TaxTMI 
TaxTMI 
2015 (5) TMI 1134
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....equity shares) in a company called Maharashtra Scooters Ltd. ("MSL"), are to be valued, for the purposes of sale to the Appellant, at the rate of Rs. 151.63 per share as on 3rd May, 2003. MSL is jointly promoted by the Appellant and the Respondent and is a public company whose shares are listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). 3. Being dissatisfied with the arbitral award, the Respondent before us (original Petitioners) challenged the same before the learned Single Judge under the provisions of section 34 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") on various grounds as set out in the Arbitration Petition. After hearing the parties, the learned Single Judge, by an elaborate and reasoned order, negated all the contentions of the Respondent, save and except one, on the basis of which the award was set aside. In a nutshell, the ground on which the award was set aside by the learned Judge was that Clause 7 of the Protocol Agreement entered into between the parties and which gave the right of first refusal to the Appellant to purchase the shareholding of the Respondent, was contrary to section 111A of the Companies Act, 1....
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....vides 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 such rate as may be agreed to between the parties or decided upon by arbitration. The procedure to be followed in such a situation is also set out in the said clause. 7. It is the case of the Respondent that the Appellant had for the last 20 odd years repeatedly been requesting the Respondent to divest/transfer its 27% shareholding to the Appellant. On 30th June 2002, Mr. Raghuram of CRISIL carried out a valuation of the shareholding of the Respondent in MSL. It is the case of the Respondent that this valuation was done on the joint request of the Appellant and the Respondent. This of course has been disputed by the Appellant. Be that as it may, ultimately, some time in April 2003, the Respondent considered selling and transferring its 27% shareholding to the Appellant and in furtherance thereof, addressed a letter dated 9th April, 2003 offering to sell its 27% shareholding in MSL (30,85,712 shares) to the Appellant at a price of Rs. 232.20 per share. 8. In....
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....poration has to make the first offer to Bajaj Auto Ltd. And in turn Bajaj Auto Ltd. has to accept or reject that offer. This process has been completed and since no agreement has been reached on the value of the share, as per the Agreement, the parties involved have to proceed to appoint a Sole Arbitrator for the purpose. ............ You are, therefore, requested to be kind enough to kindly forward your acceptance to be appointed as the Sole Arbitrator for this assignment and also communicate the retainership charges and venue suitable to you for the purpose of Arbitration. The detail Terms of Reference would be communicated to you later." (emphasis supplied) 11. Pursuant thereto, on 29th December, 2003 a joint reference was made to the Arbitrator to decide the rate at which the shares of the Respondent would be sold to the Appellant. This joint reference has been signed by the Appellant as well as the Respondent. The said letter reads as under :- "Dear Sir, We thank you for consenting to be appointed as the 'Sole Arbitrator' in the MSL arbitration assignment. We are outlining below the terms of reference, in this matter. ....
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.... submission of the Respondent before the learned Single Judge was that clause 7 created a right of pre-emption, and MSL being a listed public company, section 111A of the Companies Act 1956 was thereby violated. It was the submission of the Respondent that section 111A provides that the shares or debentures of a public company and any interest therein shall be freely transferable. It was the further submission of the Respondent that section 9 of the Companies Act further provides that the provisions of the Companies Act shall have effect notwithstanding anything to the contrary contained in the Memorandum and Articles of Association of the company. It was therefore submitted that a pre-emption right recognised by clause 7 of the Protocol Agreement, and which was then incorporated in the Articles of Association of MSL, must yield to the provisions of section 111A of the Companies Act. In other words, it was submitted that clause 7 of the Protocol Agreement being contrary to the provisions of the Companies Act, was unenforceable. The learned Single Judge, after hearing the parties, upheld this contention of the Respondent and set aside the arbitral award on this sole ground. Being ag....
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....hly restrictive pre-emptive clause that caused great fetters on the right of free transferability found in any ordinary pre-emption clause. He submitted that (i) clause 7 fetters the right of the Respondent to sell its shares to any other person including any other existing member of MSL, without offering the same to the Appellant; (ii) allows the Appellant to purchase the shares of the Respondent without accepting the price at which the shares were offered but at a price to be determined or fixed by arbitration. Such a provision, according to Mr. Khambatta, was therefore undoubtedly a fetter on the right of the Respondent to freely transfer its shares to a person of its choice and at a price of its choice and therefore clearly impinged upon the provisions of section 111A(2) of the Companies Act, which contemplated free transferability of shares. 16. Mr. Khambatta further submitted that since the Protocol Agreement was incorporated in the Articles of Association of MSL, upon incorporation of MSL and registration of its Articles of Association, the Protocol Agreement stood subsumed in its Articles. Hence, on 29th December 2003, which is the date of reference to arbitration, claus....
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....rly impinge on the provisions of section 111A(2), was the submission of Mr. Khambatta. In light of the above, Mr. Khambatta submitted that clause 7 of the Protocol Agreement and which was subsequently incorporated in the Articles of MSL, restricts the shareholders of MSL to sell its shares to buyers of its choice, and at a price of its choice, and thereby would undoubtedly be a restriction on its transferability. This being the case, he submitted that the said clause was invalid and unenforceable. 19. In the alternative, Mr. Khambatta submitted that even assuming that the Protocol Agreement survived as an independent contract after it was incorporated in the Articles of MSL, it would make no difference to his submissions. He submitted that if something cannot be done directly, it also cannot be done indirectly. Once a restriction on transferability of shares in the Articles of a public company is invalid and unenforceable, the identical restriction cannot be permitted to re-emerge in a different avatar. Whether clause 7 is held as a part of the Articles of MSL, or a part of a free standing agreement, it remains equally restrictive and hence invalid and unenforceable. For all the....
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....to part with or transfer its shareholding or any part thereof, is required to give written notice to the other party specifying its intention to do so and the rates at which it is willing to transfer/part with the same. Once 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. 22. Having said this, we shall now turn our attention to certain statutory provisions. Before we deal with the provisions of section 111A, we must make a note of the provi....
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.... not only form, in good faith, its opinion as to whether such registration ought not or ought to be refused on any of the grounds mentioned in sub-section (3) but also- (a) if it has formed the opinion that such registration ought not to be so refused, effect such registration; (b) if it has formed the opinion that such registration ought to be refused on the ground mentioned in clause (a) of sub-section (3), intimate the transferor and the transferee by notice in the prescribed form about the requirements under the law which has or which have to be complied with for securing such registration; and (c) in any other case, make a reference to the Company Law Board and forward copies of such reference to the transferor and the transferee. (5) Every reference under clause (c) of sub-section (4), shall be in the prescribed form and contain the prescribed particulars and shall be accompanied by the instrument of transfer of the securities to which it relates, the documentary evidence, if any, furnished to the company along with the instrument of transfer, and evidence of such other nature and such fees as may be prescribed. (6) On receipt of a....
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....against such refusal, it placed an undue burden on an aggrieved person who often happened to be a small investor. The Legislature also felt that the position at that time was not conducive to free marketability of listed securities and healthy growth of the capital markets. In view thereof, the Legislature felt that unrestricted transferability was particularly necessary for securities of public companies which are listed on the Stock Exchanges. It was in this context that the Legislature proposed the amendment to the Securities Contracts (Regulation) Act, 1956 by insertion of section 22A, to ensure free transferability of securities of public companies whose securities were listed on the Stock Exchanges. 24. On a reading of section 22A as it stood then, it is clear that the provisions therein applied only to public companies whose shares were listed on the recognised Stock Exchanges. The provision in section 22A(2) that securities of public companies shall be freely transferable, was made only as the basis for the consequential provisions in sections 22A(3) to (9) to provide for free transferability by restricting the entitlement of public companies (through their Board of Dire....
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....ion on free transferability as contemplated under section 22A. In fact, such contracts (either by way of sale, pledge or pre-emption) are entered into by a shareholder in exercise of his right to freely deal with and/or transfer his own shares. 28. Having said this, we now turn our attention to section 111A of the Companies Act. By the Depositories Act, 1996 the entire scheme/provisions of section 22A of the Securities Contracts (Regulation) Act, 1956 were deleted and simultaneously section 111A was inserted in the Companies Act. For ready reference, section 111A as it stood prior to its amendment in 2003, reads thus:- 111-A. Rectification of register on transfer.(1) In this section, unless the context otherwise requires, "company" means a company other than a company referred to in sub-section (14) of Section 111 of this Act. (2) Subject to the provisions of this section, the shares or debentures and any interest therein of a company shall be freely transferable: Provided that if a company without sufficient cause refuses to register transfer of shares within two months from the date on which the instrument of transfer or the intimation of transfer, a....
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....s [sub-section (1) read with section 111(14)]. Secondly, subject to the other provisions of section 111A, the shares or debentures and any interest therein of a company shall be freely transferable [sub-section (2)]. Thirdly, if a company, without sufficient cause, refuses to register transfer of shares within two months from the date on which the instrument of transfer or the intimation of transfer, as the case may be, is delivered to the company, the transferee may appeal to the Company Law Board and the Company Law Board shall thereafter direct such company to register the transfer of shares [proviso to sub-section (2)]. In other words, the company cannot refuse transfer of shares without sufficient cause. Fourthly, if the transfer of shares or debentures is in contravention of any of the provisions of SEBI Act, 1992 or SICA, 1985 or any other law for the time being in force, then the Company Law Board may, after such inquiry as it thinks fit, on an application made by the depository or company or participant or investor or the Security Exchange Board of India, direct any depository or company to rectify its register of records [sub-section (3)]. Sub-sections (4), (5), (6) and (....
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....e are of the view that if the legislature intended to take away that right, it would have made an express provision in that regard. It is now quite well settled by the Supreme Court that the Legislature does not interfere with the freedom of contract generally except when warranted by public policy and the Legislative intent in that regard is expressly made manifest. [See Byram Pestonji Gariwala Vs. Union Bank of India (1992) 1 SCC 31]. The Supreme Court has also further expounded that while enacting a statute, Parliament cannot be presumed to have taken away the right in property and deprivation of a legal right existing in favour of a person. [See ICICI Bank Ltd. Vs. SIDCO Leathers Ltd. (2006) 10 SCC 452]. 32. 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 any way whittle down the right of a shareholder of a public company to arrive a....
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.... Board of Directors of the company regarding transfer of shares or debentures and any interest therein of a company. The Board of Directors cannot refuse to register transfer of shares unless there is sufficient cause to do so. In other words, the setting in which Section 111A is placed in part IV of the Act under heading "transfer of shares and debentures" it is not a provision to curtail the rights of the shareholders to enter into consensual arrangement with the purchaser of their specific shares. The right to enter into consensual arrangement must prevail so long as it is in conformity with the terms of Articles of Association and other provisions of the Act and the Rules. Whereas, Section 111A is a provision mandating the Board of Directors of the company to transfer shares in the name of the transferee, subject to the stipulations in Section 111A of the Act. The expression "freely transferable" therein is in the context of the mandate against the Board of Directors to register the transfer of specified shares of the members in the name of the transferee, unless there is sufficient cause for not doing so. The said provision cannot be construed to mean that it also intends to t....
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....was also relied upon by one of the parties before the Division Bench in Messer Holdings Ltd. After dealing with the same in great detail, the Division Bench at paragraph 57 expressly disagreed with the reasoning given in the judgment and order impugned before us. The relevant portion reads thus:- "57.The Learned Single Judge has then distinguished the exposition in Madhusoodhanan's case on the basis that the Karar referred to therein was an agreement between particular shareholders relating to the transfer of the specified shares. It is noted that in that case the company was a private company and restriction on the right of the shareholders to transfer shares and prohibit invitation to the public to subscribe for shares and debentures of the company is materially different. The main thrust is that in case of public company there can be no restriction whatsoever and if any other argument was to be accepted, it would mean that Section 111A is being read as being subject to a contract to the contrary. The notification dated June 27, 1961 has been discarded on the opinion that, that cannot have any bearing in relation to Section 111A of the Companies Act as it is issued i....
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....before the Division Bench in the case of Messer Holdings Ltd. In furtherance of this argument, Mr. Khambatta submitted that the Protocol Agreement and more particularly Clause 7 thereof, was incorporated into the Articles of MSL and was therefore subsumed therein and did not independently survive. Once it was subsumed in the Articles and the same could not be incorporated the Articles of a public company, the same could not re-emerge in a different avatar, was the submission. We cannot agree with this argument. Merely because the Protocol Agreement was incorporated into the Articles of MSL, does not mean that the Protocol Agreement by itself (or clause 7 thereof) ceased to exist. The Protocol Agreement governs the rights and liabilities of the parties thereto and would continue notwithstanding the fact that they were incorporated in the Articles of MSL. Therefore, even if we are to assume that such a clause was not permissible in the Articles of a public company, that would not in any way destroy the rights created under the said Agreement inter-se between the parties. The rights and liabilities created under the said Protocol Agreement would continue to bind the parties thereto. E....
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....11A. However, that is not the case before us. Clause 7 of the Protocol Agreement and which has been incorporated in the Articles of Association of MSL, only relates to the shareholding of the Appellant and the Respondent and their rights and liabilities in relation thereto. It does not in any way affect the rights and/or liabilities of the other members of MSL. In this view of the matter, we are of the view that merely because Clause 7 of the Protocol Agreement was incorporated in the Articles of MSL, would not invalidate the same. We are also persuaded to take this view because we find that in today's global reality, joint ventures are extremely common and clauses similar to Clause 7 of the Protocol Agreement may become necessary to ensure that a joint promoter of a company does not sell his shareholding to a competitor who then possibly could get control of his rival. In this view of the matter and looking to the totality of the facts and circumstances of the case, we are clearly of the view that Clause 7 of the Protocol Agreement does not in any way impinge upon the principle of free transferability of shares as contemplated under section 111A of the Companies Act, 1956. ....
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....he company shall comply with such order within a period of ten days of the receipt of the order; or (b) direct rectification of the register and also direct the company to pay damages, if any, sustained by any party aggrieved. (6) If a person contravenes the order of the Tribunal under this section, he shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees." (emphasis supplied) 39. Sub-section (2) of section 58 specifically provides that without prejudice to sub-section (1), the securities or other interest of any member in a public company shall be freely transferable. However, the proviso to the said section stipulates that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract. Before the Companies Act, 2013 came into force, the 57th Report of the Parliamentary Standing Committee on the Companies Bill 2011, at pg. 86 thereof, noted that the proviso to section 58 "simply seeks to codify the pronouncements made by ....
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....o judgments of the Supreme Court relied upon by Mr. Khambatta are in the case of Needle Industries Ltd2 and Darius Kavasmaneck3. Ongoing through the aforesaid judgments, we do not find anything therein that supports the contentions of the Respondent as raised herein. Neither of these judgements decide the issue that an agreement voluntarily entered into by an individual shareholder giving a right of pre-emption to a third person regarding his own shares, constitutes a restriction imposed on the right of a shareholder to transfer his shares and is therefore accordingly impermissible by virtue of section 111A of the Companies Act. The said two judgments hold that a private company, by virtue of section 3(1)(iii), must contain provisions in its Articles of Association placing a restriction on the right of shareholders to transfer their shares, whilst a public company cannot have such a general restriction on transfer of shares by its members. We do not see how these judgments can be of any assistance in deciding the issue raised before us. 43. The next judgment relied upon by Mr. Khambatta was of the Supreme Court in the case of V.B. Rangaraj.4 On perusing the said judgment, we fin....
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....his 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 after enunciating certain basic principles relating to the transfer of shares and in the background of earlier decisions on the subject. 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. 141. 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 Relief Act, 1963, which corresponds to Section 12 of the Specific Relief Act, 1877. The section provides that specific performance of such contracts may be enforced when there exists no standard for ascertaining the actual....
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....e 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 transfer of specified shares, namely, those inherited from the late Sukumaran and Madhavi, inter se. It was unnecessary for the Company or the other shareholders to be a party to the agreement. As provided in clause 10 of the Karar, Exhibits R-59 and R-60 did not obviate compliance with the Karar. Both Exts. R-59 and R-60 were executed on 15-7-1985, several months prior to the Karar. The parties who had consciously entered into the agreement regarding the transfer of their parents' shares are, therefore, obliged to act in terms of the Karar. The defence of Ravi and Srinivasan based on Exts. R-59 and R-60 should not, in the circumstances, have been accepted by the Division Bench. Having regard to the nature of the shareholding, on the basis of the law as enunciated by the Federal Court and the Privy Council in the decisions noted above, it must be held that the Karar was specifically performable. (emphasis supplied) 44. We must mention here that the Division Bench of this Court in Messer Holdings Ltd.1 has relied ....
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....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 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. This is more so since the reasoning given by the learned Single Judge has been specifically disapproved by another Division Bench of this Court in the case of Messer Holdings Ltd.1 Appeal No. 153 of 2010 will therefore have to allowed. CROSS OBJECTIONS LODG NO.13 OF 2010 47. Having held so, we will now have to examine the Cross Objections that have been filed by the Respondent. In a nutshell the Cross Objections were filed because the learned Single Judge negated all the other contentions raised by the Respondent (original Petitioner) in the section 34 Petition filed by it to challenge the arbitral award. 48. In the Cross Objections, the Respondent has challenged the award mainly on two grounds. The first ground of challenge to the impugned award is on the issue....
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....rbitrator 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]; (ii) the fixation of the "date" for valuation by the Arbitrator was beyond the scope of the submission [paragraph 13(viii) of the impugned order]; and (iii) the Protocol Agreement was illegal and any determination under the Agreement was void. This argument was canvassed on the basis that the shares of a public company by virtue of section 111A of the Companies Act are to be freely transferable and the Articles of Association of MSL must yield to the principle of free transferability embodied in section 111A. [paragraph 13(ix) of the impugned order]. As far as the objection relating to section 111A is concerned, we have already given detailed findings in that respect, earlier in this judgment. As noted earlier, this last objection regarding section 111A appealed to the learned Single Judge on the basis of which the award was set aside. As set out earlier, we have set aside the impugned order in so far as it set aside the arbitral award on the ground that clause 7 of the Protocol Agreemen....
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....eference 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 Appellant and the Respondent to file their respective pleadings in reference to what would be the "relevant date" for the purposes of valuing the Respondent's 27% shareholding in MSL. According to Mr. Samdani, it was also the Appellant's own case before the Arbitrator that without an agreed "relevant date" for valuation, the Respondent could not have made its offer and the Appellant could not have accepted the said offer. All these facts, according to Mr. Samdani, therefore clearly indicated that parties were not ad-idem on the "date" on which the shareholding of the Respondent was to be valued, and this exercise of determining the "date" was outside the scope of the joint reference made to the Arbitrator. 54. Additionally, it was the submission of Mr. Samdani that the correspondence exchanged between the parties in relation to the sale of the said shares of the Respondent, viz. letters dated 9th April 2003, 3rd May 2003, 10th May 2003 and 6th June 2003 established that there....
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.... 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 in turn Bajaj Auto Ltd. has to accept or reject that offer. This process has been completed and since no agreement has been reached on the value of the share, as per the Agreement, the parties involved have to proceed to appoint a Sole Arbitrator for the purpose. The Govt. of Maharashtra, Industries, Energy and Labour Department has suggested to appoint your goodself as the Sole Arbitrator and this has well been received and agreed to by M/s. Bajaj Auto Ltd. and this Corporation. You are, therefore, requested to be kind enough to kindly forward your acceptance to be appointed as the Sole Arbitrator for this assignment and also communicate the retainer-ship charges and venue suitable to you for the purpose of Arbitration. The detail Terms of Reference would be communicated to you later." (emphasis supplied) 56. Thereafter, a joint reference was made to the Arbitrator on 29th December, 2003 wherein it was stated thus :- "2. BAL had expressed its....
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....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 the course of dealings between the parties. We therefore have no hesitation in holding that on the basis of the correspondence exchanged between the parties and the Arbitrator, there was a concluded contract for sale of the Respondent's 27% shareholding in MSL to the Appellant. The only question that the Arbitrator had to decide was the "rate" at which the said shares were to be sold as contemplated under Clause 7 of the Protocol Agreement and it was on this basis that a joint reference was made to the Arbitrator. We, therefore, are unable to agree with the submission of Mr. Samdani that on reading the correspondence between the parties viz. the letters dated 9th April 2003, 3rd May 2003, 10th May, 2003 and 6th June, 2003 it was established that there was no concluded contract as on 3rd May, 2003. 59. We are also unable to agree with the submission of Mr. Samdani that because the parties were not ad-idem with respect to the "date" on which the valuation w....
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.... 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 making "going concern" and was not ripe for winding up. 63. In support of the above submission, Mr. Samdani adverted to the fact that Mr. Raghuram of CRISIL, as on 30th June, 2002 valued the shares of MSL on the "Net Asset Value" (NAV) method on a "going concern" basis (hereinafter referred to as "the first report"). He submitted that after examining different scenarios, Mr. Raghuram accepted the historical break-even level of sales (Scenario III in the first report) and carried out the valuation on that basis. Mr. Raghuram did not apply any discounts and valued the MSL shares at Rs. 227/-per share. Whilst doing so, Mr. Raghuram also stated that in case the "going concern" assumption did not remain valid, then MSL could be valued on the "liquidation basis". On this liquidation basis, Mr. Raghuram gave discounts only on workmen's dues and contingent liability and accordingly, valued the MSL shares at Rs. 204/-per share, was the submission. Mr. Samdani submit....
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....es, 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. For all the aforesaid reasons, Mr. Samdani submitted that the Arbitrator was in fundamental error in accepting Mr. Bansi Mehta's valuation that valued the MSL shares using the NAV method on a "liquidation basis". 65. From what has been argued at the bar, it appears that the real grievance of the Respondent is that though the valuers viz. Mr. Raghuram and Mr. Bansi Mehta both adopted the NAV method, Mr. Bansi Mehta in his report had taken into account certain discounts whilst arriving at his valuation. Mr. Samdani submitted that when the shares of a company are valued on the NAV method on a "going concern" basis, there is no question of giving any discounts whereas if it is valued on a "liquidation basis", the only discounts that can be given are workmen's dues, contingent liabilities and capital gains tax liability. The real dispute therefore really revolves around the discounts given by Bansi Mehta whilst arriving at his valuation, and which have been accepte....
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....he 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. (6) As in Attorney-General of Ceylon v. Mackie (supra), a valuation of reference to the assets would be justified where as in that case the fluctuations of profits and uncertainty of the conditions at the date of the valuation prevented any reasonable estimation of prospective profits and dividends. 12. In setting out the above principles, we have not tried to lay down any hard and fast rule because ultimately the facts and circumstances of each case, the nature of the business, the prospects of profitability and such other considerations will have to be taken into account as will be applicable to the facts of each case. But one thing is clear, the market value unless in exceptional circumstances to which we have referred, cannot be determined on the hypotheses that because in a private limited company one holder can bring it into liquidation, it should be valued as on liquidation by the break-up method. The yield method is the g....
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....erely 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 Court had not "tried to lay down any hard and fast rule because ultimately the facts and circumstances of each case, the nature of the business, the prospects of profitability and such other considerations will have to be taken into account as will be applicable to the facts of each case". Now it is true, as observed by the Court, that there cannot be any hard and fast rule in the matter of valuation of shares in a limited company and ultimately the valuation must depend upon the facts and circumstances of each case, but that does not mean that there are no well-settled principles of valuation applicable in specific fact-situations and whenever a question of valuation of shares arises, the taxing authority is in an uncharted sea and it has to innovate new methods of valuation according to the facts and circumstances of each case. The principles of valuation as formulated by the Court are clear and well-defined and it is only in dec....
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....ch 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. The Chairman and Managing Director of the Appellant was to be the Chairman of MSL. Even under the Articles of Association of MSL, several important decisions to be taken by MSL, were subject to approval of the Appellant. Moreover, the Chief Executive of MSL was to be appointed by the Board out of a panel of names suggested by the Appellant. Furthermore, key management functions of MSL were virtually integrated with the Appellant and MSL only had an assembly plant by which it could not manufacture, but only assemble scooters; (iv) As a result of customer preference for motorcycles, the market for scooters had shown a declining trend, adversely affecting the operations of MSL. MSL had suffered operating losses for financial years 2001-02, 2002-03 and 2003-04; (v) The market share of geared scooters with which MSL is concerned, had gone down from 23.5% in 1999-2000 to 4.9% in 2003-04. (vi) To....
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....ntion 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 of the present case. (ii) he had already four different assignments in which, he undoubtedly represented the interests of WMDC. (a) he was a member of the State Govt. Committee to advise the State Govt. on disinvestment of WMDC shares in MSL. (b) he prepared the first report regarding valuation as on 30th June 2002. (c) he advised WMDC regarding BAL's attempted purchase of MSL shares. (d) he gave the second report regarding valuation as on 3rd May 2003. (iii) In his evidence, Mr. Raghuram admits that he was jointly advising both WMDC and BAL in the 3rd assignment mentioned above namely item (c) -advising WMDC regarding BAL's purchase of MSL shares. (iv) There are glaring inconsistencies in the two reports of Mr. Raghuram. The inconsistencies and contradictions are so glaring and so many that it is difficult to reconcile the two repor....
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.... 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 Rs. 296.40 on the rate of Rs. 494/-per share. This results in the value of a share being Rs. 102.46. In Appendix-8, he has calculated 45% discount on the six monthly average rate on National Stock Exchange namely discount of Rs. 222.30 on the rate of Rs. 494/-per share. This results in the value of a share being Rs. 124.42. As reiterated above, Mr. Raghuram himself has indicated a discount of 20% to 40% in his first report. In the facts of the case, I think that fixing 30 % discount would be just, fair and reasonable and would meet the ends of justice in Appendices 8 and 9, VRS payment has been taken at Rs. 6 lacs per employee. I am of the opinion that it would be just, fair and reasonable to consider the VRS payment at Rs. 5 lacs per employee. This would also be consistent with the limits under the Income Tax Law (though an employer may offer an....
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....stated earlier, the core business of MSL (assembling scooters) was not only suffering repeated losses over the years but was not even in a position to break-even, let alone make any profits. We, therefore, find that the learned Arbitrator committed no error in accepting Mr. Bansi Mehta's valuation report which values the shares of MSL on the NAV method on a "liquidation basis". The Arbitrator has accepted said report of Mr. Bansi Mehta after carefully taking into consideration the evidence of Mr. Bansi Mehta as well as his cross examination. Looking to the reasoning and the analysis of the evidence done by the Arbitrator, we do not think that the arbitral award suffers from any patent illegality or perversity either entitling the learned single judge (under section 34) or us (under section 37) to interfere with the same. We therefore find that the learned Single Judge rightly declined to interfere with the arbitral award on this issue. We must also mention here that the only distinction that was sought to be made by Mr. Samdani between the "going concern" valuation and the "liquidation basis" valuation was that when the valuation was done on the NAV method on a "going concern" ....
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..... Before we deal with these points separately, it would be apposite to refer to a judgment of the Supreme Court in the case of G.L. Sultania and another v/s Securities and Exchange Board of India and others. (2007) 5 SCC 133 In the said judgment, the Supreme Court has inter alia laid down the principle that valuation of shares is not only a question of fact but also raises technical and complex issues which may appropriately be left to the wisdom of 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. The Supreme Court further opined that it must therefore follow that the weight-age to be given to the different factors that go into the process of valuation must be left to the wisdom, experience and knowledge of the experts in the....
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.... if the correct principles are applied, different valuers may arrive at different valuations. Each one of them may be right, yet the valuations may differ. Mathematical precision and exactitude are not the attributes of share valuation, for at best the valuation arrived at by an expert is only his opinion as to what the value of the share should be. No doubt the variation may not be very wide between two valuations prepared honestly by two valuers applying the correct approach and the correct principles, but some variation is unavoidable." (emphasis supplied) 76. In the facts of the present case, we have already found that Mr. Bansi Mehta adopted a recognised method of valuation which was accepted by the Arbitrator and did not proceed on a fundamentally erroneous basis so that the said valuation could be assailed. As stated earlier, Mr. Bansi Mehta chose to value the shares of MSL by adopting the NAV method on a "liquidation basis" looking to the peculiar functioning of MSL and the facts and circumstances of the case. Furthermore, it is not as if Mr. Bansi Mehta's valuation report was treated as gospel truth and accepted by the Arbitrator. The Arbitrator took into a....
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....nswer to Question no.27, Mr. Bansi Mehta has stated as follows :- "........... Likewise, I have considered that if the plant and machinery etc. are to be sold, then the workers have to be paid out and another adjustment that I have made is about an estimated sum that would be required for settling the matter with workers....." In answer to Question no.93, Mr. Bansi Mehta has once again stated thus:- "For the purposes of valuation, we have to proceed on the basis that hard assets are to be encashed, which can only be done if the workforce is disbanded......." 79. We therefore find credible evidence on record of Mr. Bansi Mehta as to why this adjustment/discount was required to be made and/or taken into consideration. 80. In addition to the aforesaid, we may also note that Mr. Raghuram himself in his first report (as on 30th June 2002), considering the value of MSL shares on the NAV method on a "liquidation basis", had also provided for an adjustment of Rs. 222.44 million towards VRS costs. This in fact has been taken note of even by the Arbitrator in paragraph 60 of the arbitral award. We therefore do not find any illegality or perversity in the arbitral a....
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....at the six-monthly average rate set out in Appendix-5 should be further discounted by no less than 30%." (emphasis supplied) Question No. 147 and the answer thereto reads thus:- "Q.147. Please see paragraph 5.3 of your Report. Could you explain the relevance of Appendices 6A, 6B and 6C ? A. We call it the "CDE" approach. 'C' deals with Constraint 'D' deals with Distance and 'E' deals with Empirical Data. Some time 'C' is also understood as 'common sense', which tell us that a bird in hand is worth two in the bush. In other words, if I am offered that I will get two birds, which are not down on earth but some where in the bush, it would be unrealistic to expect that I would consider the prospect of having access to two birds as equivalent to one bird that I may have to part with on earth. The second thing about "C" is constraint. Constraint is what exists in a Company is not necessarily what its owner will hope to receive. To illustrate this case, if MSL were to sell BAL's shares on May 3, 2003, they will have to pay capital gains tax, which roughly was about 10.5% then. Besides, the companies Act requires tha....
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....nt factor that suggests itself is 45%. However, as you will observe, we have also worked the value if the discount was 60% which is closer to TISCO's case." 84. The Arbitrator, after taking note of all the material on record, held that if MSL was to sell the BAL shares held by it, MSL would have to pay 10.5% towards capital gains tax, would have to transfer 10% of the receipt to Reserves and would have to pay 12.5% plus surcharge as the dividend tax. It is on this basis, and after carefully considering the evidence of Mr. Bansi Mehta, that the Arbitrator has discounted sale value of BAL shares by 30%. We also find that if the shares of MSL were required to be valued on the basis of the NAV method on a notional sale/liquidation basis, the value amount realized by a notional sale of its assets, would necessarily have to be discounted/reduced by the costs which would have to be statutorily incurred on such notional sale. 85. Whilst taking this view, we are supported by a judgment of the Single Judge of the Delhi High Court in the case of Kidarsons Industries Pvt. Ltd. V/s Hansa Industries Pvt. Ltd. ILR (1993) 2 DELHI 109 The Delhi High Court, after referring to the judgement....
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....s Co. Ltd., 89 ITR 45(11) and Madurai Mills Co. Ltd. v. CIT 74 ITR 623.(12) 39. The objector has approached the question of capital gains fax from the angle of distribution of assets of a company in liquidation to its members. He has not considered or adverted to the other aspect of the matter which is as stated before, when market value of the assets is considered as against their book value, does the liability on account of capital gains tax gets automatically involved or not? I do not consider necessary to discuss the aforesaid authorities because I am in agreement with the objector that no actual sale or transfer of the assets of the company is involved. However, I find myself unable to ignore the question of capital gains tax getting impregnated in the market value of the property the moment the same as taken into consideration as against the book value of the assets of the company. Counsel for the plaintiff has strongly urged that the moment market value of any asset is taken into consideration, the cost of realisation of the market value and the tax liability get attracted and the true market value of the asset will be ascertainable only after deductions on this acc....
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....86. Looking to the valuation report and the evidence of Mr. Bansi Mehta, as well as the detailed reasoning of the Arbitrator on this aspect, we are unable to agree with Mr. Samdani that the Arbitrator committed any fundamental error whilst accepting the discount of 30% on the sale value of BAL shares. We do not find any perversity or patent illegality or any error apparent on the face of the award that makes it vulnerable to challenge on this aspect. This argument of Mr. Samdani would therefore also have to be rejected. 87. Mr. Samdani next submitted that the arbitral award is in violation of Section 28(2) of the Arbitration and Conciliation Act, 1996, as the Arbitrator was not empowered under the Protocol Agreement to base his award on any equitable considerations and/or on what he thought was just, fair and reasonable. He submitted that looking at paragraph 100 of the arbitral award, it was clear that fixing the 30% discount on the sale value of BAL shares was done on the basis that it would be "just, fair and reasonable and would meet the ends of justice.............", in the opinion of the Arbitrator. He submitted that the Arbitrator had to decide the dispute as per the cont....
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.... with the discount on MSL's shares and not BAL shares. On this aspect, the Arbitrator has clearly made a mistake. However, we do not think that the mistake is such that would vitiate the entire arbitral award. As discussed earlier, there was a wealth of evidence before the Arbitrator and which was accepted by him, to demonstrate that a discount of 30% on the sale value of BAL shares was sustainable, both on a conceptual as well as an empirical basis. On this aspect, it would be apposite to refer to the judgment of the Supreme Court in the case of Madhya Pradesh Housing Board V/s Progressive Writers and Publishers (2009) 5 SCC 678 and more particularly paragraphs 43 and 44 thereof which read as under:- "43. It is true that the arbitrator took judicial note of certain facts which were in the realm of conjectures and surmises to conclude that the second agreement dated 4-5-1977 was entered into under political pressure and the depositor was compelled to execute the said agreement under such pressure. But the question is what is the effect of the same. In our considered opinion even this surmise and conjecture is ignored and not taken into consideration, the award of the a....
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....ly to amounts that are in the nature of surplus. 128. Q. In the 2nd sentence in paragraph 5.1 of your report, you have stated "Adopting the book value as the realisable value, the value of that component would correspond to such book value". What exactly do you mean by this? A. 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. 129. Q. Please see the Appendix 4 of your report. The mutual fund units mentioned in your appendix, would they be liquid instruments presumed to have been acquired to earn a recurring rather than a maturity return? A. Yes. If you will please see Appendix 4, the mutual fund units appear to be based on deriving recurring income. However, I would also like to invite your attention to the fact that the total market value at March 31, 2003 of all quoted investments which includes mutual fund units there is an appreciation of around Rs. 90 Crores. If you will please refer to the earlier page of Appendix 4, MSL was holding 3.38 million shares of BAL. If you will please refer to Appendix 5, you will note that th....
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....ns of Mr. Samdani that because the non-BAL shares/investments were valued at their book value, the same was a fundamental error in the approach of valuation that opened up the arbitral award to challenge. This argument of Mr. Samdani would also therefore have to be rejected. 96. That brings us to the last point urged by Mr. Samdani on the issue of control premium. Mr. Samdani submitted that Mr. Raghuram in his second valuation report had added 84.85% to the fair value of MSL's shares as on 03.05.2003 towards control premium, and accordingly, valued MSL's shares at Rs. 420.50 per share. On the other hand, Mr. Bansi Mehta as well as the Arbitrator ignored the aspect of control premium. Mr. Samdani submitted that the fair value of the Respondent's share holding in MSL had to be determined by taking into consideration that the Appellant, by purchasing the Respondent's shareholding in MSL, effectively gained full control of MSL (51%) and MSL would become a subsidiary of the Appellant. He, therefore, submitted that the Respondent's 27% stake in MSL was of special interest to the Appellant. This according to Mr. Samdani, would certainly have a bearing on the price o....
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....thereof, which at that time was approximately Rs. 65/-per share. The Arbitrator considered all these factors (especially in paragraphs 59, 65, 70, 74 and 75 of the award) and concluded that there was no basis for the inclusion/addition of any control premium. We find that the Arbitrator has considered all the relevant evidence placed before him and then come to the conclusion that the rationale for control premium would, therefore, not exist in the facts of this case. We do not think that the findings of the Arbitrator on this aspect suffer from any perversity or patent illegality, entitling us to interfere with the same under section 34 of the Arbitration and Conciliation Act, 1996. 99. For the reasons stated earlier in this judgment, we do not find any merit in the Cross Objections. We must mention here that under the arbitral award, the Arbitrator directed that the 30,85,712 equity shares of MSL held by the Respondent herein, are to be valued for the purpose of sale to the Appellant at Rs. 151.63/-per share. As per the said direction, the amount that would have to be paid by the Appellant to the Respondent for the purchase of the said 30,85,712 equity shares would come to Rs.....