TMI Blog2019 (3) TMI 1936X X X X Extracts X X X X X X X X Extracts X X X X ..... under Section 37 of the Act. Anomalous consequences would follow, if we were to do so and allow the opponent to a challenge petition under Section 34 to raise cross-objections to an arbitral award, whether towards its reasoning or its operative part, in the event the challenger succeeds in his challenge under Section 34. First of all, that would require us to read Section 34 in an unnatural way. We would have to hold that a cross-objection is not a recourse to a Court against an arbitral award. Section 34, in its very opening line (sub-section (1)), provides that recourse to a court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-sections (2) and (3). On the other hand, the right to take a cross-objection under Order 41 Rule 22 is nothing but an exercise of the same right of appeal which is given to an aggrieved party. Secondly, one would be at a loss to find applicable grounds which can be taken in such cross-objections, though, in the absence of any other indication, and also logically, it would have to be supposedly the same grounds which are provided for an application for setting aside an award. Thirdly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ested in investing in Respondent No. 1 subject to a condition that the Respondents restructure the Percept Group as agreed between the parties inter alia by an IPO. The parties accordingly entered into the SPA providing for terms and conditions of the share purchase contract. Under the SPA, the Petitioner purchased 2, 28, 374 shares of Respondent No. 2 held by Respondent No. 1 for a total consideration of ₹ 20 crores. One of the conditions subsequent under the SPA, in keeping with the original intention of the parties, required Respondent No. 1 to accomplish restructuring of the entire Percept Group not later than by 31 December 2007 and to provide the claimant documents in proof of such accomplishment. It was the case of the Petitioner that the Respondents failed to complete the restructuring of the Group within the period stipulated originally under the SPA or, i.e. by 31 December 2007, or within the period extended by the amendment agreement, i.e. by 30 June 2008, with obligation to provide documentary evidence of such completion not later than by 15 July 2008. In the event of non-fulfillment of this condition subsequent, under clause 8.5 of the SPA, the Petitioner had an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of Respondent No. 2 and bring out the IPO on the due date despite such date having been extended from time to time. The excuse of Respondent No. 1 that it had almost completed restructuring, that is to say, to the extent of about 80%, and the delay in issue of IPO was on account of advice of the merchant banking division of the Petitioner about unfavourable market conditions, was not accepted by the arbitrator as a satisfactory explanation. The arbitrator held that the SPA required 100% restructuring by a given date; that date was extended by mutual consent upto 30 June 2008; and it was no excuse to say that restructuring was done upto 80%. Want of 100% restructuring was, thus, treated by the arbitrator as a breach of the Respondents' obligations under the SPA. On the issue of legality or enforceability of the transaction of repurchase contained in the SPA, however, the learned arbitrator held against the Petitioner. The learned arbitrator, firstly, held that clauses 8.5 and 8.5.1, which gave an option to the Petitioner to demand repurchase of its shareholding in Respondent No. 2 by Respondent No. 1, were illegal because they constituted a forward contract prohibited under Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms specified by the Central Government by notification in the official gazette, in accordance with rules and bye-laws of any recognized stock exchange, these are prohibited by Section 18-A of SCRA. 5. The learned arbitrator's conclusion that the purchase option contained in clauses 8.5 and 8.5.1 was illegal and unenforceable, being a forward contract, is clearly an impossible view. The judgment of our Court in MCX Stock Exchange Ltd., which was cited before the learned arbitrator, squarely deals with a purchase option, such as the present, where the purchaser of securities requires the vendor to repurchase them on the occurrence of a contingency. Our Court in that case referred to the decision of a Division Bench of our Court in Jethalal C. Thakkar vs. R.N. Kapur AIR 1956 Bom 74 (Per Chagla C.J. speaking for the Court), where the Division Bench drew a clear distinction between a case where there was a present obligation under a contract, but the performance of which was postponed to a later date and a case, where there was no present obligation at all but the obligation arose by reason of some condition being complied with or some contingency occurring. The Court, relying on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act on the clauses either with immediate effect, or, in any case, before 12 January 2009. Relying on this clause, it is submitted that inasmuch as this exercise of option demands repurchase on or before a future date, it is not a contract excepted by the circular of SEBI dated 1 March 2000. There is no substance in the contention. Spot delivery is a delivery of shares against payment of price. Just because the original vendor of securities is given an option to complete repurchase of securities by a particular date, it cannot be said that the contract for repurchase is on any basis other than spot delivery. There is nothing to suggest that there is any time lag between payment of price and delivery of shares. There is nothing to suggest that the shares would be delivered first and the price demanded later or vice versa. There is, accordingly, no distinction to be drawn here. The statement of law in MCX Stock Exchange Ltd. squarely and fully applies to the facts of our case. 7. That brings us to the second leg of the arbitrator's award on illegality or unenforceability of the share purchase option contained in clauses 8.5 and 8.5.1, on account of breach of Section 18-A of SCR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontained in clauses 8.5 and 8.5.1 cannot be termed as a contract in derivative. Mr. Jagtiani refers to the definition of 'derivative' contained in clause (ac) of Section 2 of SCRA, which was inserted by Act No. 31 of 1999, i.e. the same amending Act, which introduced Section 18-A in SCRA. The definition is as follows:- 2(ac) derivative includes-(A) a security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security; (B) a contract which derives its value from the prices, or index of prices, of underlying securities; (C) commodity derivatives; and (D) such other instruments as may be declared by the Central Government to be derivatives. 9. Learned Counsel refers to the definition of 'option in securities' contained in clause (d) of Section 2. Clause (d) provides that option in securities means a contract for the purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi a galli, a put, a call or a put and call in securities. Learned Counsel relies on the Supreme Court judgment in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 3 October 2013, in fact making it clear that it was not), it may be technically possible to treat it as an option in securities, and as such, a derivative. So far so good. That, by itself, however, does not make it bad in law or impermissible. What the law prohibits (Section 16 read with the SEBI Circular of 1 March 2000) is not entering into a call or a put option per se; what it prohibits is trading or dealing in such option treating it as a security. Only when it is traded in or dealt with, it attracts the embargo of law as a derivative, that is to say, a security derived from an underlying debt or equity instrument. As such derivative, no one can trade or deal in it or make a contract in respect thereof except on a recognized stock exchange or as settled on the clearing house of a recognized stock exchange or as between parties and on terms which the Central Government may specify, in accordance with the rules or bye-laws of such stock exchange, in keeping with the three categories referred to in clauses (a) to (c) of Section 18-A. In other words, any and every trading in such put option is illegal or unenforceable under Section 16 read with a notification issued under that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or sustaining it (i.e. its operative part) when the challenger is able to justify his challenge. Mr. Jagtiani relies on a judgment of a learned Single Judge of our Court in Satpal P. Malhotra vs. Puneet Malhotra and Others [Judgment of R.D. Dhanuka, J. of Bombay High Court dated 6/5/2013] . In this case, the learned Judge held that the provisions of the Code of Civil Procedure, including Order 41 Rule 22 thereof, which provide for cross-objections, would apply to arbitration appeals filed in Court under Section 37 of the Act. The learned Judge was of the view that Section 37 has to be read with the provisions of Civil Procedure Code and in particular Order 41 Rule 22 thereof; it is not inconsistent with these latter provisions. While rendering this view, the learned Judge relied on a Supreme Court judgment in the case of ITI Ltd. vs. Siemens Public Communications Network Ltd. (2002) 5 Supreme Court Cases 510 In this judgment, what the Supreme Court held was that merely because the Act does not make CPC applicable, by reference, it should not be held that CPC is inapplicable. In particular, the Court held that a revision against an order passed by a civil court in a first appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction under Order 41 Rule 22 is nothing but an exercise of the same right of appeal which is given to an aggrieved party. Secondly, one would be at a loss to find applicable grounds which can be taken in such cross-objections, though, in the absence of any other indication, and also logically, it would have to be supposedly the same grounds which are provided for an application for setting aside an award. Thirdly, there is no provision in law for making such cross-objections in any particular form. If there is no form unlike the one provided in Order 41 Rule 22 and the objections in a challenge petition could be in the form of a reply to the petition, there is no indication how such objections are to be treated in case the challenge petition under Section 34 is rejected. Should a cross-objection be nevertheless heard and determined in that case, just as a cross-objection would under sub-rule (4) of Order 41 Rule 22. Then there is the unanswered question of time of such cross-objections. A strict time-line is provided for a challenge petition under Section 34. Should there be no time for cross-objections and should there be any consequences for non-filing of such objections within t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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