TMI Blog2015 (5) TMI 1134X X X X Extracts X X X X X X X X Extracts X X X X ..... this is done, clause 7 envisages 3 scenarios. (1) If the other party within 30 days of receipt of such notice agrees to such proposal, the party giving the notice is bound to sell such shares at the rate specified in the notice. (2) If the other party is willing to purchase the shares but considers the rate proposed in the notice as too high or unacceptable, it would communicate its intention to purchase the shares within 30 days from receipt of the notice and the question of rate is to be referred to arbitration. (3) If the other party, on receiving the notice to purchase the shares, fails to accept the said proposal within 30 days of its receipt, the party giving the notice is free to sell the shares to any other person, but only at a rate not less than the rate specified in such notice. The concept of free transferability would mean that a shareholder has the freedom to transfer his shares on terms defined by him, provided the terms are consistent with the Articles of Association as well as the Companies Act and Rules and other governing laws. The fact that the shares of a public company can be subscribed to by the public, unlike in the case of a private company, does not in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares as contemplated under section 111A of the Companies Act, 1956. Thus the order of the learned Single Judge is unsustainable, insofar as it set aside the impugned award on the ground that the effect of Clause 7 of the Protocol Agreement was to impose a restriction on the free transferability of shares as contemplated under section 111A of the Companies Act - Appeal No. 153 of 2010 in Arbitration Petition No. 174 of 2006, Notice of Motion No. 993 of 2010, Cross Objections (L) No. 13 of 2010, Appeal No. 153 of 2010 in Arbitration Petition No. 174 of 2006 - - - Dated:- 8-5-2015 - M. S. Shah (CJ) And B. P. Colabawalla, JJ. For the Appellant : Aspi Chinoy, Snehal Shah, Shriraj Dhru, Lata Dhru and Mitesh Naik i/b Dhru Co. For the Respondent : D. J. Khambatta, Senior Advocate, Bindi Dave, Janhavi Dwarka Das, M. Mandevia and Sameer Pandit i/b Wadia Ghandy JUDGMENT B. P. Colabawalla, J. 1. By this Appeal, exception is taken to the order of the learned Single Judge dated 15th February 2010, under which, the learned Single Judge was pleased to set aside the arbitral award dated 14th January, 2006 passed by the Sole Arbitrator (Mr. Justice A.V. Savant). 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns in this judgment. We shall first take up the contentions raised in Appeal No. 153 of 2010. APPEAL NO.153 OF 2010 5. The brief facts that give rise to the controversy are that the Respondent (original Petitioner before the learned Single Judge) is a State Government Corporation and a wholly owned undertaking of the State of Maharashtra. As stated earlier, MSL is a listed public company incorporated and registered under the provisions of Companies Act, 1956. The equity shares of MSL are listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). 6. MSL was incorporated pursuant to the Protocol Agreement dated 2nd October, 1974 entered into between the Appellant and the Respondent which inter alia provided that the Appellant would grant benefit of know-how and offer its assistance in the manufacture of two wheeler scooters to MSL and would also participate in the equity share capital of MSL on the terms and conditions as set out therein. In accordance with the terms and conditions of the said Agreement, the Respondent as of today continues to hold 27% of the equity shareholding of MSL and the Appellant continues to hold 24% thereof. The balance 49% o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, requested that a meeting be called for by the High Level Committee to negotiate the price. Thereafter, by their letter dated 6th June 2003, the Appellant reiterated that they were not agreeable to the price of ₹ 232.20 per share as demanded by the Respondent and offered to purchase the 27% shareholding of the Respondent at the rate of ₹ 75/-per equity share. Again, by their letter dated 31st July, 2003 the Appellant informed the Respondent that if their offer of ₹ 75/-per share was not acceptable to the Respondent then arbitration be initiated in terms of clause 7 of the Protocol Agreement. It is the case of the Respondent that this correspondence clearly indicates that there was no concluded contract arrived at between the parties in respect of sale of the said shares. We will deal with this argument later in this judgment, when we deal with the Cross Objections. 10. Be that as it may, as there was no agreement on the rate at which the shareholding of the Respondent would be sold to the Appellant, in terms of clause 7 of the Protocol Agreement, the Respondent addressed a letter dated 27th October, 2003 to the Arbitrator requesting him to accept his a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be held in Mumbai. 7. Cost of Arbitration shall be fixed by the 'Arbitration Tribunal' in accordance with Sec. 31(8) of the Arbitration and Conciliation Act 1996. These costs will be shared equally by BAL and WMDC. 8. BAL and WMDC will be happy to provide any information as may be required by the Arbitrator. (emphasis supplied) 12. Pursuant to the aforesaid joint reference, parties appeared before the Arbitrator and led the necessary evidence. The Respondent had also challenged the jurisdiction of the Arbitrator. The Arbitrator, after considering the challenges and the evidence, by a detailed award, held in favour of the Appellant and declared that the 30,85,712 equity shares of MSL held by the Respondent (its 27% shareholding) and valued as on 3rd May 2003, are to be sold to the Appellant at a price of ₹ 151.63 per share. 13. Being aggrieved by the aforesaid award, the Respondent challenged the same before this Court under the provisions of section 34 of the Arbitration and Conciliation Act, 1996. As stated earlier, the learned Single Judge negated all the contentions of the Respondent herein save and except one, on the basis of which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n agreement voluntarily entered into by a shareholder of a public company regarding its own shares, was not within the purview of nor affected by section 111A(2) of the Companies Act or its predecessor viz. section 22A(2) [as it then stood before its deletion] of the Securities Contracts (Regulation) Act 1956. In support of the aforesaid submissions, Mr. Chinoy placed heavy reliance on a Division Bench judgment of this Court in the case of Messer Holdings Ltd. v/s S.M. Ruia and others 2010 (59) Company Cases 29 (Bom). He submitted that in the aforesaid judgment, the order impugned in this Appeal, has been specifically considered and the Division Bench has expressly disagreed with/overruled the view expressed by the learned Single Judge in the order impugned before us. He therefore submitted that the impugned order was clearly erroneous and requires interference in appeal in so far as it sets aside the award on the ground that clause 7 of the Protocol Agreement impinges upon the principles of free transferability of shares as contemplated under section 111A of the Companies Act. 15. On the other hand, Mr. Khambatta, learned Senior Counsel appearing on behalf of the Respondent, su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in its Articles, whereas the Articles of a public company cannot contain any restriction on free transferability; (ii) unless restrictions on transferability are incorporated into the Articles, shares by their very nature remain freely transferable; (iii) no extraneous restrictions such as restrictions in a separate/private agreement is valid or enforceable even in a private company, let alone a public company; (iv) a public company is prohibited from incorporating any restriction on transferability of its shares in its Articles, and the said shares must necessarily remain freely transferable and cannot be subjected to any restriction. 18. Mr. Khambatta additionally submitted that a pre-emption clause or what is some time known as a right of first refusal (ROFR clauses), is a classic restriction on transferability. He submitted that a pre-emption clause is one of the most common restrictions found in the Articles of a private company and since such a clause qualifies as a restriction on transferability for the purpose of validly incorporating a private company, it must necessarily amount to a restriction in the context of a public company. If this be the case, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice shall be bound to sell and transfer such shares to the other party at the rate specified in such notice. If the other party is willing to purchase the shares but considers the rate proposed to be too high or unacceptable, it shall within 30 days from the receipt of the notice, give written intimation to the party giving notice of its intention to purchase the shares and the question of rate shall be referred to arbitration of a sole arbitrator if agreed to by both the parties or two arbitrators one to be appointed by each party in accordance with the provisions of the Indian Arbitration Act. If the party receiving a notice within 30 days of its receipt, fails to accept the proposal for purchase of the shares, the party giving the notice will be free to sell the shares to any other party but only at a rate not less than the rate specified in such notice. (emphasis supplied) 21. Clause 7 of the Protocol Agreement inter alia provides that if either party desires to part with or transfer its shareholding or any part thereof in the equity share capital of MSL, such party shall give first option to the other party for the purchase of such shares at the agreed price, or in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 82 or Section 111 of the Companies Act, 1956 (1 of 1956), but subject to the other provisions of this section, a company may refuse to register the transfer of any of its securities in the name of the transferee on any one or more of the following grounds and on no other ground, namely:- (a) that the instrument of transfer is not proper or has not been duly stamped and executed or that the certificate relating to the security has not been delivered to the company or that any other requirement under the law relating to registration of such transfer has not been complied with; (b) that the transfer of the security is in contravention of any law; (c) that the transfer of the security is likely to result in such change in the composition of the Board of Directors as would be prejudicial to the interests of the company or to the public interest; (d) that the transfer of the security is prohibited by any order of any court, tribunal or other authority under any law for the time being in force. (4) A company shall, before the expiry of two months from the date on which the instrument of transfer of any of its securities is lodged with it for the purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pees. (9) If in any reference made under clause (c) of sub-section (4) of this section, any person makes any statement (a) which is false in any material particular, knowing it to be false; or (b) which omits any material fact knowing it to be material, he shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to fine. (10) For the removal of doubts, it is hereby provided that nothing in this section shall apply in relation to any securities the instrument of transfer in respect whereof has been lodged with the company before the commencement of the Securities Contracts (Regulation) Amendment Act, 1985. (emphasis supplied) 23. The statement of objects and reasons indicate that the purpose for incorporating section 22A in the Securities Contracts (Regulation) Act, 1956 was that at the said time, sections 82 and 111 of the Companies Act, 1956 permitted the Board of Directors of companies to assume powers under the Articles of Association to refuse registration of transfer of securities without assigning any reason. Though there was a provision for an appeal to the Company Law Board against such refusal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntering into a consensual agreement to deal with their shares in a particular manner, either in praesenti or at a future date, would impinge or violate the concept of free transferability as contemplated under section 22A(2) . The purpose of the said provision, as we understand it, was to ensure that the Board of Directors of the company cannot refuse transfer of shares except on the grounds specified in the said section. This does not mean that if an individual shareholder enters into a separate agreement with another shareholder to deal with his specified shares in a particular manner, the same would violate the concept of free transferability as envisaged under section 22A. 27. We have come to this conclusion because we find that shares of a company are movable property and the right of the shareholder to deal with his shares and/or to enter into contracts in relation thereto (either by way of sale, pledge, pre-emption etc.), is nothing but a shareholder exercising his property rights. Such contracts voluntarily entered into by a shareholder for his own shares giving rights of pre-emption to a third party/another shareholder, cannot constitute a restriction on free transferab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of shares or debentures, to transfer such shares or debentures and any person acquiring such shares or debentures shall be entitled to voting rights unless the voting rights have been suspended by an order of the Company Law Board. (6) Notwithstanding anything contained in this section, any further transfer, during the pendency of the application with the Company Law Board, of shares or debentures shall entitle the transferee to voting rights unless the voting rights in respect of such transferee have also been suspended. (7) The provisions of sub-sections (5), (7), (9), (10) and (12) of Section 111 shall, so far as may be, apply to the proceedings before the Company Law Board under this section as they apply to the proceedings under that section. (emphasis supplied) By the amendment in 2003, the words Company Law Board appearing in section 111A were substituted with the word Tribunal . However, this amendment is not germane for the purposes of the present Appeal. 29. On reading section 111A four things become clear. Firstly, unless the context otherwise requires, it applies only to public companies [sub-section (1) read with section 111(14)]. Secondly, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, to the other provisions of section 111A. The proviso to sub-section (2) reinforces that section 111A is to regulate the powers of the Board of Directors of the company regarding transfer of shares or debentures or any interest therein of a company. As set out in the proviso to sub-section (2), the Board of Directors can refuse to register transfer of shares only if sufficient cause to do so is made out. Section 111A and more particularly sub-section (2) thereof, is not a provision to curtail the rights of the shareholders to enter into a consensual agreement/arrangement with a purchaser in relation to their specific shares. The right to enter into a consensual agreement/arrangement must prevail so long as it is in conformity with the Articles of Association, the provisions of the Companies Act and Rules, and other governing laws. Therefore, the expression freely transferable appearing in sub-section (2) of section 111A cannot be construed to mean that it also intends to take away the right of shareholders to enter into consensual agreements/arrangements with the purchaser in relation to their specific shares. 31. We are of the view that if the legislature intended to take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of section 111A of the Companies Act, clause 6.1 itself was illegal and void, as it infracted the principle of free transferability of shares as set out in section 111A(2). After considering the provisions of section 22A of the Securities Contracts (Regulation) Act, 1956 (as it stood prior to its deletion), as well as the provisions of section 111A of the Companies Act, the Division Bench of this Court negated the aforesaid contention. In paragraph 51 of the judgment, after reproducing section 111A, the Division Bench held as under:- Even the sweep of Section 111A is the same as Section 22A of the Securities Contracts Act. In that, it is a provision regarding rectification of register on transfer. Sub-Section (2) opens with the expression subject to the provisions of this section In other words, it is a provision restating that the shares or debentures and any interest therein of a company shall be freely transferable subject, however, to the stipulation provided in the other part of Section 111A of the Act. The proviso to subsection (2) reinforces the position that Section 111A is to regulate the powers of the Board of Directors of the company regarding transfer of shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to pay such prevailing market price and abides by other stipulations in the Act, Rules and Articles of Association there can be no violation. For the sake of free transferability both the seller and purchaser must agree to the terms of sale. Freedom to purchase cannot mean obligation on the shareholder to sell his shares. The shareholder has freedom to transfer his shares on terms defined by him, such as right of first refusal, provided the terms are consistent with other regulations including to repurchase the shares at the prevailing market price when such offer is made. The fact that shares of public company can be subscribed and there is no prohibition for invitation to the public to subscribe to shares, unlike in the case of private company, does not whittle down the right of the shareholder of a public company to arrive at consensual agreement which is otherwise in conformity with the extant regulations and the governing laws. (emphasis supplied) We are in full agreement with the aforesaid reasoning of the Division Bench. 34. It is important to note that the judgment and order impugned before us was also relied upon by one of the parties before the Division Ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he shareholders of a public company with a third party regarding his own specified shares (either by way of sale, pre-emption or otherwise), do not impinge on free transferability of shares as contemplated under section 111A, this so called distinction pails into insignificance. If the parties are free to enter into a consensual arrangement which does not infract free transferability as contemplated under section 111A, we see no reason to hold that merely because the price of the shares is to be determined by the process of arbitration, the same would to be in violation of section 111A. The fact that the price of the shares is to be determined by the process of arbitration is also a term of the very same consensual arrangement which is not violative of the provisions of section 111A(2). We, therefore, find no substance in this argument. 36. The second distinguishing feature that Mr. Khambatta sought to highlight is that in the facts of our case, this consensual arrangement as set out in clause 7 of the Protocol Agreement was also incorporated in Articles of Association of MSL whereas that was not the case before the Division Bench in the case of Messer Holdings Ltd. In furtheran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ol Agreement. We, therefore, find no substance in this argument. 37. Even otherwise, we find force in the argument of Mr. Chinoy that such a clause (clause 7), even if incorporated in the Articles of Association of a public company, would not in any way violate the principles of free transferability of shares as contemplated under section 111A of the Companies Act. Clause 7 of the Protocol Agreement and which finds place in the Articles of MSL by virtue of incorporation of the Protocol Agreement in its Articles, only sets out how the Respondent and the Appellant are to deal with their respective shareholdings. It is not a blanket pre-emption clause which binds all the shareholders of MSL to sell their shares only to other members of MSL, which clauses are incorporated in the Articles of Association of a private company. Pre-emption clauses in the Articles of a private company are in the nature of a blanket restriction on all its members, and such clauses if incorporated in the Articles of a public company would certainly amount to a restriction on free transferability of shares as envisaged under section 111A. However, that is not the case before us. Clause 7 of the Protocol Agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Tribunal against the refusal within a period of thirty days from the date of receipt of the notice or in case no notice has been sent by the company, within a period of sixty days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, was delivered to the company. (4) If a public company without sufficient cause refuses to register the transfer of securities within a period of thirty days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, is delivered to the company, the transferee may, within a period of sixty days of such refusal or where no intimation has been received from the company, within ninety days of the delivery of the instrument of transfer or intimation of transmission, appeal to the Tribunal. (5) The Tribunal, while dealing with an appeal made under sub-section (3) or sub-section (4), may, after hearing the parties, either dismiss the appeal, or by order (a) direct that the transfer or transmission shall be registered by the company and the company shall comply with such order within a period of ten days of the receipt of the order; or (b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ................... 40. On reading section 58 and the above Notification issued by the Securities and Exchange Board of India, we are of the view that section 58 merely clarifies and codifies the existing legal position regarding such pre-emption agreements. In other words, what was implicit in the provisions of section 111A of the Companies Act, 1956 has now been made explicit in section 58 of the Companies Act, 2013. 41. For all the reasons set out earlier in this judgement, and coupled with the fact that the reasoning given in the impugned order before us has been specifically disagreed with by another Division Bench of this Court in the case of Messer Holdings Ltd., we are unable to uphold the order of the learned Single Judge insofar as it set aside the impugned award on the ground that Clause 7 of the Protocol Agreement imposed a restriction on free transferability of shares as contemplated under section 111A of the Companies Act, 1956. 42. Having held so, we shall now deal with the judgments relied upon by Mr. Khambatta. The first two judgments of the Supreme Court relied upon by Mr. Khambatta are in the case of Needle Industries Ltd2 and Darius Kavasmaneck3. Ongoi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ranagraj's case, the Supreme Court pointed out that an agreement between particular shareholders relating to transfer of specified shares did not impose a restriction on the transferability of shares. The Supreme Court in Madhusoodhanan's case held as under- 139.The respondents cited Article 29 of the Articles of the Company in support of their argument that Exhibits R-59 and R-60 overrode the Karar insofar as it required that 50% of the shares of the late K. Sukumaran and Madhavi had to be transferred to Madhusoodhanan on Madhavi's death. Article 29 says that the executors or administrators of the deceased sole holder of a share shall be the only persons recognised by the Company as having any title to the share. It was the contention of the respondents that insofar as the Karar provided for the transfer of the shares of the late Sukumaran and Madhavi to Madhusoodhanan, it was contrary to Article 29 of the Articles of Association of the Company and could not be enforced. This submission is made on the basis of the decision of this Court in V.B. Rangaraj v. V.B. Gopalkrishnan [ (1992) 1 SCC 160 : AIR 1992 SC 453]. 140. That decision must be understood and read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ho were the only shareholders of a private company. The agreement was that for all times to come each of the branches of the family would always continue to hold equal number of shares and that if any member in either of the branches wished to sell his share/shares, he would give the first option of purchase to the members of that branch and only if the offer so made was not accepted, the shares would be sold to others. This was a blanket restriction on all the shareholders, present and future. Contrary to the agreement, one of the shareholders of one branch sold his shares to members of the second branch. Such sale was challenged in a suit as being void and not binding on the other shareholders. This Court rejected the challenge holding that the agreement imposed a restriction on shareholders' rights to transfer shares which was contrary to the Articles of Association of the Company. It was, therefore, held that such a restriction was not binding on the Company or its shareholders. The decision is entirely distinguishable on facts. There is no such restriction on the transferability of shares in the Karar. It was an agreement between particular shareholders relating to the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of the articles of association, in that event, naturally provisions of the articles of association would govern and not the provisions made in SHA. 262. The nature of SHA was considered by a two-Judge Bench of this Court in V.B. Rangaraj v. V.B. Gopalakrishnan [(1992) 1 SCC 160]. In that case, an agreement was entered into between shareholders of a private company wherein a restriction was imposed on a living member of the company to transfer his shares only to a member of his own branch of the family, such restrictions were, however, not envisaged or provided for within the articles of association. This Court has taken the view that provisions of the shareholders' agreement imposing restrictions even when consistent with company legislation, are to be authorised only when they are incorporated in the articles of association, a view we do not subscribe to. (emphasis supplied) In view of the above discussion, we find that the reliance placed by the Respondent on the judgement of the Supreme Court in Rangaraj's case is wholly misplaced. 46. In this view of the matter, we are clearly of the view that the order of the learned Single Judge is unsustai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d between WMDC and BAL is illegal and/or void on account of violation of section 16 of the Securities Contract (Regulations) Act 1956 (SCRA); iii) Whether the said Protocol Agreement is illegal on account of violation of the provisions of Section 111A read with Section 9 of the Companies Act 1956 ? iv) Whether the said Protocol Agreement is illegal on account of violation of the provisions of section 23 of the Indian Contract Act 1872 ? v) Whether the said Protocol Agreement is illegal on account of violation of the provisions of section 10 of the Sale of Goods Act 1930? 50. For the reasons that followed in paragraphs 14 to 29 of the award, all the aforesaid five points were answered in the negative and against the Respondent. 51. Be that as it may, when the award was challenged by filing a petition under section 34 of the Arbitration and Conciliation Act 1996, on the issue of jurisdiction, the arguments canvassed before the learned Single Judge were that (i) the Arbitrator had exceeded his jurisdiction in deciding the date for valuation of shares of MSL, proposed to be transferred by the Respondent to the Appellant [paragraph 13(i) of the impugned order]; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fact that the Protocol Agreement itself contained another arbitration clause (i.e. clause 19) that conferred a much wider jurisdiction on the Arbitrator and which was admittedly not invoked by any of the parties. 53. Mr. Samdani submitted that valuation, being a matter of contract between the parties, requires that they be at ad-idem on the date with respect to which the valuation was required to be done. According to him, the parties undisputedly were not at ad-idem inasmuch as the Respondent had taken a stand that no date has been agreed, and therefore there was no concluded contract. In addition thereto, he submitted that the Appellant had taken a stand before the Arbitrator that the date of valuation should be as on 30th June, 2002 and in the alternative 3rd May, 2003. In light of the stand taken by the Appellant as well as the Respondent, it was clear that there was no agreed date and therefore the Arbitrator, under Clause 7 of the Protocol Agreement read with the joint reference dated 29th December 2003, did not possess jurisdiction to adjudicate the said issue. He submitted that this contention is further fortified by the fact that the Arbitrator had to direct the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut only at a rate not less than the rate offered to the other party. In the present case, the Appellant by their letter dated 3rd May, 2003 clearly stated their intention to purchase the shareholding of the Respondent in MSL, but considered the rate at which the said shareholding was to be purchased, as too high and/or unacceptable. By their letter dated 10th May, 2003, the Appellant confirmed that their letter dated 3rd May, 2003 was under Clause 7 of the Protocol Agreement and was their confirmation to purchase the shares offered, though the price at which they were offered was not acceptable to them. This was again reiterated by their letters dated 6th June 2003 and 31st July, 2003. On reading this correspondence, it is clear that there was a concluded contract between the parties as contemplated under Clause 7 of the Protocol Agreement. This is in fact how the parties also understood it. It is for this very reason that the Respondent by their letter dated 27th October, 2003 initiated the arbitral process by addressing a letter to the Sole Arbitrator stating therein as under :- As per the Protocol Agreement, the Corporation has to make the first offer to Bajaj Auto Ltd. and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to be determined, and hence, in accordance with Clause 7 of the Protocol Agreement, the question of rate at which the Appellant was to purchase the equity shares held by the Respondent in MSL, was being referred. All this material would clearly indicate that there was a concluded contract between the parties as on 3rd May, 2003 and looking at the letter dated 27th October, 2003 as well as the joint reference dated 29th December 2003, clearly establishes that even the parties understood it to be so. If according to the Respondent there was no concluded contract, then there would have been no occasion to either address the letter dated 27th October, 2003 to the Arbitrator or make a joint reference to him under clause 7 of the Protocol Agreement for determining the rate at which the shareholding of the Respondent would be sold to the Appellant. It is only for the first time in the application filed by the Respondent before the Arbitrator on 6th April 2004, that the Respondent sought to question as to whether a concluded contract had been arrived at. This to our mind was obviously an after-thought and was a clear deviation from the manner in which the Respondent had understood th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract was arrived at between the parties. In our view, in holding so, the Arbitrator had not transgressed and/or exceeded his jurisdiction, and the determination of the date on which the valuation was to be done, was very much within the scope of the joint reference dated 29th December, 2003. We find that the Arbitrator has correctly taken the date as 3rd May, 2003 being the date when a concluded contract was arrived at between the parties for the sale of the Respondent's 27% shareholding in MSL to the Appellant. We find that the Arbitrator has dealt with this issue in detail from paragraphs 30 to 36 of the award. We do not find any perversity in the same. Similarly, we find that the learned Single Judge has dealt with this issue in paragraphs 16 to 19 of the impugned order and we are in full agreement with the reasoning contained therein. This contention, therefore, of Mr. Samdani will also have to be rejected. CHALLENGE TO VALUATION ON MERITS 62. This brings us to the next objection of Mr. Samdani regarding the valuation of the shares of MSL. Mr. Samdani submitted that MSL has been wrongly valued on a liquidation basis although admittedly MSL was a profit ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to be wound up or was ripe for winding up. He submitted that the Arbitrator himself had held and accepted that the NAV method had two streams, viz. (1) valuation on a going concern basis and (2) valuation on a liquidation basis . Mr. Samdani submitted that the Arbitrator, without applying his mind and without any material on record, held that MSL is a loss making company and the valuation of MSL on liquidation basis was therefore justified. According to Mr. Samdani, the aforesaid findings were totally perverse and revealed a complete non-application of mind disregarding the material on record. He submitted that the Arbitrator committed a fundamental error by ignoring the fact that MSL was in fact a profit making company. This in itself takes away the very foundation of the Arbitrator's decision for valuing MSL on a liquidation basis , was the submission of Mr. Samdani. He submitted that while one segment of MSL (Operating Segment) was making operating losses, the Investment Segment was extremely profitable and MSL was thereby making profits. This fact has been ignored by the Arbitrator which makes the award vulnerable to challenge, was the submission of Mr. Samdani. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod are not mutually exclusive; both should help in ascertaining the profit-earning capacity as indicated above. If the results of the two methods differ, an intermediate figure may have to be computed by adjustment of unreasonable expenses and adopting a reasonable proportion of profits. (3) In the case of a private limited company also where the expenses are incurred out of all proportion to the Commercial venture, they will be added back to the profits of the company in computing the yield. In such companies the restriction on share transfers will also be taken into consideration as earlier indicated in arriving at a valuation. (4) Where the dividend yield and earning method break down by reason of the company's inability to earn profits and declare dividends, if the set back is temporary then it is perhaps possible to take the estimate of the value of the shares before set back and discount it by a percentage corresponding to the proportionate fall in the price of quoted shares of companies which have suffered similar reverses. (5) Where the company is ripe for winding up then the break-up value method determines what would be realised by that process. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions on the date of the valuation, prevented any reasonable estimation of prospective profits and dividends. Therefore, the Supreme Court in the aforesaid judgment has inter alia laid down that the NAV method can be adopted either where a company is ripe for winding up or where the fluctuation of profits and uncertainty of conditions on the date of valuation prevent any reasonable estimation of prospective profits and dividends. 68. The other leading decision on valuation is the judgment of the Supreme Court in the case of Commissioner of Gift Tax, Bombay v/s Smt. Kusumben D. Mahadevia. (1980) 2 SCC 238 After referring to the principles laid down in Mahadeo Jalan's case, the Supreme Court in Kusumben's case at paragraph 5 summed up as under :- 5.The Revenue then pointed out that the principles of valuation set out by the Court in Mahadeo Jalan case [(1973) 3 SCC 157 : 1973 SCC (Tax) 103 : (1972) 86 ITR 621] were merely broad guide-lines and they did not obviate the necessity of considering each case on its own facts and circumstances and in support of this contention the Revenue relied on the observation made by the Court that in setting out these principles, the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istinction, viz. that Mr. Raghuram adopted the NAV method on a going concern basis without taking into account any discounts, whereas Mr. Bansi Mehta adopted the NAV method on a liquidation basis and took into account certain discounts for the purposes of valuation. This was done by Mr. Bansi Mehta in view of the peculiar circumstances of MSL's functioning and the fact that its operating segment was not only making repeated losses over the years but that admittedly it was incapable of making any profits. Both the aforesaid reports were considered in detail by the Arbitrator. In doing so, the Arbitrator firstly adverted to certain admitted facts which were as follows :- (i) The principal activity of MSL involved the assembly of scooters for which completely knocked down kits were received from the Appellant; (ii) The Appellant and the Respondent had entered into a technical know-how agreement under which MSL was assembling Bajaj Chetak Scooters; (iii) Admittedly, under the provisions of the Protocol Agreement, the management of MSL was with the Appellant. Five persons on the Board of Directors were to be nominated by the Respondent and four by the Appellant. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at pages 30 to 32, Mr. Raghuram talks of a control premium of 84.85 % and adds it, not to market value of ₹ 62,35, but to the fair value of ₹ 227/-as calculated by him. It is difficult to appreciate this inconsistent and contradictory approach. When confronted with this, he gives inconsistent and evasive answers as to what is meant by equity value and market value. Further, when he was asked about minimum alternate tax which WMDC will have to pay on the gain that it would make on the sale of shares to BAL, he concedes that he was not sure of the position as to the liability to pay minimum alternate tax and/or capital gains tax since he was not a tax expert. In view of the severe criticism leveled by Mr. J.J. Bhatt and the glaring inconsistencies and contradictions in the evidence of Mr. Raghuram, it is not possible for me to accept the evidence of Mr. Raghuram for more than one reason. I may mention some of them as under : (i) the extent to which Mr. Raghuram can be called an independent and objective expert is extremely doubtful. Without meaning any disrespect to the professional, it is not possible to accept that he is an independent expert witness in the facts o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss in his second report and also in his unconvincing answers in the course of his cross-examination. (xi) The factor of VRS has been totally ignored by Mr. Raghuram though admittedly, on a prior occasion, VRS was offered by MSL in 2001-02. These are some of the reasons, which I am mentioning for discarding the evidence of Mr. Raghuram. In view of the same, it is not possible to accept the contentions raised by Mr. Rohit Kapadia for accepting the said evidence. 72. After rejecting the report and evidence of Mr. Raghuram, the Arbitrator, from paragraph 76 onwards, analyzed the valuation report and evidence led by Mr. Bansi Mehta and came to the conclusion that the evidence of Mr. Bansi Mehta ought to be accepted subject to two changes. In paragraphs 100 101 of the arbitral award, the Arbitrator has held as under :- 100. In the light of the above, I think interests of justice would be met by fixing the rate on the basis of the calculations made by Mr. Bansi Mehta in Appendix-8 and 9 to his report subject, however, to two changes. In Appendix 9, he has calculated discount of 60% on the six monthly average rate on National Stock Exchange, namely discount of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 148.20 345.80 11,712.37 2. Other Treasury investments (at book value) 7,776.00 (B) 19,488.37 Total (A+B) 17,328.37 No. of Shares 114.28 Value per Share 151.63 101. In view of the above, I declare that the rate at which 30,85,712 equity shares of MSL held by WMDC are to be valued as on 3rd May 2003 for the purpose of sale to BAL, should be ₹ 151.63 per share. (emphasis supplied) 73. The abbreviations OS stand for operating segment and IS stand for investment segment. After going through the arbitral award in great detail, we find that the learned Arbitrator has given cogent and plausible reasons for rejecting Mr. Raghuram's second valuation report and accepting the valuation report of Mr. Bansi Mehta. After taking into consideration the totality of the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s would have to be taken into account whilst arriving at the market value of the assets being sold. This to our mind, would be the position whether you value the Company on the NAV method on a going concern basis or on the NAV method on a liquidation basis . We therefore fail to see on what basis it is submitted that when a Company is valued on the NAV method on a going concern basis, there is no question of any discounts. 74. Mr. Samdani next submitted that even if the NAV method on a liquidation basis was to be accepted, even then the impugned award was liable to be interfered with as Mr. Bansi Mehta (in his valuation report) had taken into account certain discounts which were contrary to law. According to Mr. Samdani, the only discounts that could be taken into consideration were (a) workmen's compensation; (b) contingent liabilities if any; and (c) liability towards capital gains tax. He submitted that the discounts that were taken into account by Mr. Bansi Mehta and which were accepted by the Arbitrator, were not in consonance with the discounts that were permissible under a valuation on the NAV method on a liquidation basis . The first discount that was assaile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inciples have been clearly laid down in paragraphs 32 and 37 of the said judgment and read thus :- 32. These decisions clearly lay down the principle that valuation of shares is not only a question of fact, but also raises technical and complex issues which may be appropriately left to the wisdom of the experts, having regard to the many imponderables which enter into the process of valuation of shares. If the valuer adopts the method of valuation prescribed, or in the absence of any prescribed method, adopts any recognised method of valuation, his valuation cannot be assailed unless it is shown that the valuation was made on a fundamentally erroneous basis, or that a patent mistake had been committed, or the valuer adopted a demonstrably wrong approach or a fundamental error going to the root of the matter. Where a method of valuation is prescribed the valuation must be made by adopting scrupulously the method prescribed, taking into account all relevant factors which may be enumerated as relevant for arriving at the valuation. 37. It may also be observed that not any one of the parameters is in itself decisive. All the factors have to be considered and the valuation arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y if it is demonstrated that by accepting the discounts taken into consideration by Mr. Bansi Mehta in his valuation report, the Arbitrator committed any patent illegality or the award suffered from the vice of perversity. 77. Having said this, we shall now deal with each of the discounts independently. The first discount taken into account was an amount of ₹ 30 crores towards VRS (Voluntary Retirement Scheme). Before we deal with this discount on merits, we must mention here that as rightly submitted by Mr. Chinoy, no such ground is taken in section 34 petition and neither was the said contention urged before the learned Single Judge. In fact the contentions raised before the learned Single Judge have been listed at paragraph 13 of the impugned order and there is no mention of this contention. This is probably why we find no discussion on this issue in the impugned judgment. We would therefore be justified in not allowing Mr. Samdani to urge this contention for the first time before us. However, lest it be said that we have not dealt with the argument of Mr. Samdani, we proceed to deal with this contention. 78. As stated earlier, the valuation of MSL shares was done on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lus as well as Dividend Tax when MSL was valued on the NAV method on a liquidation basis . He submitted that in liquidation there is no question of any Reserves and Surplus and dividend is paid to the shareholders only after all the liabilities, workmen's dues and other statutory dues, if any, are paid. He therefore submitted that by accepting the 30% discount on the sale value of BAL shares the Arbitrator committed a fundamental error and this was an error apparent on the face of award which rendered it vulnerable to challenge. 82. In this regard, we must note what Mr. Bansi Mehta has stated in his valuation report as well as his evidence before the Arbitrator. Mr. Bansi Mehta has pointed out that in valuing the shares of MSL on the basis of the break-up value of its assets on a notional liquidation, what has to be worked out is what a shareholder can expect to get if the investee company (in this case, MSL) were to realize its investment, and in abstract theory distribute the entire proceeds of such asset sale to its shareholders. 83. In this regard, it would be appropriate to note the contents of paragraph 5.4 of the valuation report of Mr. Bansi Mehta and his answe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rupee. Also, the distance causes factors which may be considered as giving rise to uncertainties like statutory changes, etc. These two factors, what Lord Keynes said liquidity preference and fear of uncertainties require, that what is in the bush needs to be discounted. Finally, let me deal with 'E', i.e. Empirical Examples. You referred to Appendices 6A, 6B and 6C. Now, these three Appendices are working that focus on the 'E' aspect. Let me explain, since you have asked me to explain. In Appendix 6A, we have dealt with two investment Companies, namely TATA Investment and Industrial Investment Trust. These are two very large companies. We tried to work out as as to whether the market value of the shares of these two Companies reflect the appreciation in the value of the Company's shareholding in other Companies. According to our workings, the discount in the case of TATA Investment is 82.58% of the market value of shares in other Companies. Similar percentage for IIT is 91.41%. Let me now go to Appendix 6B, which deals with the workings for TISCO. As is known, TISCO holds very significant investments in other Companies. On a similar exercise, we find that for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital gains tax (notional). The valuers have also taken into consideration the cost of realisation of market value i.e. expenses in the event of sale or transfer of assets. These items are inherent in market value and cannot be ignored whenever one talks of market value of assets for purpose of valuation of shares of a company. 38. The main objection on behalf of the objector in this connection is regarding deduction on account of capital gains tax. According to him there is no sale or purchase of any fixed asset or immovable properties of the company. Therefore, the question of payment of capital gains tax does not arise. According to the learned counsel no deduction ought to have been made on this account from the market value of the properties. It is true that there is no actual sale or transfer of the immovable assets of the company involved, yet the question remains when the market value of the fixed assets is taken into consideration as against their book value, whether the concept of capital gains tax automatically comes into play or not. According to the learned counsel for the objector since there is no sale or transfer of the fixed assets of the company, there is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be, such charges. Thus in the context of market value of the properties under consideration, liabilities on account of capital gains tax and cost of realisation of the market value have to be provided for. The market value will be minus such liabilities. The value of assets of the company has been raised from book value to market value. When the objector wants to have the benefit of market value of assets being taken into consideration, he must provide for the basic elements of market value, i.e. the elements which form part of the market value. 40. In A Study on Share Valuation a booklet published by the Institute of Chartered Accountants of India while dealing with the subject of Valuation of Assets, it has been said:- In these times of changing price levels, it is unrealistic to take book values of different assets of a company particularly fixed assets if the values have changed materially since the date of their acquisition. In such cases, therefore, realisable value of the assets should be ascertained, if necessary, with the help of expert valuers. Normally, such value of assets would be taken after taking into account the cost of realisation, as well as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or as amiable compositeur . It would therefore follow that the Arbitral Tribunal cannot decide the matter on the notions of fair and equitable principles alone. It is bound by the contract between the parties. 90. However, in the facts of the present case, we find the reliance placed on the aforesaid provisions as wholly misplaced. As noted earlier, Mr. Bansi Mehta in his evidence clearly stipulated in paragraph 5.4 of his report that the fair market value of BAL shares must allow for a discount of about 30% and that the BAL shares held by MSL valued at the six monthly average rate set out in Appendix -5 of his valuation report should be further discounted by no less than the 30%. It is on the basis of this evidence that the Arbitrator had applied the discount of 30% to the value of BAL shares. This figure of 30% is directly traceable to the evidence of Mr. Bansi Mehta, who has in categorical terms stated that the discount should be no less than the 30%. The observations of the Arbitrator in paragraph 100 of the arbitral award fixing the 30% discount on the ground that it should be just, fair and reasonable and would meet the ends of justice, cannot be read in isolation or be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not find that this mistake committed by the Arbitrator would have the effect of vitiating the arbitral award. 92. Mr. Samdani next submitted that Mr. Bansi Mehta in his valuation report had valued the non-BAL shares/investments on their book value as opposed to their market value. According to Mr. Samdani, this too was a fundamental error in the valuation report of Mr. Bansi Mehta, and which was accepted by the Arbitrator whilst determining the valuation of the share price of MSL. 93. On this point, Mr. Bansi Mehta was cross examined by the Respondent herein. It would be pertinent to note his answers to Question Nos. 121, 128 and 129 which read as under:- 121. Q. Would it be correct to say that the valuation of IS done by you is on a break up method with adjustments? A. I cannot give a one word answer of yes or no. If you will see Appendix 8 of my report, you will find that I have segregated MSL's holding of shares in BAL, which I have valued keeping in view the average market value of BAL's shares. As far as other assets comprised in IS are concerned, I have taken the book value as at March 31, 2003 since I believe that there may not be any material differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e almost the entire appreciation may have arisen on account of MSL's share holding in BAL which were considered separately in the valuation report and have been valued on their market value. In answer to Question No. 164 also, Mr. Bansi Mehta has stated that the non-BAL investments can be encashed easily and his own data indicated that there was not much appreciation in these investments. As there was no material appreciation on these investments, Mr. Bansi Mehta thought that it was a fit case to value the non-BAL investments on their book value as opposed to their market value. Mr. Bansi Mehta, in answer to Question No. 173, has explained that if he had valued these investments on the market value basis, he would have had to apply a discount to that value as was done in the case of BAL shares and in such an eventuality the market value of these investments would have been lower than their book value. This is the justification given by Mr. Bansi Mehta for valuing the non-BAL shares/investments on their book value as opposed to their market value. 95. On going through the evidence of Mr. Bansi Mehta as well as the reasoning of the Arbitrator, we do not find any fundamental er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shareholder's agreement between the Appellant and the Respondent had already bestowed effective management control to the Appellant without boardroom control. Mr. Raghuram therefore himself concluded that the peculiar nature of the shareholders agreement between the Appellant and the Respondent would imply that the rationale for control premium might not exist. The conclusion of Mr. Raghuram in the said first valuation report was that taking into consideration the peculiar nature of the shareholders agreement between the Appellant and the Respondent would result in a market discount being offered to an alternative potential buyer to compensate for the lack of effective control. The concluding portion of paragraph 4.7 of Mr. Raghuram's first report is as under :- These aspects of the shareholders agreement would result in a market discount being offered to an alternative potential buyer to compensate the incumbent for the lack of effective control. The market discount as suggested by empirical studies is normally 20% -40 % of the market value and can be decided only through negotiations between WMDCL and BAL. We have accordingly not factored the control premium in o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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