TaxTMI 
TaxTMI 
2015 (5) TMI 1134
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....a 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, 1956 ("the Companies Act"). The learned Judge he....
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....sfer 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 reply thereto, by their letter dated 3rd May, 2003, the Ap....
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....jaj 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. 1. The appointment of 'Sole Arbitrator' is made jointly by BAL and WMDC, in terms of the Clause No. ....
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....panies 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 aggrieved by this part of the impugned order, the Appellant has filed the present Appeal (Appeal No. 153 of 2010) before us. 14. In this Appeal, the real controversy revolves ....
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.... 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, clause 7 of the Protocol Agreement was nothing but a part and parcel of Articles of Association of MSL. He submitted that Indian law has always prohibited restrictions on free transfera....
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....stricts 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 aforesaid reasons, Mr. Khambatta submitted that the order of the learned Single Judge cannot be faulted and the same requires no interference by us in Appeal. 20. As stated earlier, the real controversy in this Appeal revolves around clause....
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....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 provisions of section 22A of the Securities Contracts (Regulation) Act, 1956 which was inserted in the said Act by the Securities Contracts (Regulation) (Amendment) Bill, 1985 and was a predecessor to section 111A of the Companies Act. Section 22A as introduced by th....
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....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 reference under sub-section (4), the Company Law Board shall, after causing reasonable notice to be given to the company and also to the transferor and the transferee concerned and giving them a reasonable opportunity to make their representations, if any, in writing by order direct either that the transfer shall be registered by the company or that it need not be regist....
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....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 Directors) to refuse registration of transfers only in four stipulated circumstances [section 22A sub-section (3)]. This is also borne out by the statement of objects and reasons discussed above. In other words, section 22A(2) provided for free transferability and the actual steps taken to provide for the same were set out in sections 22A(3) to (9). 25. The wordings of section 22A as well as the objects and reasons discussed above make it c....
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....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, as the case may be, is delivered to the company, the transferee may appeal to the Company Law Board and it shall direct such company to register the transfer of shares. (3) The Company Law Board may, on an application made by a depository, company, participant or investor or the Securities Exchange Board of India, if the transfer of shares or debentures is in contravention of any of the provisions of the Securities and Exchange Board of India Act, 1992 (15 of 1992)....
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....any 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 (7) are not really germane to the issue involved in this Appeal. 30. As stated earlier, section 22A was inserted in the Securities Contract (Regulation) Act, 1956 which inter alia provided that subject to the provisions of that section, the securities of public companies would be freely transferable and the company could refuse the transfer only on four specific grounds as set out in sub-section (3) thereof. It thus follows that the provisions of section 22A were intended to regulate the right of the Board of D....
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....liament 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 at a consensual agreement/arrangement (either by way of sale, pledge, pre-emption etc.) with a third party or another shareholder, which is otherwise in conformity with the Articles of Association, the Companies Act and Rules, and any other governing laws. 33. Whilst taking this view, we are supported by a judgment of the Division Bench of this Court in the case of Messer Holdings Ltd. In the facts of that case also there was a similar clause (clause 6.1) as the one in the present case (clause 7) and the shares under....
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....onsensual 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 take away the right of the shareholder to enter into consensual arrangement/agreement with the purchaser of their specific shares. If the legislature intended to take away that right of the shareholder, it would have made an express provision in that regard. Reliance has been rightly placed on the decision of the Apex Court in the case of Byram Pestonji Gariwala (supra) which takes the view that the freedom of contract generally, the legislature does not interfere except when warranted by public policy, and the "legislative in....
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.... 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 in exercise of powers under Depositories Act, 1996. With utmost humility at our command, we do not agree with this reasoning of the Learned Single Judge in the case of WMD Corporation Ltd. (supra) for the reasons recorded hitherto." (emphasis supplied) 35. Faced with the judgment in Messer Holdings Ltd., Mr. Khambatta, the learned senior counsel appearing on behalf of the Respondent, submitted that whether a particular clause was a restriction on transferability of shares had to be necessarily decided on a case to case basis. He submitted th....
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....ncorporated 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. Even if we are to hold that the company (namely MSL) was not bound by the terms of the Protocol Agreement, it would only mean that if the Respondent sought to sell their shareholding in breach of Clause 7 of the Protocol Agreement, the company (MSL) would not be in a position to refuse such transfer, in the absence of any Court or other judicial authority granting an injunction restraining it from doing so. This does not mean that the parties to the Protocol Agreement cannot, in appropriate proceedings, seek to enforce its terms. It is one thing to say th....
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.... 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. 38. We must also mention here that agreements like the one contained in clause 7 of the Protocol Agreement before us, have now been expressly made a part of section 58 of the Companies Act, 2013. Section 58 of the Companies Act, 2013 reads as under:- "58. Refusal of registration and appeal against refusal. (1) If a private company limited by shares refuses, whether in pursuance of any power of the company under its articles or otherwise, to register the transfer of, or the transmission by operation of law of the right to, any securities or interest of a ....
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....hout 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 various Courts holding that contracts relating to transferability of shares of a company entered into by one or more shareholders of a company (which may include promoter or promoter group as a shareholder) shall be enforceable under law." Keeping in line with the proviso to section 58(2) of the Companies Act 2013, the Securities And Exchange Board of India has also issued a notification dated 3 October 2013 being Notification No.LAD-NRO/GN/2013-14/26/6667 which declares that no person in the territory to which the Securities Contracts (Regulation) Act, 1956 extends, shall save with the permission of the Board, enter into any contract ....
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....te 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 find that the facts in that case were totally different than the facts before us. In fact Ranagraj"'s judgment has been considered by the Division Bench of this Court in Messer Holdings Ltd.1 We must mention here that Rangaraj's judgement also came up for consideration before another bench of the Supreme Court in the case of M.S. Madhusoodhanan v/s Kerala Kaumudi (P) Ltd. (2004) 9 SCC 909 : AIR 2004 SC 909 In Madhusoodhanan's case, the Supreme Court considered a case where specific performance was sought of an Agreement/Karar dated 16th January, 1986 which provided for the division of shares of the late parents (Sukumaran and Madhavi) in the percentage of 50:25:....
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.... 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 damage caused by the non-performance of the act agreed to be done, or when the act agreed to be done is such that compensation in money for its non-performance would not afford adequate relief. In the case of a contract to transfer movable property, normally specific performance is not granted except in circumstances specified in the explanation to Section 10. One of the exceptions is where the property is "of special value or interest to the plaintiff, or consists of goods which are not easily obtainable in the market". It has been held by a long line of authority that shares in a private limited company would come within the phrase "not easily obtainable in the market" (see Jainarain Ram ....
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....f 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 upon the judgment of the Supreme Court in Madhusoodhanan's case to come to the conclusions that it did. 45. We must also make note of the fact that the view expressed in Rangaraj's case has not been subscribed to by a three Judge Bench of the Supreme Court in the case of Vodafone International Holdings BV vs. Union of India and Another. (2012) 6 SCC 613 Though the issue before us did not directly arise before the Supreme Court in Vodafone's case, at paragraphs 261 and 262 of the said judgement, the Supreme Court opined as under:- "Share holders' agreement 261. Share holders' Agreement (for short "SHA") is essentially a contract between some or all other shareholders in a company, the purpose of w....
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....at 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 of jurisdiction and the scope of reference. The second ground of challenge is on merits regarding the valuation of the Respondent's 27% shareholding in MSL. JURISDICTION/SCOPE OF REFERENCE :- 49. Before the Sole Arbitrator, the Respondent had filed an interim application raising mainly two objections. The first objection raised was that the joint reference made by the Appellant and the Respondent to the Arbitrator on 29th December 2003, was illegal and hence the Arbitrator had no jurisdiction. The second objection raised before the Arbitrator was that the Protocol Agreement dated 2nd October, 1974 was illegal and void in view of the provisions of (a) section 16 of the Securities Contracts (Regulation) Act 1956; (b) section 111A and section 9 of the Comp....
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.... 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 Agreement imposed a restriction on free transferability of shares as contemplated under section 111A of the Companies Act. As far as the other contentions raised by the Respondent, regarding the jurisdiction of the Arbitrator on the aspect of the "date" on which the shares are to be valued, the learned Single Judge negated the contentions of the Respondent. Being aggrieved by these findings (amongst others), the Respondent has filed the above Cross Objections. 52. Mr. Samdani, learned Senior Counsel appearing on behalf of the Respondent, in support of the Cross Objections, submitted that the Arbitral Tribunal had exceeded its jurisdiction by embarking upon an inquiry and adjudicating on a "date" with reference to which the valuation was to be undertaken. He submitted that a combined reading of the joint reference da....
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....ise 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 was no concluded contract between the parties as on 3rd May, 2003. For all the aforesaid reasons, Mr. Samdani submitted that there was no concluded contract between the parties and the Arbitrator had exceeded his jurisdiction by embarking on an inquiry and adjudicating on the "date" with reference to which valuation was to be undertaken by him. 55. Clause 7 of the Protocol Agreement contemplated a situation where if either party thereto desired to part with or transfer its shareholding or any part thereof in MSL, such party was to give first option to the other party for the purchase of such shares at such rates as may be agreed to between the parties, or decided upon by arbitration. In the present case, admittedly the Respondent offered its shares for sale to the Appellant by its letter dated 9th April, 2003. Cl....
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....nd 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 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." (emphasis supplied) 57. All this correspondence clearly establishes that the Respondent have to first make an offer to the Appellant who, in turn, have to accept or reject that offer. This process (as recorded by the Respondent in their letter dated 27th October, 2003) "has been completed and since no agree....
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....etters 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 was required to be done, there was no concluded contract or that determining the same was outside the scope of the joint reference made to the Arbitrator. It may be noted that the joint reference was made to the Arbitrator on the basis that there was a concluded contract between the parties with reference to the sale of the Respondent's 27% shareholding in MSL to the Appellant. The only question that the Arbitrator was required to decide was the "rate" at which the said shareholding ought to be sold. In deciding this question, necessarily as a matter of fact, the Arbitrator had to ascertain the "date" on which the shares of the Respondent were to be valued. A decision on the "date" was an integral part of deciding the "rate" at which the Respondent's 27% shareholding was to be sold to the Appellant. 60. To our mind, this is also contemplated in the joint reference ....
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....ng 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 submitted that on the basis of this valuation, the offer dated 9th April, 2003 was made by the Respondent to the Appellant. As the said offer was not accepted, a joint reference dated 29th December, 2003 was made to the learned Arbitrator for determining the rate at which the Respondent's shareholding would be sold to the Appellant. 64. Mr. Samdani submitted that in the course of arbitral proceedings, the Respondent obtained another valuation from Mr. Raghuram as on 3rd May, 2003 (hereinafter referred to as the "second report"). Similarly, the Appellant also obtained the valuation of one Mr. Bansi Mehta for the purposes of valuing the 27% shareholding of the Respondent in MSL as on 3rd May, 2003. Mr. Samdani submitted that Mr. Raghuram's second report, which was prepared after the commencement of arbitration, valued the shares of MSL on the NAV method on a "going concern" basis. ....
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....t 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 accepted by the Arbitrator (with certain modifications). 66. Before proceeding further, we will first briefly deal with the judgements cited before us on the subject of valuation. In Commissioner of Wealth Tax v/s Mahadeo Jalan and Mahabir Prasad Jalan and others (1973) 3 SCC 157, the question of valuation of shares held by the assessee in a company under section 7 of the Wealth Tax Act, 1957 came up for consideration. The Supreme Court, after discussing several different scenarios and referring to several judgements, summed up its conclusion as under:- "11.. An examination of the various aspects of valuation of shares in a limited company would lead us to the following conclusion: (1) Where the shares in a public limited company are quoted on the stock exchange and there are dealings in them, the price prevailing on the valuation date is the value of the shares. (2) Where the shares ....
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....o 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 generally applicable method while the break-up method is the one resorted to in exceptional circumstances or where the company is ripe for liquidation but nonetheless is one of the methods." (emphasis supplied) 67. What can be discerned from the aforesaid judgment is that where the shares in a public company are quoted on the Stock Exchange and there are dealings in them, the price prevailing on the valuation date is the value of the shares. Admittedly, MSL is a listed Company whose shares are quoted on the Stock Exchange. Despite this, both the valuers viz. Mr. Raghuram as well as Mr. Bansi Mehta did not adopt this method of valuation because the average quoted price of MSL shares in 2003 was approx Rs. 65/-per share which did not reflect its true value. It is for this reason that both the valuers adopted the NAV method with one distinction viz. Mr. Raghuram valued it on a "going concern" basis without giving any discounts whereas Mr. Bansi Mehta ....
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....charted 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 deciding which particular principle must be applied in a given situation that the facts and circumstances of the case become material. It is significant to note that immediately after making the above observation the Court hastened to make it clear, as if in answer to a possible argument which might be advanced on behalf of the Revenue on the basis of that observation that the yield method is the generally applicable method while the break-up method is the one resorted to in exceptional circumstances or where the company is ripe for liquidation." (emphasis supplied) 69. The Supreme Court, in Kusumben's judgment, lays down that though 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, that does not mean that there are no well settled principles of valuation applicable in specific fact situations. The principles of valuation formulate....
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....1-02, 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 achieve a break-even position, MSL required sales of about 62,000 scooters per year whereas the business plan for the period 2004-09 indicated production and sale of Chetak scooters of only 12,000 units per year. This clearly showed that the core business of MSL was not even in a position to break-even, let alone make any profits; (vii) It was an admitted fact that the non-core business assets of MSL consisting of unquoted and quoted investments constituted 96.2% of the business assets of MSL. Though the main business of MSL was supposed to be assembling scooters (the core business), the same constituted only a negligible portion of 3.8% and therefore the core business activity of MSL of assembling scooters was insignificant. 71. After adverting to these admitted facts, the Arbitrator for the reasons recorded in the impugned award discarded the second valuation report of Mr. Raghuram. On perusing the impugned award, we find that the Arbitrator has taken into consideration all the evidence that was led by the parties....
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....and contradictions are so glaring and so many that it is difficult to reconcile the two reports. (v) While in his first report, the witness has categorically discarded the valuation of shares on the net asset value method on a going concern, in his second report, he has precisely adopted the very same basis without any change in the information on the basis of which both the reports are made. (vi) In his first report, he recommends the net asset value method on liquidation basis. He has discarded the said liquidation basis in the second report. (vii) In the first report, he has discarded the element of any control premium being added to the market value of the shares and in fact, suggested a discount of 20 % to 40 % on the market value. In his second report, he had added a control premium of 84.85% and that too not on the market value but on the fair value. (viii) Both the reports of Mr. Raghuram are based on the same memorandum of information supplied by MSL, save and except, for the balance sheet and annual report for 2002-03, which was the only additional factor when the second report was prepared. This was obviously due to the intervening gap between the two reports. ....
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....ugh an employer may offer and pay more than Rs. 5 lacs in a given case). In this view of the matter, taking VRS payment at Rs. 5 lacs per employee and fixing 30% discount on the six monthly average rate on National Stock Exchange, would result in the following changes in Appendices 8 and 9. "APPENDIX-8 (See para 6.3) OS Particulars Amount (Rs.in Lakhs) Fixed Assets at Realisable value 2,328.00 Current Assets 3512 Less: Current Liab. 4043 (531.00) 1,797.00 Less: Loan Fund 937.00 840.00 Less: VRS Payment 3,000.00 (A) (2,160.00) IS Particulars Amount (Rs.in Lakhs) 1. Investment in 33,87,036 BAL shares 6 monthly average rate on NSE 494.00 Less: 30% discounting 148.20 345.80 11,712.37 2. Other Treasury investments (at book value) 7,776.00 (B) 19,488.37 Total (A+B) 17,328.37 No. of Shares 114.28 Value per Share 151.63 101. In view of the above, I declare that the rate at which 30,85,712 equity shares of MSL held by WMDC are to be valued as on 3rd....
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....mdani was unable to make good this submission. We fail to see on what basis this submission is made. To our mind discounts are to be applied on the market value of the assets because what has to be worked out is what a shareholder can expect to get after all the assets of the Company are notionally sold and in abstract theory the entire sale proceeds are distributed to the shareholders. Whatever dues the Company would have to pay (statutory or otherwise) whilst selling its assets would have to be taken into account whilst arriving at the market value of the assets being sold. This to our mind, would be the position whether you value the Company on the NAV method on a "going concern" basis or on the NAV method on a "liquidation basis". We therefore fail to see on what basis it is submitted that when a Company is valued on the NAV method on a "going concern" basis, there is no question of any discounts. 74. Mr. Samdani next submitted that even if the NAV method on a "liquidation basis" was to be accepted, even then the impugned award was liable to be interfered with as Mr. Bansi Mehta (in his valuation report) had taken into account certain discounts which were contrary to law. Acco....
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....here is considerable scope for difference of opinion even amongst experts. Even if the correct principles are applied, different valuers may arrive at different valuations. Each one of them may be right in their approach and yet the valuations may differ. In a nutshell, 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. These principles have been clearly laid down in paragraphs 32 and 37 of the said judgment and read thus :- "32. These decisions clearly lay down the principle that valuation of shares is not only a question of fact, but also raises technical and complex issues which may be appropriately left to the wisdom of the 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 val....
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....tailed evidence led by the parties in relation to the said reports, sought to accept Mr. Bansi Mehta's report subject to two changes as indicated earlier. Valuation being a question of fact as laid down by the Supreme Court in G.L. Sultania's case, coupled with the fact that the scope of interference with an arbitral award under section 34 of the Act is in any case only on certain limited parameters, we would be entitled to interfere with the award only if it is demonstrated that by accepting the discounts taken into consideration by Mr. Bansi Mehta in his valuation report, the Arbitrator committed any patent illegality or the award suffered from the vice of perversity. 77. Having said this, we shall now deal with each of the discounts independently. The first discount taken into account was an amount of Rs. 30 crores towards VRS (Voluntary Retirement Scheme). Before we deal with this discount on merits, we must mention here that as rightly submitted by Mr. Chinoy, no such ground is taken in section 34 petition and neither was the said contention urged before the learned Single Judge. In fact the contentions raised before the learned Single Judge have been listed at paragr....
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....ve to be rejected. 81. The second discount which was assailed by Mr. Samdani was the discount of 30% on the sale value of BAL shares held by MSL. He submitted that Mr. Bansi Mehta's report suggests a discount of 30% on the sale value of BAL shares on account of three heads:-(I) Capital Gains, (II) Reserves and Surplus and (III) Dividend Tax. He submitted that there was no question of any adjustment on account of Reserves and Surplus as well as Dividend Tax when MSL was valued on the NAV method on a "liquidation basis". He submitted that in "liquidation" there is no question of any Reserves and Surplus and dividend is paid to the shareholders only after all the liabilities, workmen's dues and other statutory dues, if any, are paid. He therefore submitted that by accepting the 30% discount on the sale value of BAL shares the Arbitrator committed a fundamental error and this was an error apparent on the face of award which rendered it vulnerable to challenge. 82. In this regard, we must note what Mr. Bansi Mehta has stated in his valuation report as well as his evidence before the Arbitrator. Mr. Bansi Mehta has pointed out that in valuing the shares of MSL on the basis of t....
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....o pay 12.5% plus surcharge as the dividend tax. I have myself given this conceptual or common sense calculation in Appendix 7, which shows that the "process loss" is around 28%. Now, that is as far as Constraint. Distance is an economic concept in which there is universal recognition about the time value of money. In a simple terms, a Rupee one year hence cannot be equivalent to a Rupee today. It would be less than a Rupee. Also, the distance causes factors which may be considered as giving rise to uncertainties like statutory changes, etc. These two factors, what Lord Keynes said "liquidity preference and fear of uncertainties" require, that what is in the bush needs to be discounted. Finally, let me deal with 'E', i.e. Empirical Examples. You referred to Appendices 6A, 6B and 6C. Now, these three Appendices are working that focus on the 'E' aspect. Let me explain, since you have asked me to explain. In Appendix 6A, we have dealt with two investment Companies, namely TATA Investment and Industrial Investment Trust. These are two very large companies. We tried to work out as as to whether the market value of the shares of these two Companies reflect the appreciation....
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.... valuers have further determined the liabilities of the company whether actual or notional. The fixed assets of the company have been taken at market value as against their book value which was much lower. Similarly market value of the stock in trade has been taken into consideration as against the book value which was much lower. Therefore, the valuers have taken into consideration the liability on account of capital gains tax (notional). The valuers have also taken into consideration the cost of realisation of market value i.e. expenses in the event of sale or transfer of assets. These items are inherent in market value and cannot be ignored whenever one talks of market value of assets for purpose of valuation of shares of a company. 38. The main objection on behalf of the objector in this connection is regarding deduction on account of capital gains tax. According to him there is no sale or purchase of any fixed asset or immovable properties of the company. Therefore, the question of payment of capital gains tax does not arise. According to the learned counsel no deduction ought to have been made on this account from the market value of the properties. It is true that there is....
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....ed in the market value. To illustrate, the moment one talks of sale or transfer of a lease hold plot, the charges payable to the superior lessor for obtaining its permission to transfer are automatically understood as payable. The market value of such a property cannot be considered de hors these charges. The use of the words "market value" would be understood to mean the price plus or minus, as the case may be, such charges. Thus in the context of market value of the properties under consideration, liabilities on account of capital gains tax and cost of realisation of the market value have to be provided for. The market value will be minus such liabilities. The value of assets of the company has been raised from book value to market value. When the objector wants to have the benefit of market value of assets being taken into consideration, he must provide for the basic elements of market value, i.e. the elements which form part of the market value. 40. In "A Study on Share Valuation" a booklet published by the Institute of Chartered Accountants of India while dealing with the subject of Valuation of Assets, it has been said:- "In these times of changing price levels, it is unr....
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....8.Rules applicable to substance of dispute- (1).. (2) The arbitral tribunal shall decide ex aequo et bono or as amiable compositeur only if the parties have expressly authorised it to do so. (3) " 89. On reading Section 28(2), it is ex-facie apparent that unless expressly authorised by the parties, the Arbitral Tribunal cannot decide any matter "ex aequo et bono" or as "amiable compositeur". It would therefore follow that the Arbitral Tribunal cannot decide the matter on the notions of fair and equitable principles alone. It is bound by the contract between the parties. 90. However, in the facts of the present case, we find the reliance placed on the aforesaid provisions as wholly misplaced. As noted earlier, Mr. Bansi Mehta in his evidence clearly stipulated in paragraph 5.4 of his report that the fair market value of BAL shares must allow for a discount of about 30% and that the BAL shares held by MSL valued at the six monthly average rate set out in Appendix -5 of his valuation report should be further discounted by no less than the 30%. It is on the basis of this evidence that the Arbitrator had applied the discount of 30% to the value of BAL shares. This figure of 30% ....
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....d are not based on the sole ground that the second agreement came to be executed under political pressure. There is enough material available on record to arrive at such conclusion as the one arrived at by the arbitrator. All the said conclusions were not arrived at solely on the basis of conjectures and surmises." (emphasis supplied) We, therefore, do not find that this mistake committed by the Arbitrator would have the effect of vitiating the arbitral award. 92. Mr. Samdani next submitted that Mr. Bansi Mehta in his valuation report had valued the non-BAL shares/investments on their book value as opposed to their market value. According to Mr. Samdani, this too was a fundamental error in the valuation report of Mr. Bansi Mehta, and which was accepted by the Arbitrator whilst determining the valuation of the share price of MSL. 93. On this point, Mr. Bansi Mehta was cross examined by the Respondent herein. It would be pertinent to note his answers to Question Nos. 121, 128 and 129 which read as under:- "121. Q. Would it be correct to say that the valuation of IS done by you is on a break up method with adjustments? A. I cannot give a one word answer of yes or no. If you w....
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....r taking the book value of the non-BAL shares/investments as opposed to their market value. He has further stated that he has adopted this approach since he believed that there may not be any material difference between the market value and the book value of these pure financial assets. He has further stated that prima facie almost the entire appreciation may have arisen on account of MSL's share holding in BAL which were considered separately in the valuation report and have been valued on their market value. In answer to Question No. 164 also, Mr. Bansi Mehta has stated that the non-BAL investments can be encashed easily and his own data indicated that there was not much appreciation in these investments. As there was no material appreciation on these investments, Mr. Bansi Mehta thought that it was a fit case to value the non-BAL investments on their book value as opposed to their market value. Mr. Bansi Mehta, in answer to Question No. 173, has explained that if he had valued these investments on the market value basis, he would have had to apply a discount to that value as was done in the case of BAL shares and in such an eventuality the market value of these investments w....
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....ward. The Arbitrator, in paragraph 59 of the arbitral award has referred to the first valuation report of Mr. Raghuram (as on 30th June, 2002) where he himself concluded that though the sale of the Respondent's 27% shareholding to the Appellant would give the Appellant 51% shareholding in MSL, the nature of the shareholder's agreement between the Appellant and the Respondent had already bestowed effective management control to the Appellant without boardroom control. Mr. Raghuram therefore himself concluded that the peculiar nature of the shareholders agreement between the Appellant and the Respondent "would imply that the rationale for control premium might not exist." The conclusion of Mr. Raghuram in the said first valuation report was that taking into consideration the peculiar nature of the shareholders agreement between the Appellant and the Respondent would result in a market discount being offered to an alternative potential buyer to compensate for the lack of effective control. The concluding portion of paragraph 4.7 of Mr. Raghuram's first report is as under :- "These aspects of the shareholders agreement would result in a market discount being offered to an....