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TMI Blog2023 (2) TMI 379X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to as "Edelweiss"), had challenged an Award dated 6th June 2013 passed by the sole Arbitrator, whereby the sole Arbitrator concluded that two clauses, viz., clause 8.5 and clause 8.5.1 in the Share Purchase Agreement between Edelweiss and appellants herein Percept Finserve Private Limited and Percept Limited (hereinafter collectively referred to as "Percept") are illegal because they were forward contracts contrary to the provisions of the circular issued by SEBI under Section 16 of the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as "SCRA") and also because they are options and hence, contracts in derivatives not being traded on stock exchange and hit by Section 18A of SCRA. The Arbitral Tribunal held that clauses 8.5 and 8.5.1 are not enforceable. 3. Before we proceed further, it will be useful to remind us about the scope of an appeal under Section 37 of the said Act, its jurisdiction as an Appellate Court in examining an order, setting aside or refusing to set aside an Award. The Apex Court in UHL Power Company Limited V/s. State of Himachal Pradesh (2022) 4 SCC 116, in paragraph 16 held as under : 16. As it is, the jurisdiction conferred on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch restructuring. The Second condition subsequent required appellant no.1 not to dispose of any of its assets to any third party and to reflect all assets of appellant no.1 in the books of appellant no.2. Appellant no.1 was also required to ensure that the shareholding of all promoters of all its affiliates/group companies would be transferred to appellant no.2 and no assets of appellant no.1 would be dissipated by Percept till the completion. 5. Edelweiss raised a dispute alleging that Percept failed and/or neglected to complete the restructuring of the Percept group within the period stipulated in the SPA, i.e., 31st December 2007, and therefore, committed breach of the SPA. According to Edelweiss, because of the breach committed by Percept, Edelweiss was entitled to resell the shares for Rs.20 Crores to appellant no.1 for the amount that would yield an internal return rate of 10% of the consideration paid to appellant no.1 under the SPA. Edelweiss extended the time line for execution of the obligations of Percept to a date not later than 30th June 2008 and entered into the Amendment Agreement dated 23rd April 2008. The Amendment Agreement provided that if appellant no.1 breache ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rupees Ten Crores only) by way of damages or such other sum as may be determined as the damage/loss caused to the Claimant by the Respondents by the Hon'ble Tribunal." 8. After hearing the parties, the Arbitral Tribunal raised 15 issues/points for determination, one of which only is relevant for the purpose of this appeal, i.e., Whether the transactions under amended the SPA (as amended from time to time) are illegal or void or unenforceable as alleged in the Statement of Defence and Counter Claims? 9. By Award dated 6th June 2013 the learned Sole Arbitrator, despite coming to the conclusion that Percept had breached their obligations under the SPA, rejected Edelweiss's claim on the ground that the transaction of share purchase option was illegal and/or unenforceable being in breach of SCRA. 10. On the issue of legality or enforceability of the transaction of repurchase contained in the SPA, the learned Arbitrator firstly held that clauses 8.5 and 8.5.1, which gave an option to Edelweiss to demand repurchase of its shareholding in appellant no.2 by appellant no.1, were illegal because they constituted a forward contract prohibited under Section 16 of SCRA read with the Circular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act of share purchase is not an acceptable view. The submission by Percept that Edelweiss invoking its right under clauses 8.5 and 8.5.1 by virtue of paragraph 6 of the said letter calling upon appellant no.1 to act on the clauses either with immediate effect or in any case before 12th January 2009 would mean that this exercise of option demands repurchase on or before a future date and hence, it is not a contract excepted by the circular of SEBI dated 1st March 2000 is also not correct. Mr. Pimple submitted that the Circular dated 1st March 2000 only permitted spot delivery of shares against payment of price and since there was a postponement of purchase of shares even after exercise of the option by Edelweiss and coming into being of the contract of share purchase, it falls foul with the circular and hence, it is illegal. We do not agree with Mr. Pimple. The learned Single Judge very correctly held that 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. The relevant portion of letter dated 30th December 2008 read as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rce with effect from 20th February 1957, Section 20 thereof contained an absolute prohibition on options in securities. The legislative intention was also clear from the preamble of SCRA which provided that this legislation was enacted to prevent undesirable transactions in securities by regulating the business of dealing therein, by prohibiting options and other matters connected therewith; (b) thereafter, on 27th June 1969 the Government of India, through the Ministry of Finance, vide its Notification No.SO 2561, issued under Section 16 of SCRA, prohibited forward contracts and permitted contracts for the sale or purchase of securities, inter alia so long as such contracts qualified as spot delivery contracts; (c) by virtue of the Securities Laws (Amendment) Act, 1995, with effect from 25th January 1995, Section 20 of SCRA containing the prohibition on options in securities, came to be deleted. Although Section 20 was deleted, the 1960 notification continued to be in force prohibiting forward contracts and permitting only spot delivery contracts; (d) by the Securities Laws (Amendment) Act 1999, with effect from 22nd February 2000, Section 18A was introduced in the SCRA t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 18A, viz., that such an option must be traded on a recognised stock exchange and settlement on the clearing house of the recognised stock exchange. The option derived its value from the underlying shares of appellant no.2 and, therefore, was a derivative. A derivative in the present case, being an option attached to the shares of an unlisted public company, was not permitted and would fall foul of the public policy under SCRA violative of Section 18A; (h) MCX (Supra) is not applicable in the present case because in the said case the Court held that options come into existence upon the exercise thereof, however, the Court did not decide the question of legality of buyback arrangements pursuant to put option, vis-a-vis, the provisions of Section 18A and the same was kept open as it was not the ground taken by SEBI in the show cause notice; and (i) clauses 8.5 and 8.5.1 are void part of the SPA and can be properly separated from the rest and the rest of the provisions of the SPA does not become invalid. Mr. Tamboly did not have any issue on this submission. 16. Mr. Tamboly submitted that : (a) though the policy underlying Section 18A of SCRA was to stop speculation/sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned Single Judge of this Court in Banyan Tree Growth Capital L.L.C. V/s. Axiom Cordages Limited and Ors. 2020 SCC Online Bom 781 and a learned Single Judge of the Calcutta High Court in EIG (Mauritius) Limited V/s. McNally Bharat Engineering Company Limited 2021 SCC Online Cal 2915 to buttress his submissions. 17. Having heard the counsel and considering the Arbitrator's Award and the impugned judgment, we are of the view that appellants have not made out any case for interference. We totally agree with the view expressed by the learned Single Judge that the 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 an incorrect view. The judgment in MCX (Supra) squarely deals with a purchase option, such as the present, where the purchaser of securities requires the vendor to repurchase on the occurrence of a contingency. As held in MCX (Supra), a contract giving an option to a purchaser to require repurchase of securities by his vendor on some contingency occurring would only mean that there was no present obligation at all but the obligation arose by reason of some contingency occurring. On the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 183 (E) dated 1st March , 2000 issued under section 29A of the said Act, the Securities and exchange Board of India (hereinafter referred to as 'the Board') being of the opinion that it is necessary to prevent undesirable speculation in securities in the whole of India, hereby declare that no person in the territory to which the said Act extends, shall, save with the permission of the board, enter into any contract for sale or purchase of securities other than such spot delivery contract or contract for cash or hand delivery or special delivery or contract in derivatives as is permissible under the said Act or the Securities and Exchange Board of India Act, 1992 (15 of 1992) and the rules and regulations made under such Acts and rules, regulations and bye-laws of a recognised stock exchange : Provided that any contracts for sale or purchase of government securities, gold related securities, money market securities and ready forward contracts in debt securities entered into on the recognised stock exchange shall be entered into in accordance with,- (a) the rules or regulations or the bye-laws made under the Securities Contracts (Regulation) Act, 1956 (42 of 1956), or t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, and options. Derivatives, as explained by the Apex Court, are a form of financial instruments which are traded in the securities market and whose values are derived from the value of the underlying variables like the share price of a particular scrip in the cash segment of the market or the stock index of a portfolio of stocks. Derivative trading is governed by Section 18A of SCRA. There are two types of derivative instruments, viz., futures and options. A future or future contract is an agreement between two parties to buy or sell an asset at a certain time in future at a price agreed upon on the date of the agreement. An option, on the other hand, is a contract between a buyer and his seller, which gives a right, but not an obligation, to buy or sell the underlying asset at a stated price on or before a specified date. What the buyer of an option buys is his right to exercise the option, often with a premium; his counter-party, who gives him such option, receives the option premium and in consideration thereof, is obliged to buy or sell the underlying asset against the option exercised by the buyer. Options are, as the Apex Court explained, either of call or put, call option ..... X X X X Extracts X X X X X X X X Extracts X X X X
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