TaxTMI 
TaxTMI 
2010 (2) TMI 589
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....ms of the protocol agreement, the petitioner holds 27 per cent of shareholding of MSL while the respondent continues to hold 24 per cent. The balance 49 per cent 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 authorised 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 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 ....
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....irectors, 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 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 the 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 9-4-2003, the petitioner offered to sell its shares to the respondent, at a price of Rs. 232.20 per share. By a reply dated 3-5-2003, 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 se....
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.... On 29-12-2003, 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 October 2, 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 10-1-2004, directions were issued for filing pleadings. On 23-1-2004, an application was filed by the petitioner that the respondent should be treated as ....
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....espondent filed a reply, opposing the application and, inter alia, contended that by its letter dated 3-5-2003, 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 per cent 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 21-7-2004. While rejecting the application, the arbitrator stated that the reasons for the rejection would follow and form part of the award. On 10-8-2004, an application was filed by the petitioner seeking relief to the effect that the arbitral Tribuna....
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....nd 10 of the Sale of Goods Act, 1930 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 14-1-2006, 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 3-5-2003, 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 the date for valuation of the shares of MSL, proposed to be transferred by the petitioner to the respondent; (ii) MSL held 3.4 per cent 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 per cent on the value of the shares held....
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....tion, 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 pre-emption 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 pre-emptive 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 of its 27 per cent holding in MSL and to transfer it to the respondent, the respondent accepted the offer by its letter dated 3-5-2003. This was clarified by th....
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....applying a discount of 30 per cent in the facts of the case. The evidence of Mr. Bansi Mehta suggested that a discount between 28 to 40 per cent would have to be allowed on a conceptual basis whereas on an empirical comparison based on market capitalisation, a discount between 56 to 91 per cent would have to be taken. The arbitrator has held that the discount should be not less than 30 per cent in the facts of this case. The reference by the arbitrator to the report of Mr. Raghuram indicating 20 to 40 per cent 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 per cent is valid. The evidence is referred to in the arbitral award itself and the award can be sustained on that basis. The realisable 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 su....
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....2 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 3-5-2003, 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 10-5-2003, the respondent confirmed that its earlier response of 3-5-2003, was to the offer made by the petitioner on 9-4-2003 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 3-5-2003, was not an unqualified acceptance since a meeting was sought for negotiation to explore a settlement. In dealing with this submission, it is to be noted that on 31-7-2003, the respondent sought the initiation of the arbitral process, in the event that its offer....
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....s 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 27-1-2004, 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 9-4-2003 and 3/10-5-2003. 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 6-4-2004, that the petitioner sought ....
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....ubstantive 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 Oil & Natural Gas Corpn. Ltd.'s case (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." (p. 719) 22. 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 deci....
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....ustan Zinc Ltd. v. Friends Coal Carbonisation [2006] 4 SCC 445, which in turn has followed Oil & Natural Gas Corpn. Ltd.'s case (supra). In the judgment in R.S. Sharma & Co.'s case (supra), the Bench of two learned Judges of the Supreme Court has summarised 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 ....
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.... MSL, besides the acquisition of 3.4 per cent of the holding in the BAL shares. The second aspect relates to the discounting of the holding of BAL shares. 28. The arbitrator culled out the principles for valuation of shares from the judgments of the Supreme Court in CWT v. Mahadeo Jalan [1972] 86 ITR 621 and CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38^1 . The judgment in Mahadeo Jalan's case (supra), 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 capitalisation 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 ....
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....an 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 per cent 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-core business assets of MSL which consist of unquoted investments and quoted investments, constitute 96.2 per cent 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 per cent. 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 ....
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....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 per cent to 60 per cent 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 per cent 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 per cent to 40 per cent in his first report". 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 ....
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....lier that the fair market value must allow for a discount of about 30 per cent. 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 per cent." [Emphasis supplied] 33. 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 per cent." The underlying principle is that, the realisable value of an asset is less than the market value in a liquidation valuation. The arbitrator adopted a discount of 30 per cent 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 per ce....
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....wealth of evidence before the arbitrator, which was accepted by him to demonstrate that a discount of 30 per cent was susceptible both on a conceptual and an empirical basis. The challenge on this ground is, therefore, lacking in substance. Book value of non-BAL holdings 35. 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 realisable 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^1. 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 balance-sheet of MSL as of 31-3-2003, showed that almost 98 per cent or more of the appreciation in the quoted inv....
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....oach 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 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. 37. 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 postp....
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....ich, finality must vest in the decision of the arbitrator. 41. 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 applic....
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....rinciple to be attracted, it must be evident 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. 46. In the subsequent judgment of the Supreme Court in Tarapore & Co. v. Cochin Shipyard Ltd. [1984] 2 SCC 680 and Thawardas Pherumal's case (supra), 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 & Co.'s case (supra), the principle was formulated in the following terms by the Supreme Court :- "if a question of law is specif....
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....al 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 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 6-4-2004. 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 ....
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....registered company shall be freely transferable. A company could refuse transfer only on four specified grounds. On 20-9-1995, the Depositories Ordinance was promulgated. The Ordinance thereafter, was enacted into legislation by the Depositories Act, 1996. 53. 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 20-9-1995. 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 mem....
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....e" is defined as follows:- "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 [1881] 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." 57. In Ontario Jockey Club Ltd. v. Samuel McBride AIR 1928 PC 291, the Privy Council dealt with a case, where the transfer of shares in the Ontario Jockey Club Ltd.'s case ( supra) was refused on the ground, inter alia, that the provisions of the bye-laws had not been observed. In the 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 Jock....
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....reed 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 the other 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 Re....
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....ormance. A situation involving the restriction on the transferability of shares in a private company has 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. 61. 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 recognises 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 fulfil 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 ....
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....ight of pre-emption contained in a family settlement. The Company Law Board held that the articles of association of the company, which was a public limited company, did not recognise a right of pre-emption. 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 Company Law Board rested its decision both on the basis that the pre-emptive right was not recognised by the articles of association and on the foundation that a public company could not have a provision recognising pre-emptive rights to its members. The Delhi High Court in an appeal arising out of the judgment of the Company Law Board relied upon the judgment of the Supreme Court in V.B. Rangaraj's case (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 Company Law Board further rightly mentioned that as per the provisions of....
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....ting dated March 16, 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." (p. 50) 64. A special leave petition against the judgment of the Delhi High Court was dismissed by the Supreme Court on 7-4-2006. I am in respectful agreement with the view of the Delhi High Court which reflects the correct position in law. 65. 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 the 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 destabilise bargains which are the heart of commerce. 66. The submission that section 111A would not inter....