held in V.B.Rangaraj vs.

Gopalkrishnan,18 that an agreement between the members of a

family, who were the only shareholders of a private Company,

which imposed a restriction on the shareholders' right to transfer

the shares, was contrary to the Articles of Association and was not

binding on the Company or its shareholders. In

MS.Madhusoodhanan vs. Kerala Kaumudi (supra), the First

Respondent was a private Company. An agreement, styled as a

Karar was entered into between the mother, the Appellant and the

other brothers about the division of the effective control over

family concerns among the other four brothers and the transfer of

shares of one of the brothers in the Company to the Appellant.

Parties agreed that each of the sons would have a majority

shareholding in one of the concerns. Mrs.Justice Ruma Pal,

speaking for the Bench of the Supreme Court, noted that in

deciding whether the agreement should be implemented, the basic

fact was that each brother had been given a majority shareholding

in the Company specified against his name in the Karar and since

18 (1992) 73 Comp Cases 201

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the others three brothers had taken the full benefit of the

agreement, they were bound to comply with by its terms. The

Supreme Court observed thus:

"It is settled law that shares are movable properties and are transferable. As far as private companies like Kerala

Kaumudi are concerned, the Articles of Association restrict the shareholder's right to transfer shares and prohibit any invitations to the public to subscribe for any shares in, or debentures of the company. This is how a

"private company" is now defined in section 3(1)(iii) of the Companies' Act, 1956 and how it was defined in

section 2(13) of the 1913 Act.

Subject to this restriction, a holder of shares in

a private company may agree to sell his shares to a person of his choice. Such agreements are specifically enforceable under Section 10 of the Specific Relief Act, 1963, which corresponds to section 12 of the Specific

Relief Act, 1877. The section provides that specific performance of such contracts may be enforced when

there exists no standard for ascertaining the actual damage caused by the 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 properties "of special value or interest to the plaintiff, or consisting of goods which are not easily obtainable in the market", it has been held

by a long line of authority that shares in a private limited company would come within the phrase "not easily obtainable in the market" (see: Jainarain Ram Lundia v. Surajmull Sagarmull, AIR 1949 FC 211, 218). The Privy Council in the Bank of India Ltd. v. J.A.H.Chinoy, AIR 1950 PC 90 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

::: Downloaded on - 09/06/2013 15:36:44 ::: 68

adequate remedy". Specific performance of a contract for transfers of shares in a private limited company could

be granted." (emphasis supplied).

The judgment in Madhusoodhanan, therefore, deals with a

private Company. The observations of the Supreme Court noted

earlier, expressly clarified that as far as private Companies are

concerned, the Articles of Association restrict shareholders' rights

to transfer the shares and prohibit invitation to the public to

subscribe to shares or debentures of the Company. An agreement

by which, subject to its restriction, a holder of shares agrees to sell

his shares to a person of his choice is specifically enforceable in

view of the limited market for the shares of such a Company.

Madhusoodhanan's case involved a private Company. The

Supreme Court held that the decision in Rangaraj was

distinguishable inasmuch as there was no restriction on the

transferability of the shares in the Karar and the Karar itself was an

agreement between particular shareholders relating to the transfer

of specified shares. The agreement, ruled the Supreme Court, was

capable of specific performance. A situation involving the

restriction on the transferability of shares in a private Company has

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to be contrasted with cases involving public Companies where the

law provides for free transferability. Free transferability of shares

is the norm in the case of shares in a public Company.

53. The provision contained in the law for the free

transferability of shares in a public Company is founded on the

principle that members of the public must have the freedom to

purchase and, every shareholder, the freedom to transfer. The

incorporation of a Company in the public, as distinguished from

the private, realm leads to specific consequences and the

imposition of obligations envisaged in law. Those who promote

and manage public companies assume those obligations.

Corresponding to those obligations are rights, which the law

recognizes as inhering in the members of the public who subscribe

to shares. The principle of free transferability must be given a

broad dimension in order to fulfill the object of the law. Imposing

restrictions on the principle of free transferability, is a legislative

function, simply because the postulate of free transferability was

enunciated as a matter of legislative policy when Parliament

introduced Section 111A into the Companies' Act, 1956. That is a

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binding precept which governs the discourse on transferability of

shares. The word "transferable" is of the widest possible import and

Parliament by using the expression "freely transferable", has

reinforced the legislative intent of allowing transfers of shares of

public companies in a free and efficient domain.

54. The effect of Clause 7 of the Protocol Agreement is to

create a right of pre-emption between the Petitioner and the

Respondent in the event that either of them seeks to part with or

transfer its shareholding in MSL. In that event, the party desirous

to transfer its shareholding is obligated to furnish a first option to

the other for the purchase of the shares at such rate, as may be

agreed to between the parties or decided upon by arbitration. The

consequence of Clause 7 of the Protocol Agreement, which has

been incorporated in the Articles of Association, is to preclude sale

to or purchase by the members of the public of the shares, which

are offered for sale if the offer is accepted by the Petitioner, or as

the case may be, by the Respondent within thirty days of the

receipt of the notice. The effect of a clause of preemption is to

impose a restriction on the free transferability of the shares by

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subjecting the norms of transferability laid down in Section 111A

to a preemptive right created by the agreement between the

parties. This is impermissible. Section 9 of the Companies' Act,

1956 gives overriding force and effect to the provisions of the Act,

notwithstanding anything to the contrary contained in the

Memorandum or Articles of a Company or in any agreement

executed by it or for that matter in any resolution of the Company

in general meeting or of its Board of Directors. A provision

contained in the Memorandum, Articles, Agreement or Resolution

is to the extent to which it is repugnant to the provisions of the Act,

regarded as void.

55. The Delhi High Court had occasion to consider the issue

in its decision in Smt.Pushpa Katoch vs. Manu Maharani Hotels

Ltd.19 In the case before the Delhi High Court, in a Petition under

Sections 397 and 398 of the Companies' Act, 1956, one of the

grievances was that three sisters of the Appellant had transferred

their shareholding in a Public Limited Company, in violation of a

right of preemption contained in a family settlement. The

19 121(2005) DLT 333

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Company Law Board held that the Articles of Association of the

Company, which was a Public Limited Company, did not recognize

a right of preemption. Since the Company was a Public Limited

Company, no fetter could be imposed on the right of the

shareholder to transfer his shares, by virtue of the provisions of

Section 111A. The CLB rested its decision both on the basis that

the preemptive right was not recognized by the Articles of

Association and on the foundation that a Public Company could not

have a provision recognizing preemptive rights to its members.

The Delhi High Court in an appeal arising out of the judgment of

the CLB relied upon the judgment of the Supreme Court in

Rangaraj (supra) to hold that a restriction which is not specified in

the Articles, would not bind either the Company or its

shareholders. The Delhi High Court also held that by virtue of the

provisions of Section 111A, the right of a shareholder to transfer

his/her shares could not be fettered. Mr.Justice A.K.Sikri held

thus:

"The CLB further rightly mentioned that as per the provisions of Section 111A of the Act, there could not be any fetters on the right of a shareholder to transfer his/her shares. It may be noted that the Legislature has made different provisions for transfer of shares in case of

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private limited company and public limited company. Section 111, which deals with "Power to refuse

registration and appeal against refusal", relates to the private limited companies. On the other hand,

provisions of Section 111A dealing with "Rectification of register on transfer" are attracted in the case of public limited companies. While restrictions can be stipulated in the Articles of Association so far as transfer of shares

of a private limited company is concerned, sub-section (2) of Section 111A of the Act specifically provides that the shares or debentures and any interest therein of a company shall be freely transferable. Proviso to this sub-

section further stipulates that if a company without sufficient cause refuses to transfer the shares within two

months, the transferee may file an appeal to the Company Law Board and "it shall direct company to register the transfer of shares". Since the respondent No.

1 company is a public limited company, the CLB rightly opined that there could be no fetters on the right of a shareholder to transfer his/her shares. We have already noted that there is no such provision giving pre-emptory

right to other promoters in the Articles of Association. Even if there was such a provision in the Articles of

Association, it would have been ultra vires the provisions of the Act, as no company can provide in the Articles of Association any matter which offends the specific

provision of an act (see Re.Denver Hotel Co., 1893(1) Chancery Division 495). No doubt, the four sisters promoted the company and their intention was to make the family property as a hotel and run the same. No doubt, in the Board meeting held on 16th March 1994

and the Memorandum of Family Agreement it was recorded that any promoter wanting to sell the shares would first offer the same to other promoters. However, at the same time, while incorporating this company, the promoters decided to have a public company limited by shares rather than a private company. They should have understood the implication and consequences of getting a public company incorporated. If they wanted such an

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arrangement, as recorded in the minutes of the meeting dated 16th March 1994 and the Memorandum of Family

Settlement, they should have been wise enough to incorporate a private company and further to provide

such a clause in the Articles of Association. After incorporating a public company, it was too late in the day to think of such an arrangement and recording the same in the Board meeting or the family settlement,

which could not have any legal basis."

A Special Leave Petition against the judgment of the Delhi High

Court was dismissed by the Supreme Court on 7th April 2006. I am

in respectful agreement with the view of the Delhi High Court

which reflects the correct position in law.

56. Counsel appearing on behalf of the Respondent

submitted that Section 111A has no application to contracts for the

transfer of particular shares between particular shareholders

when incorporated in the Articles of Association. The submission is

that restrictions which bind third parties are bad. Section 111A

was intended to curb the power of the Board of Directors to

obstruct transfers and clearer words would be required to

destabilize bargains which are the heart of commerce.

::: Downloaded on - 09/06/2013 15:36:44 ::: 75 57. The submission that Section 111A would not interdict

"an agreement between particular shareholders relating to the

transfer of specified shares" is based on the judgment of the

Supreme Court in Madhusoodhanan (supra). In that case, as

already noted earlier, the Supreme Court noted that the Karar was

an agreement between "particular shareholders relating to the

transfer of the specified shares". What is significant is that the

Company in that case was a private Company. The Supreme Court

noted with some emphasis that in the case of a private Company,

the Articles of Association would restrict the right of shareholders

to transfer shares and prohibit invitation to the public to subscribe

for shares or debentures of the Company. The position in law of a

Public Company is materially different. By the provisions of the

Companies' Act, 1956, restrictions on the transferability of shares

which are contemplated by the definition of a "private company"

under Section 3(1)(iii) are expressly made impermissible in the

case of a public company by the provisions of Section 111A. Once

that be the position, the submission urged on behalf of the

Respondent cannot be accepted. In essence, the submission of the

Respondent is that the provisions of Section 111A should be read

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as being subject to a contract to the contrary. A restriction to that

effect cannot be read into the provision of Section 111A; firstly

because, such a restriction is not mentioned in the statutory

provision; secondly, the word "transferable" is of the widest

import; and thirdly, the context in which the provision has been

introduced, is susceptible to the inference that it should be given a

wide meaning. Where the language of the statute is plain and

unambiguous, neither the consequence nor the conduct of parties

would be of relevance. Reliance was sought to be placed on a

notification that was issued on 27th June 1961 by which, in exercise

of powers conferred by Section 28(2) of the Securities Contracts

(Regulation) Act, 1956, the Central Government specified contracts

of preemption as contained in promotion or collaboration

agreements or in the Articles of Association of a Limited Company

as contracts to which the said Act shall not apply. That

notification, it has to be noted, related to an exemption from the

provisions of the SCRA and cannot override the plain mandate of

Section 111A. Besides, Section 111A was introduced in the

Companies' Act, 1956 by the Depositories Act, 1996 with effect

from 20th September 1995. The plain intendment and meaning of

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58. The arbitral award on this aspect of the matter, is

completely contrary to the governing principles of law. The award

is contrary to substantive provisions of law and is patently illegal.

The illegality in the present case, is something that goes to the root

of the matter and is certainly not one which can be termed as of a

trivial nature. The award must, in the circumstances, be held to be

contrary to public policy. The Arbitrator cited the judgment of the

Supreme Court in Madhusoodhanan's case and held that the

principle which was laid down in the earlier judgment in Rangaraj

was inapplicable inasmuch as the restriction creating a preemptive

right was incorporated in the Articles of Association. The

Arbitrator proceeded on the basis that the presence of a clause

conferring a right of preemption in the Articles of Association was

sufficient to dispose of the challenge to the legality of the provision.

In this, the Arbitrator has fallen into a patent illegality. The fact

that the restriction is contained in the Articles of Association would

deal with the submission based on the application of the Rangaraj

principle. But that is not dispositive of the legality of a provision

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by which a right of preemption is created in the case of a Public

Limited Company. The Arbitrator has ignored the express and

specific provisions of the Companies' Act, 1956; lost sight of the

very concept of free transferability of the shares of a Public Limited

Company and failed to apply the provisions of Section 9 under

which overriding force is given to the Act notwithstanding

anything to the contrary contained in the Memorandum, Articles or

agreement.

59. For all these reasons, the award of the Learned Arbitrator

would have to be set aside. The Petition is accordingly made

absolute in terms of prayer clause (a) by setting aside the award.

There shall be no order as to costs.

......

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