Court sets aside award in breach of Share Purchase Agreement case, rules on legality of share repurchase option

The court set aside the award in a case involving a breach of a Share Purchase Agreement (SPA) and the legality of a share repurchase option. The court held that the arbitrator's view that the share repurchase option was illegal and unenforceable was incorrect. The court also ruled that cross-objections by the Respondents were impermissible under Section 34 of the Arbitration Act. The petition succeeded, and no costs were awarded.

---

---

Issues Involved:
1. Breach of the Share Purchase Agreement (SPA) conditions by the Respondents.
2. Legality and enforceability of the share repurchase option under the SPA.
3. Validity of the arbitrator's findings and conclusions.

Detailed Analysis:

1. Breach of the Share Purchase Agreement (SPA) Conditions by the Respondents:
The arbitration petition challenges an award passed by a sole arbitrator concerning disputes arising from a share purchase contract. The SPA, dated 8 December 2007 and amended on 21 April 2008 and 23 April 2008, required Respondent No. 1 to restructure the Percept Group by 31 December 2007, later extended to 30 June 2008. The Petitioner claimed the Respondents failed to complete the restructuring within the stipulated time. The arbitrator concluded that the Respondents breached their obligations under the SPA, as they did not achieve 100% restructuring by the agreed date. The excuse of completing 80% restructuring due to unfavorable market conditions was not accepted.

2. Legality and Enforceability of the Share Repurchase Option under the SPA:
The arbitrator found clauses 8.5 and 8.5.1 of the SPA, which allowed the Petitioner to demand the repurchase of shares by Respondent No. 1, to be illegal and unenforceable. This was based on two grounds:
- They constituted a forward contract prohibited under Section 16 of the Securities Contracts (Regulation) Act, 1956 (SCRA) and SEBI's circular dated 1 March 2000.
- They were considered a contract in derivatives not traded on a recognized stock exchange, violating Section 18-A of SCRA.

3. Validity of the Arbitrator's Findings and Conclusions:
The Petitioner argued that the arbitrator's conclusion regarding the illegality of the share purchase option was untenable, citing the Division Bench judgment in MCX Stock Exchange Ltd. vs. SEBI. The court in MCX Stock Exchange Ltd. distinguished between a present obligation postponed to a later date and an obligation arising from a future contingency. The Petitioner contended that the SPA's clauses 8.5 and 8.5.1 did not constitute a forward contract but rather an option contingent on future events, thus not violating Section 16 of SCRA.

The court found the arbitrator's view that the contract was a forward contract to be an "impossible view," disregarding the law stated in MCX Stock Exchange Ltd. The court also rejected the argument that the repurchase option constituted a contract in derivatives under Section 18-A of SCRA. Section 18-A does not invalidate contracts but makes certain derivative contracts legal and valid if they meet specific criteria. The option in the SPA did not amount to trading in derivatives and was not prohibited by the SEBI circular of 1 March 2000.

The court also addressed the Respondents' cross-objections, concluding that under Section 34 of the Arbitration Act, cross-objections are not permissible in a challenge petition. Section 34 is a complete code for setting aside an arbitral award, and importing provisions of Order 41 Rule 22 of the CPC into it would lead to anomalous consequences.

Conclusion:
The petition succeeded, and the impugned award was set aside. The court held that the arbitrator erred in declaring the share repurchase option illegal and unenforceable. The court did not entertain the Respondents' cross-objections, emphasizing that Section 34 of the Arbitration Act is a complete code and does not allow for cross-objections. No order as to costs was made.

---