Western Maharashtra Case

7/25/2019 Western Maharashtra Case

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MANU/MH/0109/2010

Equivalent Citation: 2010(4)BomCR873, [2010]154CompCas593(Bom), [2010]102SCL239(Bom)

IN THE HIGH COURT OF BOMBAY

Arbitration Petition No. 174 of 2006

Decided On: 15.02.2010

Appellants: Western Maharashtra Development Corpn. Ltd.

Vs.Respondent: Bajaj Auto Limited

Hon'ble Judges/Coram:Dr. D.Y. Chandrachud, J.

Counsels:For Appellant/Petitioner/Plaintiff: Rohit Kapadia and Pravin Samdani, Sr. Advs. and Bindi Dave,Kunal Vajani and Ankit Virmani, Advs., i/b., Wadia Ghandy and Co.

For Respondents/Defendant: Aspi Chinoy and J.J. Bhat, Sr. Advs., Snehal Shah, Shiraj Dhru,Lata Dhru and Ranju Yadav, Advs. i/b., Dhru and Co.

Subject: Arbitration

Acts/Rules/Orders:

Arbitration and Conciliation Act, 1996 - Section 16, Arbitration and Conciliation Act, 1996 -Section 34, Arbitration and Conciliation Act, 1996 - Section 24, Arbitration and Conciliation Act,

1996 - Section 28, Arbitration and Conciliation Act, 1996 - Section 28(1), Arbitration andConciliation Act, 1996 - Section 28(2), Arbitration and Conciliation Act, 1996 - Section 31(2),Arbitration and Conciliation Act, 1996 - Section 31(3), Arbitration and Conciliation Act, 1996 -Section 34(2); Companies Act, 1956 - Section 2(13), Companies Act, 1956 - Section 3(1),Companies Act, 1956 - Section 9, Companies Act, 1956 - Section 43A, Companies Act, 1956 -Section 48, Companies Act, 1956 - Section 87A, Companies Act, 1956 - Section 111,Companies Act, 1956 - Section 111A, Companies Act, 1956 - Section 111A(1), Companies Act,1956 - Section 111(14), Companies Act, 1956 - Section 155, Companies Act, 1956 - Section

397, Companies Act, 1956 - Section 398; Indian Arbitration Act ;Securities Contract RegulationAct, 1956 - Section 22A, Securities Contract Regulation Act, 1956 - Section 28(2); Sale ofGoods Act, 1930 - Section 4, Sale of Goods Act, 1930 - Section 5, Sale of Goods Act, 1930 -

Section 9, Sale of Goods Act, 1930 - Section 9(1), Sale of Goods Act, 1930 - Section 10;

Securities Contracts (Regulation) Act, 1956 ;Depositories Act, 1996 ;SEBI Act, 1992 ;SickIndustrial Companies (Special Provisions) Act, 1985 ;Specific Relief Act, 1963 - Section 10;Specific Relief Act, 1877 - Section 12

Cases Referred:ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705; Delhi Development Authority v. R.S. Sharma &Co. (2008) 13 SCC 80; Hindustan Zinc Ltd. v. Friends Coal Carbibusatuib (2006) 4 SCC 445;Commissioner of Wealth Tax v. Mahadeo Jalan (1972) 86 ITR 621; Commissioner of Gift Tax v.

Kusumben D. Mahadevia (1980) 122 ITR 38; Seth Thawardas Pherumal v. Union of India AIR1955 SC 468; Tarapore and Co. v. Cochin Shipyard Ltd. (1984) 2 SCC 680; Lubrizol (India) Ltd.v. Lubrizol Corporation U.S.A. 1998(1) ALL MR 435; V.B. Rangaraj v. V.B. Gopalkrishnan (1992)

1 SCC 160; M.S. Madhusoodhanan v. Kerala Kaumudi Pvt. Ltd. (2003) 117 Com. Cases 19;

Ontario Jockey Club Ltd. v. Samuel McBride AIR 1928 Privy Council 291; V.B. Rangaraj v.Gopalkrishnan (1992) 73 Comp Cases 201; Jainarain Ram Lundia v. Surajmull Sagarmull AIR1949 FC 211; Bank of India Ltd. v. J.A.H. Chinoy AIR 1950 PC 90; Smt. Pushpa Katoch v. ManuMaharani Hotels Ltd. 121 (2005) DLT 333

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Case Note:Arbitration - Validity of Award - Validity of Contract - Sections 34 and 111A ofArbitration and Conciliation Act, 1996 and Section 9 of Companies' Act, 1956 - Present

petition filed under Section 34 of Act, 1996 against award passed by arbitrator -Petitioner contended that contract on whose basis award was passed was null andvoid, therefore, award is unsustainable - Held, party desirous to transfer its

shareholding is obligated to furnish first option to other for purchase of shares at

relevant rate, as may be agreed to between parties or decided upon by arbitration -Consequence of Clause 7 of protocol agreement, which has been incorporated inArticles of Association, is to preclude sale to or purchase by members of public ofshares, which are offered for sale if offer is accepted by petitioner, or as case may be,by respondent within thirty days of receipt of notice - Effect of clause of preemption isto impose restriction on free transferability of shares by subjecting norms of

transferability laid down in Section 111A of Act, 1996 to preemptive right created byagreement between parties - This is impermissible - Section 9 of Act, 1956 givesoverriding force and effect to provisions of Act, 1996, notwithstanding anything tocontrary contained in Memorandum or Articles of Company or in any agreement

executed by it or for that matter in any resolution of Company in general meeting orof its Board of Directors - A provision contained in Memorandum, Articles, agreementor Resolution is to extent to which it is repugnant to provisions of Act, 1996 regardedas void - Therefore, contract between parties is void - Award passed on basis saidcontract is unsustainable - Hence award is set aside, petition is allowed

Industry: Auto

JUDGMENT

D.Y. Chandrachud, J.

1. The challenge in these proceedings under Section 34 of the Arbitration and Conciliation Act,1996 is to an arbitral award dated 14th January 2006 of a sole Arbitrator, Mr. Justice A.V.

Savant.

The Protocol Agreement:

2. On 2nd October 1974, a Protocol Agreement was entered into between the Petitioner and theRespondent pursuant to which Maharashtra Scooters Ltd. (MSL) was incorporated andregistered under the provisions of the Companies' Act, 1956. MSL is a Public Company and its

shares are listed on the Bombay Stock Exchange and the National Stock Exchange. ThePetitioner is an undertaking of the government of Maharashtra. In accordance with the terms ofthe Protocol Agreement, the Petitioner holds 27% of shareholding of MSL while the Respondentcontinues to hold 24%. The balance 49% is held by the public. The recitals to the agreementstate that the Petitioner was desirous of availing of the experience and know how of the

Respondent in the manufacture of two wheeler scooters, for the installation of plant andmachinery and the establishment of a Scooter Project. The Respondent agreed to participate inthe equity capital of a new manufacturing Company - MSL. The initial authorized capital of MSLwas Rs. 200 lakhs consisting of Rs. 150 lakhs in equity shares and Rs. 50 lakhs in cumulativeredeemable preference shares. By the agreement, it was agreed that the shareholding of the

Petitioner, the Respondent and of the public shall be in the proportion set out earlier. Neitherparty to the agreement could allow the structure of MSL, the number of shares or the rights,privileges, restrictions or qualifications of any class of shares to be altered or any further issueof capital to be made without the specific prior consent of the other party. Any further issue ofcapital was to be made in a manner that would ensure that the participation by the party in thetotal issued equity share capital shall remain in the same proportion. Neither party was entitledto increase or reduce directly or indirectly its proportion of the shareholding in the equity share

capital of MSL or to deal with its shareholding so as to lose its absolute control over votingrights. The intent was that the parties to the agreement shall, between them, control at least51% of the equity capital of MSL.



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Clause 7:

3. Clause 7 of the agreement upon which the dispute in the present case centers, was to thefollowing effect:

7. If either party desires to part with or transfer its shareholding or any part thereofin the equity share capital of Maharashtra Scooters Limited, such party shall give

first option to the other party for the purchase of such shares at such rates as maybe agreed to between the parties or decided upon by arbitration. The party desiringto part with or transfer its shares or any part thereof shall give to the other party a

written notice of such intention specifying the number of shares and the rate atwhich it is willing to sell the same and if the other party within 30 days of thereceipt of such notice, agrees, to such proposal for purchase of such shares, theparty giving the notice shall be bound to sell and transfer such shares to the otherparty at the rate specified in such notice. If the other party is willing to purchasethe shares but considers the rate proposed to be too high or unacceptable, it shall,within 30 days from the receipt of the notice, give written intimation to the party

giving notice of its intention to purchase the shares and the question of rate shall bereferred to arbitration of a sole arbitrator if agreed to by both the parties or two

arbitrators one to be appointed by each party in accordance with the provisions ofthe Indian Arbitration act. If the party receiving a notice within 30 days of itsreceipt, fails to accept the proposal for purchase of the shares, the party giving thenotice will be free to sell the shares to any other party but only at a rate not lessthan the rate specified in such notice.

4. The agreement stipulated that of the seven signatories to the Memorandum and Articles ofAssociation, four would be nominated by the Petitioner and three by the Respondent. The Boardof Directors was to consist of nine Directors, of which five were to be nominees of the Petitionerand four of the Respondent. The appointment of the Chairman of the Board had to be made

from the names suggested by the Respondent. Though the management of MSL was to vest inthe Board, the daytoday work of the Company was to be carried out by the Chief Executive, to

be appointed by the Board of MSL. The selection of the Chief Executive was to be made from apanel to be suggested by the Respondent. The parties undertook to ensure that MSL wouldenter into an agreement with the Respondent for obtaining technical know how.

The 'offer' and 'acceptance':

5. Between 1986 and 2003, the Respondent had been requesting the Petitioner to divest itsshareholding in MSL in its favour. By a letter dated 9th April 2003, the Petitioner offered to sellits shares to the Respondent, at a price of Rs. 232.20 per share. By a reply dated 3rd May2003, the Respondent confirmed its interest in buying the shares, but stated that the price thatwas offered by the Petitioner, was not acceptable. The Respondent requested that a meeting becalled of a High Level Committee to carry forward the negotiations in order to reach a fair and

amicable settlement. On 7th May 2003, the Petitioner addressed a letter to the Respondentstating that the Respondent was required to respond to an offer within one month of the receiptof the letter and called upon the Respondent to confirm whether this constituted a letter in

response to a buy back by the Respondent. If not, the Respondent was called upon to ensurethat the requisite response was submitted to the Petitioner by the appointed date. By itsresponse dated 10th May 2003, the Respondent confirmed that its letter dated 3rd May 2003,was its response under Clause 7 of the Protocol Agreement to the Petitioner's offer dated 9thApril 2003. The Respondent confirmed that by its letter, it has confirmed its intention topurchase the shares offered, but stated that the price offered was not acceptable to theRespondent. The Respondent once again renewed its request for a meeting of a High Level

Committee to negotiate upon and resolve the price. On 6th June 2003, the Respondent made acounter offer on the price of Rs. 75/ per equity share of MSL stating that it reflected a premium

of 5.6% over the prevailing market price as on 6th June 2003. By a letter dated 31st July 2003,the Respondent stated that in the event that the price offered of Rs. 75/ per share was notacceptable to the Petitioner, the next step in terms of Clause 7 of the Protocol Agreement wasto initiate the arbitral process.



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Reference to Arbitration:

6. On 23rd September 2003, the Principal Secretary in the Industries, Energy and LabourDepartment of the State Government, forwarded a set of names of former Judges of this Courtfor appointment of an Arbitrator. On 27th October 2003, the Petitioner addressed a letter to Mr.

Justice A.V. Savant, stating that under the Protocol Agreement, the Petitioner had to make thefirst offer to the Respondent and in turn, the Respondent had to accept or reject the offer made

by the Petitioner for divesting its holding in MSL. The letter recorded that "this process has beencompleted and since no agreement has been reached, on the value of the shares, as per theagreement, the parties involved have to proceed to appoint a sole Arbitrator for the purpose".Accordingly, Mr. Justice A.V. Savant was informed that the Government of Maharashtra hadsuggested his appointment as a sole Arbitrator, which had been agreed to, by the Respondentand by the Petitioner. Correspondence ensued between the parties. On 29th December 2003, a

joint reference to arbitration was made by the Petitioner and by the Respondent to Mr. JusticeA.V. Savant. The terms of reference inter alia were as follows:

1. The appointment of "Sole Arbitrator" is made jointly by BAL and WMDC, in terms

of the Clause No. 7 of the "Protocol Agreement" dated 2 October 1974, betweenWMDC and BAL, the copromoters of MSL.

2. BAL had expressed its willingness to buy the stake held by WMDC in MSL. WMDChad 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 protocolagreement, "the question of rate" for the purchase by BAL of equity shares in MSLheld by WMDC, is hereby referred to the Sole Arbitrator.

3. The arbitrator shall take into account the Protocol Agreement covenants and allother concerned factors which may have impact on the share price of MSL shares,while giving his arbitral award.

Arbitral Proceedings:

7. At the first meeting before the Arbitrator on 10th January 2004, directions were issued forfiling pleadings. On 23rd January 2004, an application was filed by the Petitioner that the

Respondent should be treated as the claimant to the arbitral proceedings and should bedirected to file its statement of claim. At the second meeting before the Arbitrator, directionswere issued to the parties to file their statements regarding the valuation of shares and therelevant date for valuation. The Petitioner by its letter dated 3rd February 2004, sought a

meeting with the Respondent, on the ground that certain issues "need to be clarified", whiledrafting the statement of claim. On 5th February 2004, the Petitioner, in a letter to theRespondent, claimed that there was an agreement between the parties that the valuation of theshares should be, as on the last quarter of 2003 and suggested that a specific date, as opposedto the period of the last quarter, should be agreed. The Respondent by its letter dated 13th

February 2004 denied that there was any such agreement on the relevant date for valuation ofshares, as suggested and set up a case that the relevant date for valuation would be 30th June2002. The Petitioner by its letter dated 13th February 2004, denied that there was anyagreement, by which the cut off date was to be 30th June 2002. The Respondent in its letterdated 17th February 2004, once again reiterated that the parties had agreed to 30th June 2002

as the relevant date for valuation.

8. At the third meeting before the Arbitrator on 6th March 2004, it was agreed that partieswould urge their submissions on the preliminary issue as to what should be the relevant datefor valuation.

The challenge to jurisdiction:

9. On 6th April 2004, an application was filed by the Petitioner, questioning the jurisdiction of

the Arbitrator. The contention of the Petitioner was that (i) The Protocol Agreement dated 2nd



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October 1994 was illegal and void on the ground that (a) the agreement was a forward contractprohibited by the Securities Contract Regulation Act; and (b) The agreement containedrestrictions on the transferability of the shareholding of MSL which were violative of the

provisions of Section 111A read with Section 9 of the Companies' Act, 1956 and hence, void;(ii) The joint reference dated 29th December 2003, was void inter alia on the ground that itproceeded on the premise that a concluded contract existed between the Petitioner and the

Respondent though as a matter of fact, no contract had been arrived at since neither of the

parties accepted the offer, nor had they agreed to a cut off date for valuation of shares. TheRespondent filed a reply, opposing the application and inter alia contended that by its letterdated 3rd May 2003, the offer of the Petitioner had been formally accepted, but had clarifiedthat the rate was not acceptable. The Respondent contended that in fact and in law, an offerwas made by the Petitioner for the sale of its 27% stake and the Respondent had accepted theoffer to purchase the holding of the Petitioner. There was, it was urged, a concluded contract

with the rate to be ascertained through the arbitral process. Hence, according to theRespondent, a contract for the sale of the shareholding of the Petitioner had been concludedand what remained to be determined, was the rate at which the shares would be valued, interms of Clause 7 of the Protocol Agreement.

Arbitral Meetings on (i) preliminary objection and (ii) date for valuation:

10. The Arbitrator ruled on the preliminary objection to his jurisdiction, on 21st July 2004.While rejecting the application, the Arbitrator stated that the reasons for the rejection wouldfollow and form part of the award. On 10th August 2004, an application was filed by thePetitioner seeking relief to the effect that the Arbitral Tribunal should "determine and declarethe date of 29th December 2003, being the date of the joint reference made" by the parties "asthe relevant date for the purpose of valuation of the said shares proposed to be sold" by thePetitioner to the Respondent. By its reply, the Respondent submitted that the relevant date for

valuation should be, 30th June 2002 or, in the alternative, assuming that there was no suchagreement between the parties on that date, the relevant date for valuation should be 3rd May2003, which was the date on which, the Respondent had accepted the offer of the Petitioner, in

terms of Clause 7 of the Protocol Agreement. On 31st August 2004, the Arbitrator held that the

relevant date for valuation of shares would be 3rd May 2003, when the contract was concluded.

11. The Arbitrator has, in the course of the arbitral award delivered on 29th December 2005,furnished reasons for accepting 3rd May 2003 as the date for valuation of shares. The Arbitratornoted that on 9th April 2003, the Petitioner made a specific offer to the Respondent in terms ofClause 7 of the Protocol Agreement and in terms of the decision of the Government ofMaharashtra to sell its equity shareholding in MSL to the Respondent at Rs. 232.20 per share.The price of Rs. 232.20 was based on a valuation report submitted by Crisil Advisory Services

on 3rd September 2002. In response to the offer of the Petitioner, the Respondent conveyed itsacceptance on 3rd May 2003, clarifying at the same time that the price was not acceptable. TheRespondent's subsequent letter dated 10th May 2003, once again confirmed that the earlier

letter of 3rd May 2003, was in response to the offer in terms of Clause 7 of the Protocol

Agreement and that by its letter, the Respondent had confirmed its intention to accept the offerthough the price was not acceptable. The Arbitrator held that the correspondence exchangedbetween the parties, between 9th April and 6th June 2003, left no manner of doubt that therewas a concluded contract under which the Petitioner was to sell its shares to the Respondentand the Respondent was to purchase those shares and the contract was concluded on 3rd May2003. The Arbitrator held consequently, the relevant date for the purpose of valuation would be

3rd May 2003, which was the date on which the contract was concluded. At this stage, it mayalso be necessary to note that in the PartI Award, the Arbitrator referred to the provisions ofSections 9 and 10 of the Sale of Goods Act and relied upon two English judgments and upon a

judgment of the Supreme Court in support of his conclusion that the date of valuation would be

the date of the acceptance of the offer to purchase.

Award:

12. By his arbitral award dated 14th January 2006, the Arbitrator declared that the rate atwhich 30,85,712 equity shares of MSL, held by the Petitioner are to be valued as on 3rd May



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2003, for the purposes of sale to the Respondent, is Rs. 15 1.63 per share.

Challenge to the Award

Submissions of Petitioner:

13. In assailing the award under Section 34 of the Arbitration and Conciliation Act, 1996,

Counsel appearing on behalf of the Petitioner urged the following submissions:

(i) The Arbitrator exceeded his jurisdiction in deciding the date for valuation of the

shares of MSL, proposed to be transferred by the Petitioner to the Respondent; (ii)MSL held 3.4% of the equity capital of Bajaj Auto Ltd. (the Respondent), Bajaj AutoFinance Ltd. and Bajaj Hindustan Ltd. MSL also held investment in fully paid bondsand mutual funds. In valuing the shares of MSL, the Arbitrator applied a discount of

30% on the value of the shares held by MSL in the Respondent ("the BAL shares").The Arbitrator neither adjudicated upon, nor decided why a discount should beapplied to the BAL shares. The Petitioner was selling 27% stake in MSL to theRespondent as a result of which the Respondent would obtain a majority holding inMSL and would also as a result obtain 3.4% of the equity capital in BAL. Hence, the

value of the BAL shares held by MSL cannot be subjected to a discount, particularlysince the Respondent had a special interest in the acquisition of a 27% stake inMSL; (iii) Neither the Arbitrator, nor the valuer whose evidence is accepted by theArbitrator, have decided why only the book value of the nonBAL quotedinvestments, be taken and not the market value; (iv) No adjudication or

determination has been rendered by the Arbitrator at all on valuation. TheArbitrator merely stated that fixing of a 30% discount would be just, fair andreasonable and would meet the ends of justice. This constitutes an error apparenton the face of the record, since the Arbitrator has proceeded on a basis which is notpermitted by Section 28(2); (v) The invocation of a rationale of a 20 to 40%discount as a reason by the Arbitrator to apply a 30% discount discloses a totalnonapplication of mind or perversity, on the part of the Arbitrator, considering the

context in which the discount of 20 to 40% came to be stated. The fact that 20 to40% of the discounted price of MSL shares is translated to a percentage discount inthe holding of BAL shares is such as to shock the conscience of the Court; (vi) The

application of a discount to the BAL holding and the use of only the book value inthe nonBAL holding affects the rights of the Petitioner and causes a direct financialloss and injury. The value of the discount applied is Rs. 50 crores in the shares ofBAL alone; (vii) The evidence of Mr. Bansi Mehta was liable to be consideredirrelevant, non germane and extraneous to the reference after his answer toquestions 14 to 16 in the course of his evidence. The Arbitrator has to decide a civildispute on a balance of probabilities and he must of necessity decide on some

evidence. If the evidence of one side is discarded and the evidence of the other sideis admittedly not under Clause 7 of the Protocol Agreement, on which he is called

upon to make a valuation, the Arbitrator should have come to the conclusion thaton the evidence, he could not value at all; (viii) The fixation of the date forvaluation by the Arbitrator is beyond the scope of the submission; and (ix) TheProtocol Agreement is illegal and any determination under the agreement is void.The effect of the Protocol Agreement is to create a right and preemption in MSLwhich is a listed Company. The Protocol Agreement is incorporated in the Articles ofAssociation of MSL. The shares of a Public Company are declared by Section 111Aof the Companies' Act, 1956 to be freely transferable. The Articles of Association

must yield to the principle of free transferability embodied in Section 111A and thepreemptive right is inoperable. On this defence, there was virtually no adjudicationby the Arbitrator.

Submissions of Respondent:

14. On the other hand, it was urged on behalf of the Respondent that (i) In pursuance of the

formal offer made by the Petitioner under Clause 7 of the Protocol Agreement to divest itself of



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its 27% holding in MSL and to transfer it to the Respondent, the Respondent accepted the offerby its letter dated 3rd May 2003. This was clarified by the Respondent by a letter dated 10thMay 2003, by which the Respondent stated that the earlier letter was in terms of Clause 7 of

the Protocol Agreement but the price offered by the Petitioner was not acceptable. In fact, theletter addressed by the Petitioner to the Arbitrator on 27th October 2003 clearly establishesthat the process had been completed though there was no agreement on the value of the

shares to be sold. The joint reference by the parties to the Arbitrator on 29th December 2003

postulates that a contract for the sale of the Petitioner's holding in MSL to the Respondentexisted though there was a dispute about the rate. The Minutes of the Meeting before theArbitrator show that the date for valuation was regarded as an ingredient of the rate and therewas never any dispute about the date of the contract. The tenor of the correspondence whichwas exchanged between the parties also shows that all the letters related to the date ofvaluation and there was no dispute about the date of the contract. Until the reference was

made to arbitration, the common premise was that the agreement was arrived at, withreference to the offer dated 9th April 2003, on 3rd May 2003. This was the position untilJanuary 2004. The Arbitrator directed the pleadings to be filed on the valuation of the sharesand the relevant date. It was only in the application of 6th April 2004 that the Petitioner sought

to raise a dispute on whether a concluded contract has come into existence. Hence, thequestion as regards the date of valuation was raised not in the context of the contract not beingconcluded, but as an ingredient of the rate and it was only in the application of 6th April 2004that the Petitioner sought to link the date of valuation to the submission that the contract hadnot been concluded; (ii) In so far as the question of valuation is concerned, the only groundwhich has been raised in the Arbitration Petition (Ground AA) relates to the discounting of the

value of BAL shares held by MSL; (iii) Considering the scope of Section 34 of the Arbitration andConciliation Act, 1996, an appellate review of an arbitral award is not permissible in law. Thedecision of the Supreme Court in ONGC Ltd. v. Saw Pipes Ltd. MANU/SC/0314/2003 : (2003) 5SCC 705 does not contemplate an appellate review or suggest a reappraisal of evidence; (iv)

The arbitral award furnishes a valid basis from the evidence for applying a discount of 30% inthe facts of the case. The evidence of Mr. Bansi Mehta suggested that a discount between 28 to40% would have to be allowed on a conceptual basis whereas on an empirical comparison

based on market capitalization, a discount between 56 to 91% would have to be taken. TheArbitrator has held that the discount should be no less than 30% in the facts of this case. The

reference by the Arbitrator to the report of Mr. Raghuram indicating a 20 to 40 % discount iserroneous, because this was a reference to the valuation of MSL shares. But merely becauseone ground which is relied upon by the Arbitrator suffers from an error of fact, would notdetract from the validity of the award. There was a wealth of evidence before the Arbitrator insupport of the finding that the discount of 30% is valid. The evidence is referred to in the

arbitral award itself and the award can be sustained on that basis. The realizable value of anasset is less than the market value in a liquidation valuation; (v) As regards the book valuebeing taken of the nonBAL holding, the evidence shows that there was no appreciation in the

value of such holding. If the market value was taken, it would have to be discounted, whichwould then result in a figure even lower than the book value; (vi) The Arbitrator accepted theliquidation basis of valuation from the report of Mr. Bansi Mehta and applied a discount. Thereis both an adjudication and determination by the Arbitrator. Clause 7 of the Protocol Agreement

does not provide any particular method of valuation. Mr. Bansi Mehta, therefore, stated in hiscrossexamination that the classical method has been followed. Clause 7 provides for a fixationof the rate at which the shares would be sold, which lies in the domain of the Arbitrator. In any

event, this relates to an appreciation of the evidence; (vii) Parties made a specific reference ofa question of law by the application dated 6th April 2004, which was responded to and decided.The question as regards the legality of Clause 7 of the Protocol Agreement visavis Section 111Aof the Companies' Act, 1956, was not in the original reference. Yet, the question was

specifically referred to the Arbitrator during the pendency of the reference. The decision of theArbitrator was invited as a jurisdictional issue, before the Arbitrator considered the merits of thedispute. Hence, the determination of the Arbitrator is final and cannot be enquired into; (viii) Inany event, the Arbitrator has followed the decision of the Supreme Court in M.S.Madhusoodhanan v. Kerala Kaumudi Pvt. Ltd. 2003 117 Comp Cas 19. 9. The restriction in the

present case, imposed by Clause 7 of the Protocol Agreement is valid, because it is not one thatbinds all shareholders, but which binds two shareholders in a specified contingency. Therestriction is contained in the Articles of Association. Section 111A of the Companies' Act, 1956does not prohibit agreements entered into between specific shareholders regarding specific



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shares, particularly when incorporated in the Articles of Association.

15. The challenge to the arbitral award can now be taken up for consideration. Did theArbitrator exceed his jurisdiction:

16. The submission of the Petitioner is that the Arbitrator acted in excess of his jurisdiction indeciding the date with reference to which the valuation of the shares had to be determined.

17. On 9th April 2003, the Petitioner addressed a letter to the Respondent by which, it proposedto divest its shareholding of 30,85,712 equity shares in MSL at an offered price of Rs. 232.20per equity share to the Respondent. The Petitioner stated that it was making an offer inaccordance with the provisions of Clause 7 of the Protocol Agreement and in view of the

decision of the Government of Maharashtra. The Respondent in its reply dated 3rd May 2003,confirmed its interest in buying shares offered, but recorded that the price was not acceptable.The response of the Respondent was in pursuance of Clause 7 of the Protocol Agreement. By afurther letter dated 10th May 2003, the Respondent confirmed that its earlier response of 3rdMay 2003 was to the offer made by the Petitioner on 9th April 2003 and was in terms of Clause7 of the Protocol Agreement. The Respondent stated that it has confirmed its intention topurchase the shares offered, but the price offered was not acceptable.

18. The contention of the Petitioner is that the letter of the Respondent dated 3rd May 2003,was not an unqualified acceptance since a meeting was sought for negotiation to explore asettlement. In dealing with this submission, it is to be noted that on 31st July 2003, theRespondent sought the initiation of the arbitral process, in the event that its offer of a price of

Rs. 75 per share was not acceptable. The arbitral process was initiated and on 27th October2003, the Petitioner addressed a letter to the Arbitrator, recording that under the ProtocolAgreement, the Petitioner had to first make an offer to the Respondent and in turn, theRespondent had to accept or reject that offer. This process, the Petitioner recorded, "has beencompleted and since no agreement has been reached on the value of the shares, as per theagreement, the parties involved have to appoint a sole Arbitrator for the purpose". Followingthis letter, a joint reference to arbitration was made on 29th December 2003. The terms of

reference contain an express statement of fact that the Respondent had expressed itswillingness to buy the stake held by the Petitioner in MSL and that the Petitioner indicated itsdesire to sell its shareholding in MSL. However, what remained in dispute was the price per

share and hence, in accordance with Clause 7 of the Protocol Agreement, the "question of rate"for the purchase by the Respondent of the equity shares held by the Petitioner in MSL, wasbeing referred. What emerges from the material on record, therefore, is, that in terms of Clause7 of the Protocol Agreement, the Petitioner had made an offer to sell its shares in MSL, to theRespondent. The Respondent by its letters dated 3rd May and again 10th May 2003, acceptedthe offer to purchase the shares, but indicated that the price suggested by the Petitioner wasnot acceptable. Parties at that stage and, as would be noted, even later were ad idem on the

fact that the contract for the sale of shares, stood concluded by the acceptance of the offermade by the Petitioner. Clause 7 of the Protocol Agreement contemplates that if the party, to

whom an offer is made, "is willing to purchase the shares, but considers the rate proposed, tobe too high or unacceptable", it shall, within thirty days from the receipt of the notice, furnish awritten intimation to the offerer of the intention to purchase shares and the question as regardsthe rate at which the shares are to be sold shall be referred to arbitration. In the present case,the Petitioner by its letter to the Arbitrator dated 27th October 2003, clearly stated that theprocess of making of the offer and its acceptance, had been completed and there was noagreement on the value at which the shares would be sold. It is in this context, that the jointreference to the Arbitrator proceeded on the basis that a concluded contract for the sale of

shares did exist but there was a dispute about the rate.

19. The Arbitrator, during the course of the second meeting held on 27th January 2004, calledupon the parties to file their statements "regarding the valuation of shares and the relevant

date for valuation". The date for valuation was regarded as an ingredient of the rate, at whichthe shares would be sold. There was no dispute about the fact that the contract for the sale ofthe shares had been concluded. Consequently, until the reference to arbitration was made,parties proceeded on the basis that the agreement for the sale of the shares, was founded on



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the letters dated 9th April 2003 and 3rd /10th May 2003. This position held the field untilJanuary 2004. The Arbitrator directed the parties to file pleadings on the valuation of sharesand the relevant date for valuation. The correspondence exchanged between the parties in

February 2004, shows that the dispute was on the date of valuation. It was for the first time, inthe application filed by the Petitioner before the Arbitrator, on 6th April 2004, that the Petitionersought to question as to whether a concluded contract had been arrived at. This was an obvious

afterthought and was a clear deviation from the manner in which the Petitioner had understood

the course of dealings between the parties. The reference to the date of valuation wasintroduced by the Arbitrator, when there was no dispute about the date of the contract or aboutthe existence of a concluded contract. When the Arbitrator raised the question as regards thedate of valuation, this was only as an ingredient of the fixation of the rate and the premise ofthe reference to arbitration was the existence of a concluded contract. The Arbitrator was notdeciding when the contract was concluded or whether it was concluded. The Arbitrator has, as a

matter of fact, ascertained the date of valuation as an ingredient of the fixation of the rate atwhich the shares held by the Petitioner would be sold to the Respondent. The Arbitrator hasheld that the relevant date of valuation would be 3rd May 2003, which was the date on which aconcluded contract was arrived at between the parties. In PartI of his Award, the Arbitrator has

held that the date of valuation would be the date on which the offer to purchase was accepted.In holding thus, the Arbitrator has not transgressed his jurisdiction. The challenge to thearbitral award on this ground must fail.

Scope of challenge under Section 34 of the Arbitration and Conciliation Act, 1996:

20. Section 34 of the Arbitration and Conciliation Act, 1996, defines the parameters of arecourse to a Court against an arbitral award. This recourse is, by an application for settingaside the award, in accordance with the provisions of Subsections (2) and (3) of the provision.For this case, the focus on the scope of judicial intervention is on sub Clause (iv) of Clause (a)

and on sub Clause (ii) of Clause (b) of Subsection (2) of Section 34. Under these provisions, anarbitral award may be set aside by the Court, only if (i) The arbitral award deals with a disputenot contemplated by or not falling within the terms of the submission to arbitration or if it

contains decisions on matters beyond the scope of the submission to arbitration; and (ii) If the

Court finds that the arbitral award is in conflict with the public policy of India.

21. Section 28(1)(a) mandates that the arbitral Tribunal must decide the dispute in accordancewith the substantive law in India. Under Subsection (3), the Tribunal has to decide the dispute,in accordance with the terms of the contract and after taking into consideration, the usage ofthe trade applicable to the transaction. In ONGC v. Saw Pipes (supra) the Supreme Court heldthat if an award is in contravention of the provisions of the Act, it is subject to judicialintervention and can be set aside. If the arbitral Tribunal does not follow the mandatory

procedure under the Act, it would act in excess of its jurisdiction and the award would bepatently illegal. The ground for interference is elucidated thus, by the Supreme Court:

15. The result is - if the award is contrary to the substantive provisions of law or the

provisions of the Act or against the terms of the contract, it would be patentlyillegal, which could be interfered under Section 34. However, such failure ofprocedure should be patent affecting the rights of the parties.

The illegality, as the Supreme Court noted, must be such as "must go to the root of the matter"for "if the illegality is of trivial nature, it cannot be held that the award is against public policy".The decision in Saw Pipes lays down that before an award can be set aside, it must be (i)Contrary to the fundamental policy of Indian Law; or (ii) Contrary to the interest of India; or(iii) Contrary to Justice or morality; or (iv) Patently illegal. An award which is so unfair andunreasonable, that it shocks the conscience of the Court, would be liable to be set aside

because, then it would be contrary to public policy. The Supreme Court, however, emphasizedthat if the arbitral Tribunal commits a "mere error of fact or law in reaching its conclusion on a

disputed question referred to it for adjudication", the Court would have no jurisdiction tointerfere with the award. This would depend upon the reference that was made to theArbitrator. If there is a general reference to the Tribunal for deciding the dispute and if anaward is based on an erroneous and illegal proposition, the Court would interfere. In the case of



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a reasoned award, the Court can set aside the award if on the face of the award, there is anerroneous proposition of law or on its application. However, if a specific question of law issubmitted to the Arbitrator an erroneous decision on a point of law does not make the award

bad, unless the Court is satisfied that the Arbitrator has proceeded illegally. The decision of theSupreme Court in Saw Pipes (supra) does not contemplate an appellate review of an arbitralaward or a reappraisal of the evidence. The Court cannot substitute a conclusion on evidence,

which appears to the Court to be just and proper for the conclusion that is arrived at, by the

arbitral forum. The emphasis in the judgment in Saw Pipes, is that judicial intervention can bewarranted where the arbitral Tribunal has not followed the mandatory procedure prescribed bySections 24, 28 or 31(3), which affects the rights of the parties or where the award is contraryto the substantive provisions of law; to the provisions of the Act or to the terms of the contract.The emphasis is on a patent illegality. Not every error of law or fact makes an award subject to

judicial intervention.

22. The subsequent judgment of the Supreme Court in Delhi Development Authority v. R.S.

Sharma & Co. MANU/SC/3624/2008 : (2008) 13 SCC 80makes a reference to the earlierjudgments of the Court including the judgment in Hindustan Zinc Ltd. v. Friends CoalCarbibusatuib MANU/SC/8095/2006 : (2006) 4 SCC 445 which in turn has followed Saw Pipes

(supra). In the judgment in Delhi Development Authority (supra), the Bench of two Learned

Judges of the Supreme Court has summarized the principle for judicial intervention in arbitralawards, as they emerge from the decided cases, thus:

21. From the above decisions, the following principles emerge:

(a) An award, which is

(i) contrary to substantive provisions of law; or

(ii) the provisions of the Arbitration and Conciliation Act, 1996;

or

(iii) against the terms of the respective contract; or

(iv) patently illegal; or

(v) Prejudicial to the rights of the parties;

is open to interference by the Court under Section 34(2) of the Act.

(b) The award could be set aside if it is contrary to:

(a) fundamental policy of Indian law; or

(b) the interest of India; or

(c) justice or morality.

(c) The award could also be set aside if it is so unfair and unreasonable that itshocks the conscience of the court.

(d) It is open to the court to consider whether the award is against the specificterms of contract and if so, interfere with it on the ground that it is patently illegal

and opposed to the public policy of India.

At this stage, it would, however, be necessary to note that an arbitral award prejudicial to therights of the parties is not an independent head of challenge as such, and this is evident both



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from the decision in Saw Pipes and in the paraphrasing of the principles laid down in thatjudgment in Hindustan Zinc. In paragraph 13 of the judgment in Saw Pipes, the Supreme Courtaddressed the issue as to whether an award could be set aside if the arbitral Tribunal has not

followed the mandatory procedure prescribed under Sections 24, 28 or 31(3), which affects therights of parties. In Hindustan Zinc, the Supreme Court held that an award contrary to thesubstantive provisions of law or the provisions of the Act or the terms of the contract, would be

patently illegal and if it affects the rights of the parties would be open to interference of the

Court under Section 31(2).

23. The question as to whether a ground for the interference of the Court has been establishedin the facts of this case, must now be considered, in terms of the law laid down by the SupremeCourt.

The question of valuation:

24. MSL has an Operating Section and an Investment Section. MSL's Assembly Plant was set upunder technical know how from the Respondent. The assembly, the Court is informed, was ofthe Chetak Scooters of Bajaj. The Investment Section of MSL has holdings in the Bajaj Group ofCompanies and others. MSL held 3.4% of the equity capital of the Respondent ("the BAL

shares"), Bajaj Hindustan Ltd. and Bajaj Auto Finance Ltd. The nonBajaj holding was in fullypaid up bonds and Mutual Funds.

25. Principally, two submissions have been urged on behalf of the Petitioner. Firstly, theArbitrator has selected a particular method of valuation. Whether a valuation on a liquidation

basis could at all be adopted for a Company which has a going concern, was sought to beplaced in issue and it was urged that MSL is not a Company which is unable to pay its debts.The Respondent had a special interest in the acquisition of the stake held by the Petitioner inMSL. By the acquisition of the equity holding of the Petitioner, the Respondent would acquire amajority holding in MSL, besides the acquisition of 3.4% of the holding in the BAL shares. Thesecond aspect relates to the discounting of the holding of BAL shares.

26. The Arbitrator culled out the principles for valuation of shares from the judgments of theSupreme Court in Commissioner of Wealth Tax v. Mahadeo Jalan MANU/SC/0305/1972 : (1972)86 ITR 621 and Commissioner of Gift Tax v. Kusumben D. Mahadevia MANU/SC/0300/1979 :(1980) 122 ITR 38 The judgment in Mahadeo Jalan lays down that leaving aside a distress sale,the factors which are likely to affect the value of shares are: (i) The profit earning capacity of

the Company; (ii)The capacity of the Company to maintain those profits or a reasonable returnfor capital invested; (iii) The prospects for capitalization of its earning by declaring bonusshares and in a case of a financially sound Company, the prospects for the issuance of a rightsissue where existing shareholders can obtain shares for a price less than the market value,increasing the yield on investment. The Supreme Court, after enunciating various methods ofvaluation of shares, namely, (i) yield or profit earning method; (ii) the market value method ifprofit is certain; and (iii) liquidity if profit is uncertain, laid down the principles which emerge.

In so far as it is relevant to this case, the propositions (1), (4) and (5) are as follows:

1) Where the shares in a public limited company are quoted on the stock exchangeand there are dealings in them, the price prevailing on the valuation date is thevalue of the shares.

4) Where the dividend yield and earning method break down by reason of the

company's inability to earn profits and declare dividends, if the setback istemporary then it is perhaps possible to take the estimate of the value of the sharesbefore setback and discount it by a percentage corresponding to the proportionatefall in the price of quoted shares of companies which have suffered similar reverses.

5) Where the company is ripe for winding up then the breakup value methoddetermines what would be realized by that process.



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The Arbitrator adverted to certain admitted facts, these being as follows: (i) The principalactivity of MSL involved the assembly of scooters for which completely knocked down kits werereceived from the Respondent. The Respondent and MSL had entered into a technical know how

agreement. MSL was assembling Bajaj Chetak Scooters; (ii) Admittedly, the management ofMSL was with the Respondent. Five persons on the Board of Directors were to be nominated bythe Petitioner and four by the Respondent. The Chairman and Managing Director of the

Respondent was to be the Chairman of MSL. Under Clause 154 of the Articles of Association,

several important decisions to be taken by MSL, were subject to the approval of theRespondent. Moreover, the Chief Executive of MSL was to be appointed by the Board, out of apanel of names suggested by the Respondent. Key management functions of MSL were virtuallyintegrated with the Respondent. MSL only has an assembly plant by which it cannotmanufacture, but can only assemble scooters.; (iii) As a result of customer preference formotorcycles, the market for scooters had shown a declining trend, adversely affecting the

operations of MSL. MSL had suffered operating losses for financial years 200102, 200203 and200304; (iv) The market share of geared scooters with which MSL is concerned, had gone downfrom 23.5% in 19992000 to 4.9% in 200304; (v) MSL requires sales of about 62,000 scootersper year to achieve a breakeven position, whereas the business plan for the period 200409

indicates production and sale of Chetak Scooters of only 12,000 units per year. The Arbitratornoted, while dealing with the question of control premium, that even without the sale of its 27%stake by the Petitioner, the Respondent already had effective managerial control over MSLwithout boardroom control. The rationale for a control premium would, therefore, not exist inthe facts of this case. Moreover, it is an admitted fact that the non-core business assets of MSLwhich consist of unquoted investments and quoted investments, constitute 96.2% of the

business assets of MSL. Though the main business of MSL was supposed to be in the operatingsegment, namely, in the core business assets, that constituted only a negligible operation,namely, 3.8%. Hence, the core business activity of MSL of assembling scooters wasinsignificant. Having regard to these circumstances, the Arbitrator declined to accept the theory

propounded by Mr. Raghuram, the witness for the Petitioner, that a control premium must beaccounted for in the facts of this case. The valuation made by Mr. Raghuram was not acceptedby the Arbitrator for valid reasons which have been noted above. The reasons on the basis of

which the testimony of Mr. Raghuram and his valuation are discarded, are inter alia containedin paragraph 75 of the award. In fairness, it may be recorded here that Learned Senior Counsel

appearing on behalf of the Petitioner has not pressed that aspect of the matter.

27. Mr. Bansi Mehta was examined as an expert on valuation Mehta was crossexamined on

behalf of the Petitioner, in order to question his justification for adopting the net asset value ona liquidation basis. The award notes that this method was also recommended by the witness ofthe Petitioner in his first report. Mr. Bansi Mehta worked out two different valuations: (i) Avaluation of Rs. 125 per share was worked out by applying a 45% discount on the six monthly

average value on the National Stock Exchange (NSE); and (ii) A value of Rs. 102 per share wasworked out on the basis of a 60% discount on a six monthly average taken from NSE. TheArbitrator considered it fit to apply a 30% discount "in the facts of the case" and considered

that this would be "just, fair and reasonable and would meet the ends of justice". The sixmonthly average on the NSE for 33.87 lakh BAL shares was Rs. 494 per share on which a 30%

discount was applied. Paragraph 100 of the award which reads thus:

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 Appendix8 and 9 to hisreport subject, however, to two changes. In Appendix 9, he has calculated discountof 60% on the six monthly average rate on National Stock Exchange, namelydiscount 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 Appendix8, he has calculated 45% discount on the sixmonthly average rate on National Stock Exchange namely discount of Rs. 222.30 onthe 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.

28. The Award on valuation is questioned on the ground that there is a violation of the



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provisions of Section 28(2) of the Arbitration and Conciliation Act, 1996. Counsel for thePetitioner submitted that Mr. Bansi Mehta applied a discount between 45% to 60% and arrivedat the conclusion that the price of a share would vary between Rs. 102 to Rs. 124. The

Arbitrator took a discount of 30% in arriving at a valuation of Rs. 151.63 per share on theground that he considered it just, fair and reasonable and to meet the ends of justice. Thesubmission is that the Arbitrator decided what he thought is fair, just and equitable and this is

not permissible under Section 28(2) of the Act which mandates that the decision has to be

reasoned. The Arbitrator also furnished the reason that Mr. Raghuram, the witness for thePetitioner, had "himself ... indicated a discount of 20% to 40% in his first report". It was urgedthat the discount which Mr. Raghuram suggested in his evidence was on the shares of MSL,whereas the Arbitrator applied this to the valuation of BAL shares. It was urged that the award,therefore, shows no reasoning at all and betrays a non application of mind. The factual basis onwhich the Arbitrator concluded that a discount of 30% should be applied, was incorrect. As a

result of this process, it was submitted that the discount on BAL shares of Rs. 50.12 crores waswrongly granted by the Arbitrator.

29. The Arbitrator, in paragraphs 80 and 81 of the Award, considered the report of Mr. BansiMehta. The Arbitrator noted that if a conceptual basis is adopted, the value of the investments

has to be discounted between 20 to 40%. On the other hand, on an empirical comparison of

data on actual valuations, based on market capitalization, a discount of between 56 to 91% isrequired to be adopted. In Appendix6A of his report, Mr. Bansi Mehta furnished details of hisworking in respect of (i) Tata Investments; and (ii) Industrial Investment Trust, where thediscounts were 82.85% and 9 1.4%. In Appendix6B, where the example of TISCO Ltd. wasconsidered, the discount applied was 56%. Appendix6C dealt with Bajaj Auto Ltd.Consequently, an empirical comparison suggested that the discount which is to be applied while

valuing the shares held by an operating company, in other entities, would vary between 56 to91%. On the other hand, in Appendix7, Mr. Bansi Mehta applied a conceptual or common sensebasis, which showed that the discount on the shareholding held in other Companies, would beapproximately 2840%. Mr. Bansi Mehta, in his answer to Question 147 in the course of his

crossexamination explained the basis on which the discount had been calculated, firstly, takingan empirical comparison and secondly, on a conceptual analysis. While explaining paragraph5.3 of his report, Mr. Bansi Mehta makes a reference to what is described as the "C, D, E"

approaches: The acronym stands for 'constraint', 'distance' and 'empirical data'. The Arbitratorhas made a reference in his Award to the answer to Question 147 and to paragraph 5.4 of thereport of Mr. Bansi Mehta, which reads as follows:

5.4 On a conceptual basis, we have set out in Appendix7 what a shareholder can

expect to get if the Investee Company were to realize its investment and, inabstract theory, distributes the entire proceeds to the shareholders, from which itwill be evident that what a shareholder can hope to achieve is no more than 72% ofthe gain. This, in our view, reinforces what is stated earlier that the fair market

value must allow for a discount of about 30%. Accordingly, in our view, MSL'sshareholding in BAL valued at the sixmonthly average rate set out in Appendix5should be further discounted by no less than 30%.

Mr. Bansi Mehta's evidence, which has been relied upon by the Arbitrator, is, therefore, clear instipulating that the holding of MSL in the Respondent, valued on a six monthly average rate,should be discounted "by no less than 30%". The underlying principle is that, the realizablevalue of an asset is less than the market value in a liquidation valuation. The Arbitrator adopted

a discount of 30% on the valuation of BAL shares. The submission that the Arbitrator has doneso, without any reason and in the absence of any basis, is incorrect. The evidence of Mr. BansiMehta, which the Arbitrator accepts, contains a detailed elaboration of the rationale for makinga discount on the valuation of BAL shares. Mr. Mehta considered discounting both from an

empirical and a conceptual perspective. Empirically, the valuation of the BAL shares would besusceptible to a discount of between 56 to 91%, whereas, conceptually, the discount would be,no less than 30%. The Arbitrator in adopting the discount of 30%, cannot, therefore, be

faulted. The figure of 30% is traceable to the evidence of Mr. Bansi Mehta who states that thediscount should be no less than 30%. The observations of the Arbitrator in paragraph 100 ofthe Award, also refer to Appendices 8 and 9, where Mr. Bansi Mehta considered the empirical



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basis. The observations of the Arbitrator in paragraph 100 that "in the facts of the case .. fixing30% discount would be just, fair and reasonable and would meet the ends of justice", cannot beread in isolation or be utilized to suggest that the Arbitrator was applying his own notion of

what is equitable, fair and just.

30. Section 28 of the Act postulates that the arbitral Tribunal has to decide the disputesubmitted to arbitration in accordance with the substantive law for the time being in force, in

India. The arbitral Tribunal can decide ex aequo et bono or as amiable compositeur only if theparties have expressly authorised it, to do so, this being the mandate of sub section (2) ofSection 28. The arbitral Tribunal under subsection (3), has to decide in accordance with theterms of the contract and is required to take into account the usages of the trade. In thepresent case, the discount of 30% that has been applied to the BAL holding, is not adopted bythe arbitral Tribunal as amiable compositeur or on notions fairness and equity. The discount isfounded upon considerations which are germane and which were based on the evidence onrecord. The sufficiency and quality of the evidence, are matters for the arbitral Tribunal to

determine. The arbitral Tribunal accepted the evidence of Mr. Bansi Mehta for valid reasons,recording that the crossexamination has not resulted in any significant dilution of the evidence.In one area, there is an error of fact on the part of the Arbitrator where he refers to the report

of Mr. Raghuram as having indicated a discount of 30 to 40%. Admittedly, the discount that

was referred to in the report of Mr. Raghuram dealt with the valuation of MSL shares (not theBAL shares). On this aspect, the Arbitrator has misread the evidence and one ground whichweighed with him, would constitute an error of fact. But, as already discussed earlier, there wasa wealth of evidence before the Arbitrator, which was accepted by him to demonstrate that adiscount of 30% was susceptible both on a conceptual and an empirical basis. The challenge onthis ground is, therefore, lacking in substance.

Book value of nonBAL holdings:

31. The submission is that the Arbitrator was not justified in taking the book value of nonBAL

quoted investments, as opposed to the market value. A brief reference to the evidence of Mr.Bansi Mehta, would be in order. Mr. Bansi Mehta was crossexamined with reference to

paragraph 5.1 of his report, where he has stated that "adopting the book value, as a realizablevalue, the value for that component would correspond to such book value". Mr. Mehta statedthat this is a normal practice for assets that are in the nature of liquid instruments since theyare presumed to have been acquired to earn a recurring rather than the maturity return. Vol. IIQuestion 128 page 557 In answer to Question 164, Mr. Mehta stated that the nonBALinvestments can be encashed easily and that there was "not much appreciation". The mostproximate balance sheet of MSL as of 31st March 2003, showed that almost 98% or more of theappreciation in the quoted investments had come on account of MSL's shareholding in BAL.

Since the appreciation of other quoted investments, was not material, there was no need toapply a discount to that value. Mr. Mehta explained that if he had taken the realizable value ofthe other assets of the Investment Section of MSL and had applied a discount to that value, the

value of the Investment Section, would have been even lower and not higher. The evidence of

Mr. Mehta, therefore, indicates that the reason why he adopted the book value for nonBALholdings was that there was no significant appreciation in the value of those holdings. If themarket value were to be taken, it would have to be discounted, which would result in a valueeven lower and not higher. In the circumstances, there is a cogent justification on the evidencefor applying the book value for nonBAL quoted investments.

32. The Arbitrator accepted the liquidation basis from the report of Mr. Bansi Mehta forvaluation and applied a discount. There is an adjudication and determination by the Arbitrator.

During the course of the submissions, a considerable degree of emphasis was sought to beplaced on the methodology adopted by Mr. Mehta of determining the rate based on an objectivefair valuation. Paragraph 3.2 of the report states that the classical concept of valuation is the

price, which would be fetched between a willing buyer and willing seller. BAL being a listedCompany, whose shares are held by a wide body of investors, Mr. Mehta stated that hisapproach to valuation was guided by the "concept of an objective valuation between a willingbuyer and a willing seller". Mr. Mehta was asked, during the course of the crossexamination, to

demonstrate what part of Clause 7 of the Protocol Agreement requires a determination of an



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objective fair valuation. In his answer, he clarified that in the absence of any particularprovision concerning the method of valuation he would adhere to the classical concept of anobjective fair valuation between a willing seller and a willing buyer. Mr. Mehta deposed that

what he had stated in the report about the approach to valuation, was not inconsistent withClause 7 of the Protocol Agreement. He stated that he had not done the valuation under Clause7 of the Agreement. His evidence was that when a valuation is required, and no specific formula

or guideline has been prescribed, the approach is to ascertain, what can be a fair value between

a willing, (but not over eager) buyer and a willing (but not a distress) seller. The contentionthat the report of Mr. Mehta must be discarded because, he has not carried out the valuationunder Clause 7 lacks substance. Clause 7 of the Protocol Agreement does not provide for anyparticular method of valuation. Consequently, Mr. Mehta stated, in the course of his cross-examination, that the classical method had been followed. Clause 7 of the Agreement providesfor a fixation of the rate, which lies in the domain of the Arbitrator. That in any case lies in the

realm of the appreciation of evidence.

33. Section 4 of the Sale of Goods Act, 1930 provides that a contract of the sale of goods is acontract whereby the seller transfers or agrees to transfer the property in goods to the buyerfor a price. Under Section 5, a contract of sale is made by an offer to buy or sell goods for a

price and the acceptance of such offer. The contract may provide for the immediate delivery of

the goods or immediate payment of the price or both, or for the delivery or payment byinstallments, or that the delivery or payment or both shall be postponed. The price in a contractof sale can be fixed under Section 9(1) by the contract or may be left to be fixed in a mannerthereby agreed or that may be determined by the course of dealing between the parties. Wherethe price is not determined in accordance with the provisions of subsection (1) of Section 9, thebuyer shall pay the seller a reasonable price and what is reasonable is a question of fact,

determined on the circumstances of each case.

34. The challenge to the valuation must fail.

Section 111A of the Companies' Act, 1956:

35. The challenge under this head, is to the legality of Clause 7 of the Protocol Agreement. Thesubmission of the Petitioner is that Clause 7 creates a right of preemption. MSL is a listed publicCompany. The Protocol Agreement is incorporated in the Articles of Association. Section 111A of

the Companies' Act, 1956 provides that the shares or debentures of a Company and anyinterest therein, shall be freely transferable. Section 9 stipulates that the provisions of the Actshall have effect, notwithstanding anything to the contrary contained in the Memorandum orArticles of Association. Hence, the preemptive right recognized by Clause 7 of the ProtocolAgreement and incorporated in the Articles of Association, must yield to Section 111A. In thepresent case, it was submitted that on the challenge to the legality of the preemptive rightcreated by Clause 7 of the Protocol Agreement, as incorporated in the Articles, there is virtually

no adjudication by the Arbitrator.

Was there a reference on a specific question of law?

36. On behalf of the Respondent, an objection was raised to the maintainability of the challengeunder Section 34, on the ground that by an application dated 6th April 2004, the legality ofClause 7 was squarely placed in issue for a decision by the Arbitrator. This, it was urged, would

constitute a specific reference of a question of law, on which the decision of the Arbitrator wouldbe final. The submission is that the application dated 6th April 2004, was responded to anddecided: there was a reference of a specific question of law and though this was not part of theoriginal reference to arbitration yet, during the pendency of the reference, the question wassought to be raised. The decision of the Arbitrator was, it was submitted, an adjudication on areference of a specific question of law upon which, finality must vest in the decision of theArbitrator.

37. The position as it obtained under the Arbitration Act, 1940, was that the Arbitrator coulddecide an issue of jurisdiction pro tem. Where, however, parties referred a specific question oflaw and agreed to be bound by the decision of the Arbitrator, that decision became final. This



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was a principle of judge made law. The Arbitration and Conciliation Act, 1996, empowers thearbitral Tribunal, by Section 16, to rule on its own jurisdiction, including ruling on any objectionwith respect to the existence or validity of the arbitration agreement. For that purpose, an

arbitration clause, which forms part of the contract is to be treated as an agreementindependent of the other terms of the contract and a decision of the arbitral Tribunal that thecontract is null and void shall not entail ipso jure the invalidity of the arbitration clause. The

arbitral Tribunal has to decide on a plea that it does not have jurisdiction and where the

Tribunal takes a decision rejecting the plea, it has to continue with the arbitral proceedings andmake an arbitral award. A party aggrieved by the arbitral award is empowered to make anapplication for setting aside the award in accordance with the provisions of Section 34. That isthe scheme legislated upon by Parliament in the Arbitration and Conciliation Act, 1996, inregard to the empowerment of an arbitral Tribunal to rule on its jurisdiction.

38. In ONGC v. Saw Pipes Ltd. (supra), the Supreme Court recognized that "if a specificquestion of law is submitted to the Arbitrator, an erroneous decision in point of law does not

make the award bad, so as to permit its being set aside, unless the Court is satisfied that theArbitrator had proceeded illegally." para 54 page 736

39. The issues which fall for determination are: (i) What are the requirements that must be

fulfilled in law in order to postulate that parties have referred a specific question of law; and (ii)Whether in the present case, the parties must be regarded as having made a reference to theArbitrator on a specific question of law.

The specific question doctrine:

40. Since the judgment of the Supreme Court in Seth Thawardas Pherumal v. Union of IndiaMANU/SC/0070/1955 : AIR 1955 SC 468 it is now a settled principle of law that a distinctionhas to be made between those cases in which a question of law is specifically referred for thedecision of the Arbitrator and those in which a question of law incidentally arises while decidingthe question that is actually referred. If parties refer a question of law specifically to theArbitrator and it is manifest that they seek a decision from the Arbitrator in preference to a

decision of the Court, the decision of the Arbitrator would be binding on the parties and theCourt would not impose its perspective on the law in supersession of the decision of theArbitrator. In Thawardas Pherumal, the Supreme Court formulated the principle in the following

terms:

If a question of law is specifically referred and it is evident that the parties desire tohave a decision from the arbitrator about that rather than one from the Courts,then the Courts will not interfere, though even there, there is authority for the viewthat the courts will interfere if it is apparent that the arbitrator has acted illegally inreaching his decision, that is to say, if he has decided on inadmissible evidence oron principles of construction that the law does not countenance or something of thatnature.

Consequently, for the principle to be attracted, it must be evident that (i) a question of law is inissue; (ii) the parties have specifically agreed to refer it to the Arbitrator; and (iii) parties haveagreed to be bound by the Arbitrator's decision. Otherwise, the jurisdiction of the Court todetermine the validity of an arbitral award, on grounds contemplated by the statute, would not

be ousted. The submission of incidental arguments on a question of law does not amount to aspecific reference of a question of law.

41. In the subsequent judgment of the Supreme Court in Tarapore and Co. v. Cochin ShipyardLtd. MANU/SC/0002/1984 : (1984) 2 SCC 680 Thawardas Pherumal's case was regarded asbeing an authority for the proposition that where the parties specifically agreed to refer aspecific question of law for the decision of the Arbitrator and agreed to be bound by it, the

Court cannot set aside the award on the ground of an error of law apparent on the face of iteven though the decision of the Arbitrator may not be in accord with the law as understood bythe Court. In Tarapore, the principle was formulated in the following terms by the SupremeCourt:



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If a question of law is specifically referred and it becomes evident that the partiesdesired to have a decision on the specific question from the arbitrator about thatrather than one from court, then the court will not interfere with the award of the

arbitrator on the ground that there is an error of law apparent on the face of theaward even if the view of law taken by the arbitrator does not accord with the viewof the court. This view of law taken in England was stated by this Court to be the

same in this country and since the decision in Seth Thawardas case (AIR 1955 SC

468) which follows earlier decisions in England and India, it has not been departedfrom.

In that case, the reference to the Arbitrator was on the following questions: (i) Whether theclaim for compensation fell within the purview of the arbitration clause, Clause 40 of theGeneral Conditions of the Contract; and (ii) If it did, whether the claimant was entitled tocompensation. The Supreme Court held that the parties agreed to submit a specific questioneven with regard to the scope, ambit, width and construction of the arbitration clause, including

the question as to whether the arbitration clause would cover the dispute raised between theparties. The Arbitrator was required to decide whether the dispute is arbitrable and, if it was, todecide the extent of compensation. There was, therefore, held to be a reference of a specific

question of law.

42. In a judgment of a Learned Single Judge of this Court, in Lubrizol (India) Ltd. v. LubrizolCorporation U.S.A. MANU/MH/0112/1998 : 1998(1) ALL MR 435 these decisions were followed,and the Court held that there is a distinction between a case where disputes are referred to anarbitration in the decision of which, a question of law becomes material from a case in which aspecific question of law is referred and parties agreed to be bound by the Arbitrator's decision.When a question of law is a point at issue, unless both sides specifically agree to refer it andagree to be bound by the Arbitrator's decision, the jurisdiction of the Court to set things right,

when an error is apparent from the face of the record, is not ousted. The mere submission ofincidental arguments on a point of law, during the course of proceedings, is not enough.

43. In the present case, an application was filed on 6th April 2004, by the Petitioner before the

Arbitrator seeking a ruling that the arbitral Tribunal had no jurisdiction to entertain and decidethe dispute inter alia on the ground that the Protocol Agreement was void for several reasons,among them being, that it placed restrictions on the transferability of the shareholding of MSL,in violation of the provisions of Section 111A read with Section 9 of the Companies' Act, 1956.The application was responded to by the Respondent. That by itself cannot be regarded asamounting to a reference of a specific question of law for the decision of the Arbitrator. Duringthe proceedings, the Petitioner questioned the jurisdiction of the Arbitrator by presenting itsapplication of 6th April 2004. The Arbitrator was entitled to rule on his jurisdiction in terms of

the provisions of Section 16 of the Act. The application was opposed by the Respondent. Thiscannot amount to a reference of a specific question of law. Nor for that matter, is there intrinsicmaterial to lead the Court to the conclusion that the parties intended to be bound by the

decision of the Arbitrator, so as to oust the jurisdiction of the Court under Section 34 of the

Arbitration and Conciliation Act, 1996. Clearly, there was no reference on a specific question oflaw, so as to render the decision of the Arbitrator binding, or beyond the pale of the reviewingCourt under Section 34.

The Section 111A challenge:

44. That leads the Court to the decision of the Arbitrator on the challenge grounded upon theprovisions of Section 111A of the Companies' Act, 1956. While dealing with the issue, theArbitrator has extracted the provisions of Section 111A of the Companies' Act, 1956, recordedthe submission of the Petitioner, including a reference to the decisions of the Supreme Court in

(i) V.B. Rangaraj v. V.B. Gopalkrishnan MANU/SC/0076/1992 : (1992) 1 SCC 160 and (ii) M.S.Madhusoodhanan v. Kerala Kaumudi Pvt. Ltd. (2003) 117 Comp Cas 19 The Arbitrator has,

after citing the judgment of the Madhusoodanan's case, held thus:

In view of the above, it is clear that the ratio of the decision in Rangaraj's case has

no application to the facts of the present case which is governed by the Protocol



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Agreement dated 2nd October 1974. In the present case, the so called restriction isin fact incorporated in the Articles of Association which is a feature of distinctionfrom the facts in Rangaraj's case.

45. Section 111A of the Companies' Act, 1956, provides that subject to the provisions of the

Section, "the shares or debentures and any interest therein of a Company shall be freelytransferable". Section 9 provides that save as otherwise expressly provided in the Act, the

provisions of the Act shall have effect notwithstanding anything to the contrary contained in theMemorandum or Articles of a Company or in any agreement executed by it, or in any resolutionpassed by the Company in general meeting or by its Board of Directors. Any provision containin the Memorandum, Articles, agreement or resolution shall, to the extent to which it isrepugnant to the provisions of the Act, become or be void, as the case may be.

46. Originally, under the provisions of the Companies' Act, 1956, a transferor or a transfereeseeking relief in respect of a transfer/transmission of shares in a public or private Companycould either file an appeal under Section 111 or apply for rectification of the Register ofMembers under Section 155. With effect from 17th January 1986, Section 22A was inserted in

the Securities Contracts (Regulation) Act, 1956. Section 22A provided that the shares of aregistered Company shall be freely transferable. A Company could refuse transfer only on four

specified grounds. On 20th September 1995, the Depositories Ordinance was promulgated. Theordinance thereafter, was enacted into legislation by the Depositories Act, 1996.

47. Upon the enactment of the Depositories Act, 1996, Sub-section 14 was inserted into Section111 of the Act by which it was provided that a Company for the purposes of Section 111 of theCompanies' Act, 1956 means a private Company and includes a private Company which hasbecome a public Company under Section 43A. Section 111A was introduced into the Companies'Act, 1956 by the Depositories Act, 1996 with effect from 20th September 1995. Subsection (1)of Section 111A provides that a company for the purpose of the Section means a companyother than a company as defined in subsection (14) of Section 111. Hence, Section 111A

applies to public companies. Section 111A has been inserted to provide for the freetransferability of the shares or debentures of a public company other than a private company or

a private company governed by Section 43A. The Company Law Board has been empowered todirect a rectification of the Register of Members if a transfer is made in contravention of theSEBI Act, 1992; the Sick Industrial Companies (Special Provisions) Act, 1985; or any other law,for the time being in force, on an application being made, inter alia by the Company or SEBI.Simultaneously, the provisions of Section 22A of the Securities Contracts (Regulation) Act,1956, were omitted.

48. Section 3(1) (iii) of the Companies' Act, 1956 defines the expression "private company" tomean, a company which has a minimum paid up capital of one lakh rupees or such higher paidup capital as may be prescribed, and by its articles: (a) restricts the right to transfer its shares,

if any; (b) limits its members to fifty not including those who are or were formerly in theemployment of the Company and were members while in employment; (c) prohibits any

invitation to the public to subscribe for any shares or debentures; and (d) prohibits anyinvitation or acceptance of deposits from persons other than its members or directors orrelatives. A company which is not a private company, falls within the definition of expression"public company" under Section 3(1)(iv).

49. The Companies' Act, 1956 makes a clear distinction in its regard to the transferability ofshares. By definition, a "private company" is a company, which restricts the right to transfer itsshares. Consequently, upon a refusal of a private company to transfer its shares, a remedy isprovided by the Act. In the case of a public company, the Act provides that the shares ordebentures and any interest therein of a company shall be freely transferable.

50. The expression "transfer" is defined in Webster as "to convey or remove from one place,

person etc. to another" or "to make over the possession or control of" Webster's EncyclopedicUnabridged Dictionary page 2009 New Deluxe Edition. The expression "transferable" is definedin Black's Law Dictionary, Seventh Edition page 1504 to mean, "capable of being transferred,

together with all rights of the original holder". The expression "transfer" is defined to mean to



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"convey or remove from one place or one person to another; to pass or hand over from one toanother especially to change over the possession or control or; to sell or give". In Stroud'sJudicial Dictionary of Words and Phrases, 3rd Edition, page 3080 and in P. Ramanatha Aiyar's

Advanced Law Lexicon, 2005 Edition page 4751 the expression "transferable" is defined asfollows:

Transferable. An interest which by statute or otherwise is made "not transferable"

cannot be parted with either by act of parties or by operation of law (Gathercole v.Smith 17 Ch D 1). In that case, Lush L.J., said, "The word 'transferable' is of thewidest possible import, and includes 'every' means by which the property may bepassed from one person to another.

51. In Ontario Jockey Club Ltd. v. Samuel McBride AIR 1928 Privy Council 291 the Privy Councildealt with a case, where the transfer of shares in the Ontario Jockey Club Ltd. was refused onthe ground inter alia that the provisions of the Bye laws had not been observed. In proceedingsto enforce registration, the Supreme Court of Canada ordered the Company to enter the nameof the transferee on the Register. In appeal, the Privy Council noted that Bye law 37 of the

Company provided that "no shares or interest in the Club shall, at any time be transferred toany person not already a shareholder, until the Club had an opportunity to find a purchaser for

such share or interest". At the material time, the relevant provisions of Section 48 of thelegislation in Ontario provided that the shares of a company shall be deemed to be personalestate and shall be transferable on the books of the Company, in such manner and subject tosuch conditions and restrictions as may be imposed by the Act or by the Byelaws of theCompany. Under Section 87A, the Directors were empowered to make Byelaws to regulate thetransfer of shares. In the context of a restriction contained in Byelaw 87 and the provisions ofthe Ontario legislation, the Privy Council held thus:

That restrictions may be placed upon a shareholder's right of transfer of his sharescannot be questioned. The cases are numerous in which such restrictions have been

upheld. Shares are prima facie transferable. But there is no law which precludes theshareholders from contracting for value that they shall each submit to any

reasonable restriction which they choose to agree to. It may be for the benefit ofthe company that, for instance, shares shall not be transferred to rivals in thecompany's trade. A restriction which precludes a shareholder altogether fromtransferring may be invalid, but a restriction which does no more than give a rightof preemption is valid.

The judgment of the Privy Council in Ontario Jockey Club's case, therefore, involved a situationin which the legislation in Ontario, authorised the Board of Directors to regulate the transfer ofshares and transferability of the shares of the Company. The Byelaws specifically contemplateda restriction on transferability otherwise than to a member of the Company.

52. In India, the Supreme Court held in V.B. Rangaraj v. Gopalkrishnan (1992) 73 Comp Cas

201 that an agreement between the members of a family, who were the only shareholders of aprivate Company, which imposed a restriction on the shareholders' right to transfer the shares,was contrary to the Articles of Association and was not binding on the Company or its

shareholders. In Ms. Madhusoodhanan v. Kerala Kaumudi (supra), the First Respondent was aprivate Company. An agreement, styled as a Karar was entered into between the mother, theAppellant and the other brothers about the division of the effective control over family concernsamong the other four brothers and the transfer of shares of one of the brothers in the Companyto the Appellant. Parties agreed that each of the sons would have a majority shareholding inone of the concerns. Mrs. Justice Ruma Pal, speaking for the Bench of the Supreme Court,noted that in deciding whether the agreement should be implemented, the basic fact was that

each brother had been given a majority shareholding in the Company specified against hisname in the Karar and since the others three brothers had taken the full benefit of the

agreement, they were bound to comply with by its terms. The Supreme Court observed thus:

It is settled law that shares are movable properties and are transferable. As far as

private companies like Kerala Kaumudi are concerned, the Articles of Association



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restrict the shareholder's right to transfer shares and prohibit any invitations to thepublic to subscribe for any shares in, or debentures of the company. This is how a"private company" is now defined in Section 3(1)(iii) of the Companies' Act, 1956

and how it was defined in Section 2(13) of the 1913 Act.

Subject to this restriction, a holder of shares in a private company may agree to sellhis 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 12of the Specific Relief Act, 1877. The section provides that specific performance ofsuch contracts may be enforced when there exists no standard for ascertaining theactual damage caused by the nonperformance of the act agreed to be done; orwhen 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 transfermovable properties "of special value or interest to the plaintiff, or consisting ofgoods which are not easily obtainable in the market", it has been held by a long line

of authority th

Western Maharashtra Case

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