Bajaj Auto LTD Vs Western Maharashtra Development MH2015130515231613120COM84355

MANU/MH/0820/2015
IN THE HIGH COURT OF BOMBAY

Appeal No. 153 of 2010, Arbitration Petition No. 174 of 2006, Notice of Motion No. 993
of 2010, Cross Objections (L) No. 13 of 2010, Appeal No. 153 of 2010 in Arbitration
Petition No. 174 of 2006
Decided On: 08.05.2015
Appellants: Bajaj Auto Ltd.
Vs.
Respondent: Western Maharashtra Development Corporation Ltd.
Hon'ble Judges/Coram:
M.S. Shah, C.J. and B.P. Colabawalla, J.
Counsels:
For Appellant/Petitioner/Plaintiff: Aspi Chinoy, Snehal Shah, Shriraj Dhru, Lata Dhru and
Mitesh Naik i/b Dhru & Co.
For Respondents/Defendant: D.J. Khambatta, Senior Advocate, Bindi Dave, Janhavi
Dwarka Das, M. Mandevia and Sameer Pandit i/b Wadia Ghandy
JUDGMENT
B.P. Colabawalla, J.
1 . By this Appeal, exception is taken to the order of the learned Single Judge dated
15th February 2010, under which, the learned Single Judge was pleased to set aside the
arbitral award dated 14th January, 2006 passed by the Sole Arbitrator (Mr. Justice A.V.
Savant).
2 . The arbitral award passed by the Arbitrator was in favour of the Appellant. In a
nutshell, the Arbitrator held that the 27% shareholding of the Respondent (30,85,712
equity shares) in a company called Maharashtra Scooters Ltd. ("MSL"), are to be valued,
for the purposes of sale to the Appellant, at the rate of Rs.151.63 per share as on 3rd
May, 2003. MSL is jointly promoted by the Appellant and the Respondent and is a public
company whose shares are listed on the Bombay Stock Exchange (BSE) and the
National Stock Exchange (NSE).
3 . Being dissatisfied with the arbitral award, the Respondent before us (original
Petitioners) challenged the same before the learned Single Judge under the provisions
of section 34 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") on various
grounds as set out in the Arbitration Petition. After hearing the parties, the learned
Single Judge, by an elaborate and reasoned order, negated all the contentions of the
Respondent, save and except one, on the basis of which the award was set aside. In a
nutshell, the ground on which the award was set aside by the learned Judge was that
Clause 7 of the Protocol Agreement entered into between the parties and which gave the
right of first refusal to the Appellant to purchase the shareholding of the Respondent,
was contrary to section 111A of the Companies Act, 1956 ("the Companies Act"). The
learned Judge held that the effect of Clause 7 of the said Agreement was to create a
right of pre-emption between the Appellant and the Respondent for the purchase of
each others shares in MSL. The learned Judge held that MSL being a public company,
the Appellant and the Respondent (being shareholders), could not have a pre-emption
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clause inter-se between themselves as the same was violative of section 111A(2) of the
Companies Act. On that count alone the learned Judge set aside the arbitral award.
Being aggrieved by this portion of the impugned order, the Appellant is in Appeal before
us.
4. The Cross Objections have been filed by the Respondent herein (original Petitioners)
being aggrieved by the impugned order insofar as the learned Judge negated the other
contentions raised by the Respondent to challenge the arbitral award. As the arguments
in the Appeal as well as the Cross Objections have been heard by us at length, we will
deal with the Appeal as well as the Cross Objections in this judgment. We shall first
take up the contentions raised in Appeal No. 153 of 2010.
APPEAL NO. 153 OF 2010
5 . The brief facts that give rise to the controversy are that the Respondent (original
Petitioner before the learned Single Judge) is a State Government Corporation and a
wholly owned undertaking of the State of Maharashtra. As stated earlier, MSL is a listed
public company incorporated and registered under the provisions of Companies Act,
1956. The equity shares of MSL are listed on the Bombay Stock Exchange (BSE) and the
National Stock Exchange (NSE).
6. MSL was incorporated pursuant to the Protocol Agreement dated 2nd October, 1974
entered into between the Appellant and the Respondent which inter alia provided that
the Appellant would grant benefit of know-how and offer its assistance in the
manufacture of two wheeler scooters to MSL and would also participate in the equity
share capital of MSL on the terms and conditions as set out therein. In accordance with
the terms and conditions of the said Agreement, the Respondent as of today continues
to hold 27% of the equity shareholding of MSL and the Appellant continues to hold 24%
thereof. The balance 49% of the equity shareholding of MSL is held by the public. The
controversy in this Appeal No. 153 of 2010 revolves around Clause 7 of the Protocol
Agreement which inter alia provides that if either party desires to part with or transfer
its shareholding or any part thereof, in the equity share capital of MSL, such party shall
give first option to the other party for the purchase of such shares at such rate as may
be agreed to between the parties or decided upon by arbitration. The procedure to be
followed in such a situation is also set out in the said clause.
7 . It is the case of the Respondent that the Appellant had for the last 20 odd years
repeatedly been requesting the Respondent to divest/transfer its 27% shareholding to
the Appellant. On 30th June 2002, Mr. Raghuram of CRISIL carried out a valuation of
the shareholding of the Respondent in MSL. It is the case of the Respondent that this
valuation was done on the joint request of the Appellant and the Respondent. This of
course has been disputed by the Appellant. Be that as it may, ultimately, some time in
April 2003, the Respondent considered selling and transferring its 27% shareholding to
the Appellant and in furtherance thereof, addressed a letter dated 9th April, 2003
offering to sell its 27% shareholding in MSL (30,85,712 shares) to the Appellant at a
price of Rs.232.20 per share.
8. In reply thereto, by their letter dated 3rd May, 2003, the Appellant, under clause 7 of
the Protocol Agreement, confirmed their interest in buying the shareholding of the
Respondent. It was however stated that the price at which the shares were offered was
not acceptable to the Appellant and therefore, requested that a meeting be called for by
a High Level Committee to carry out official negotiations to reach a fair and marketable
settlement.

9. In response thereto, the Respondent addressed a letter dated 7th May, 2003 calling
upon the Appellant to confirm whether their letter dated 3rd May, 2003 was in response
to the buy back by the Appellant. By their letter dated 10th May, 2003, the Appellant
confirmed that their letter dated 3rd May, 2003 was a response to the offer made by the
Respondent under clause 7 of the Protocol Agreement. It was stated that in the letter
dated 3rd May, 2003 they had confirmed their intention to purchase the shares but the
price offered was not acceptable to the Appellant and therefore, requested that a
meeting be called for by the High Level Committee to negotiate the price. Thereafter, by
their letter dated 6th June 2003, the Appellant reiterated that they were not agreeable to
the price of Rs.232.20 per share as demanded by the Respondent and offered to
purchase the 27% shareholding of the Respondent at the rate of Rs.75/-per equity
share. Again, by their letter dated 31st July, 2003 the Appellant informed the
Respondent that if their offer of Rs.75/-per share was not acceptable to the Respondent
then arbitration be initiated in terms of clause 7 of the Protocol Agreement. It is the
case of the Respondent that this correspondence clearly indicates that there was no
concluded contract arrived at between the parties in respect of sale of the said shares.
We will deal with this argument later in this judgment, when we deal with the Cross
Objections.
10. Be that as it may, as there was no agreement on the rate at which the shareholding
of the Respondent would be sold to the Appellant, in terms of clause 7 of the Protocol
Agreement, the Respondent addressed a letter dated 27th October, 2003 to the
Arbitrator requesting him to accept his appointment as a Sole Arbitrator for the
assignment to determine the value of the shares. Paragraphs 2 & 4 of the said letter
read as under :-
"As per the Protocol Agreement, the Corporation has to make the first offer to
Bajaj Auto Ltd. And in turn Bajaj Auto Ltd. has to accept or reject that offer.
This process has been completed and since no agreement has been reached on
the value of the share, as per the Agreement, the parties involved have to
proceed to appoint a Sole Arbitrator for the purpose.
............
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)
1 1 . 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. 7 of the 'Protocol Agreement' dated 2 October 1974,
between WMDC and BAL, the co-promoters of MSL.
2. BAL had expressed its willingness to buy the stake held by WMDC in MSL.
WMDC had indicated its desire to sell its shareholding in MSL.However, price
per share remained in dispute and hence in accordance with clause no. 7 of the
protocol agreement, 'the question of rate' for the purchase by BAL of equity
shares in MSL held by WMDC is hereby referred to the Sole Arbitrator.
3. The Arbitrator shall take into account the Protocol Agreement covenants and
all other concerned factors which may have impact on the share price of MSL
shares, while giving his arbitral award.
4. The arbitral award will be final and binding on both parties.
5. The Arbitrator is requested to give his award within a period of 3 months
from the date of this terms of reference.
6. Arbitration proceedings will be held in Mumbai.
7. Cost of Arbitration shall be fixed by the 'Arbitration Tribunal' in accordance
with Sec. 31(8) of the Arbitration and Conciliation Act 1996. These costs will be
shared equally by BAL and WMDC.
8. BAL and WMDC will be happy to provide any information as may be required
by the Arbitrator."
(emphasis supplied)
12. Pursuant to the aforesaid joint reference, parties appeared before the Arbitrator and
led the necessary evidence. The Respondent had also challenged the jurisdiction of the
Arbitrator. The Arbitrator, after considering the challenges and the evidence, by a
detailed award, held in favour of the Appellant and declared that the 30,85,712 equity
shares of MSL held by the Respondent (its 27% shareholding) and valued as on 3rd May
2003, are to be sold to the Appellant at a price of Rs.151.63 per share.
1 3 . Being aggrieved by the aforesaid award, the Respondent challenged the same
before this Court under the provisions of section 34 of the Arbitration and Conciliation
Act, 1996. As stated earlier, the learned Single Judge negated all the contentions of the
Respondent herein save and except one, on the basis of which the award was set aside.
Before the learned Single Judge, there was a challenge to the legality of clause 7 of the
Protocol Agreement. The submission of the Respondent before the learned Single Judge
was that clause 7 created a right of pre-emption, and MSL being a listed public
company, section 111A of the Companies Act 1956 was thereby violated. It was the
submission of the Respondent that section 111A provides that the shares or debentures
of a public company and any interest therein shall be freely transferable. It was the
further submission of the Respondent that section 9 of the Companies Act further
provides that the provisions of the Companies Act shall have effect notwithstanding
anything to the contrary contained in the Memorandum and Articles of Association of
the company. It was therefore submitted that a pre-emption right recognised by clause
7 of the Protocol Agreement, and which was then incorporated in the Articles of
Association of MSL, must yield to the provisions of section 111A of the Companies Act.
In other words, it was submitted that clause 7 of the Protocol Agreement being contrary
to the provisions of the Companies Act, was unenforceable. The learned Single Judge,

after hearing the parties, upheld this contention of the Respondent and set aside the
arbitral award on this sole ground. Being aggrieved by this part of the impugned order,
the Appellant has filed the present Appeal (Appeal No. 153 of 2010) before us.
1 4 . In this Appeal, the real controversy revolves around clause 7 of the Protocol
Agreement and whether it impinges on the free transferability of shares of a public
company as contemplated under section 111A of the Companies Act. Mr. Chinoy,
learned Senior Counsel appearing on behalf of the Appellant, submitted that clause 7 of
the Protocol Agreement did not in any way impinge on the free transferability of shares
as contemplated under section 111A of the Companies Act. According to Mr. Chinoy, the
provisions of section 111A were not directed against and did not restrict or affect a
shareholder's right to deal with his own shares and enter into consensual arrangements
in relation thereto by way of sale, pledge or pre-emption. The provisions of section
111A were really speaking, to ensure that the Board of Directors of a public company
cannot refuse transfer of shares except as specified in the section. He submitted that an
agreement voluntarily entered into by a shareholder of a public company regarding its
own shares, was not within the purview of nor affected by section 111A(2A> of the
Companies Act or its predecessor viz. section 22A(2) [as it then stood before its
deletion] of the Securities Contracts (Regulation) Act 1956. In support of the aforesaid
submissions, Mr. Chinoy placed heavy reliance on a Division Bench judgment of this
Court in the case of Messer Holdings Ltd. v/s S.M. Ruia and others 2010 (59) Company
Cases 29 (Bom). He submitted that in the aforesaid judgment, the order impugned in
this Appeal, has been specifically considered and the Division Bench has expressly
disagreed with / overruled the view expressed by the learned Single Judge in the order
impugned before us. He therefore submitted that the impugned order was clearly
erroneous and requires interference in appeal in so far as it sets aside the award on the
ground that clause 7 of the Protocol Agreement impinges upon the principles of free
transferability of shares as contemplated under section 111A of the Companies Act.
15. On the other hand, Mr. Khambatta, learned Senior Counsel appearing on behalf of
the Respondent, submitted that clause 7 of the Protocol Agreement and which was
thereafter incorporated in the Articles of Association of MSL, was a highly restrictive
pre-emptive clause that caused great fetters on the right of free transferability found in
any ordinary pre-emption clause. He submitted that (i) clause 7 fetters the right of the
Respondent to sell its shares to any other person including any other existing member
of MSL, without offering the same to the Appellant; (ii) allows the Appellant to purchase
the shares of the Respondent without accepting the price at which the shares were
offered but at a price to be determined or fixed by arbitration. Such a provision,
according to Mr. Khambatta, was therefore undoubtedly a fetter on the right of the
Respondent to freely transfer its shares to a person of its choice and at a price of its
choice and therefore clearly impinged upon the provisions of section 111A(2) of the
Companies Act, which contemplated free transferability of shares.
1 6 . 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 transferability of shares of a public company. In support of this argument, Mr.
Khambatta placed reliance on sections 3(1)(iii), 3(1) (iv) and section 43A of the
Companies Act. He also placed reliance on the following judgments:-

1 . Needle Industries (India) Ltd. and others v/s Needle Industries Newey
(India) Holding Ltd. and others; MANU/SC/0050/1981 : (1981) 3 SCC 333
2. Darius Rutton Kavasmaneck v/s Gharda Chemicals Ltd. and others; 1
3 . V.B. Rangaraj v/s V.B. Gopalkrishnan and others; MANU/SC/0076/1992 :

(1992) 1 SCC 160 and
4. Pushpa Katoch v/s Manu Maharani Hotels Ltd. and others 2005 (83) DRJ 246
(Delhi High Court).
1 7 . Mr. Khambatta submitted that the above provisions of the Companies Act, as
interpreted by the Supreme Court, would reveal that:-
(i) the Articles of a private company must contain a restriction on free
transferability of its shares, a section 43A company may contain such a
restriction in its Articles, whereas the Articles of a public company cannot
contain any restriction on free transferability;
(ii) unless restrictions on transferability are incorporated into the Articles,
shares by their very nature remain freely transferable;
(iii) no extraneous restrictions such as restrictions in a separate / private
agreement is valid or enforceable even in a private company, let alone a public
company;
(iv) a public company is prohibited from incorporating any restriction on
transferability of its shares in its Articles, and the said shares must necessarily
remain freely transferable and cannot be subjected to any restriction.
18. Mr. Khambatta additionally submitted that a pre-emption clause or what is some
time known as a right of first refusal (ROFR clauses), is a classic restriction on
transferability. He submitted that a pre-emption clause is one of the most common
restrictions found in the Articles of a private company and since such a clause qualifies
as a "restriction" on transferability for the purpose of validly incorporating a private
company, it must necessarily amount to a "restriction" in the context of a public
company. If this be the case, once a pre-emption clause is held to be a restriction on
transferability, it would clearly impinge on the provisions of section 111A(2), was the
submission of Mr. Khambatta. In light of the above, Mr. Khambatta submitted that
clause 7 of the Protocol Agreement and which was subsequently incorporated in the
Articles of MSL, restricts the shareholders of MSL to sell its shares to buyers of its
choice, and at a price of its choice, and thereby would undoubtedly be a restriction on
its transferability. This being the case, he submitted that the said clause was invalid and
unenforceable.
19. In the alternative, Mr. Khambatta submitted that even assuming that the Protocol
Agreement survived as an independent contract after it was incorporated in the Articles
of MSL, it would make no difference to his submissions. He submitted that if something
cannot be done directly, it also cannot be done indirectly. Once a restriction on
transferability of shares in the Articles of a public company is invalid and unenforceable,
the identical restriction cannot be permitted to re-emerge in a different avatar. Whether
clause 7 is held as a part of the Articles of MSL, or a part of a free standing agreement,
it remains equally restrictive and hence invalid and unenforceable. For all the 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 7 of the
Protocol Agreement and whether it impinges on "free transferability" under section 111A
of the Companies Act. Clause 7 of the Protocol Agreement reads as under :-
"7.If either party desires to part with or transfer its share-holding or any part
thereof in the equity share capital of Maharashtra Scooters Ltd., such party shall
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. The
party desiring to 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 at which it is willing to sell the same and if the other party
within 30 days of the receipt of such notice, agrees, to such proposal for
purchase of such shares, the party giving the notice shall be bound to sell and
transfer such shares to the other party at the rate specified in such notice. If the
other party is willing to purchase the 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 be referred 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 of the Indian
Arbitration Act. If the party receiving a notice within 30 days of its receipt, fails
to accept the proposal for purchase of the shares, the party giving the notice will
be free to sell the shares to any other party but only at a rate not less than the
rate specified in such notice."
(emphasis supplied)
21. Clause 7 of the Protocol Agreement inter alia provides that if either party desires to
part with or transfer its shareholding or any part thereof in the equity share capital of
MSL, such party shall give first option to the other party for the purchase of such shares
at the agreed price, or in the absence of such agreement, decided upon by arbitration.
The party desiring to part with or transfer its shareholding or any part thereof, is
required to give written notice to the other party specifying its intention to do so and
the rates at which it is willing to transfer / part with the same. Once this is done, clause
7 envisages 3 scenarios. (1) If the other party within 30 days of receipt of such notice
agrees to such proposal, the party giving the notice is bound to sell such shares at the
rate specified in the notice. (2) If the other party is willing to purchase the shares but
considers the rate proposed in the notice as too high or unacceptable, it would
communicate its intention to purchase the shares within 30 days from receipt of the
notice and the question of rate is to be referred to arbitration. (3) If the other party, on
receiving the notice to purchase the shares, fails to accept the said proposal within 30
days of its receipt, the party giving the notice is free to sell the shares to any other
person, but only at a rate not less than the rate specified in such notice.
22. Having said this, we shall now turn our attention to certain statutory provisions.
Before we deal with the provisions of section 111A, we must make a note of the
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 the said Amendment Bill read as under:-
"22-A. Free transferability and registration of transfers of listed securities of

companies.(1) In this section, unless the context otherwise requires,-
( a ) "company" means a company whose securities are listed on a
recognised stock exchange;
(b) "security" means security of a company, being a security listed on a
recognised stock exchange but not being a security which is not fully
paid up or on which the company has a lien;
(c) all other words and expressions used in this section and not defined
in this Act but defined in the Companies Act, 1956 (1 of 1956) shall
have the same meanings as are assigned to them in that Act.
(2) Subject to the provisions of this section, securities of companies shall be
freely transferable.
(3) Notwithstanding anything contained in its articles or in Section 82 or Section
111 of the Companies Act, 1956 (1 of 1956), but subject to the other provisions
of this section, a company may refuse to register the transfer of any of its
securities in the name of the transferee on any one or more of the following
grounds and on no other ground, namely:-
(a) that the instrument of transfer is not proper or has not been duly
stamped and executed or that the certificate relating to the security has
not been delivered to the company or that any other requirement under
the law relating to registration of such transfer has not been complied
with;
(b) that the transfer of the security is in contravention of any law;
(c) that the transfer of the security is likely to result in such change in
the composition of the Board of Directors as would be prejudicial to the
interests of the company or to the public interest;
(d) that the transfer of the security is prohibited by any order of any
court, tribunal or other authority under any law for the time being in
force.
(4) A company shall, before the expiry of two months from the date on which
the instrument of transfer of any of its securities is lodged with it for the
purposes of registration of such transfer, not only form, in good faith, its
opinion as to whether such registration ought not or ought to be refused on any
of the grounds mentioned in sub-section (3) but also-
(a) if it has formed the opinion that such registration ought not to be so
refused, effect such registration;
(b) if it has formed the opinion that such registration ought to be
refused on the ground mentioned in clause (a) of sub-section (3),
intimate the transferor and the transferee by notice in the prescribed
form about the requirements under the law which has or which have to
be complied with for securing such registration; and
(c) in any other case, make a reference to the Company Law Board and
forward copies of such reference to the transferor and the transferee.

(5) Every reference under clause (c) of sub-section (4), shall be in the
prescribed form and contain the prescribed particulars and shall be accompanied
by the instrument of transfer of the securities to which it relates, the
documentary evidence, if any, furnished to the company along with the
instrument of transfer, and evidence of such other nature and such fees as may
be prescribed.
(6) On receipt of a 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
registered by it.
(7) Where on a reference under sub-section (4) the Company Law Board directs
that the transfer of the securities to which it relates-
(a) shall be registered by the company, the company shall give effect to
the direction within ten days of the receipt of the order as if it were an
order made on appeal by the Company Law Board in exercise of the
powers under Section 111 of the Companies Act, 1956 (1 of 1956);
(b) need not be registered by the company, the company shall, within
ten days from the date of such direction, intimate the transferor and the
transferee accordingly.
(8) If default is made in complying with the provisions of this section, the
company and every officer of the company who is in default shall be punishable
with fine which may extend to five thousand rupees. (9) If in any reference
made under clause (c) of sub-section (4) of this section, any person makes any
statement
(a) which is false in any material particular, knowing it to be false; or
(b) which omits any material fact knowing it to be material,
he shall be punishable with imprisonment for a term which may extend to three
years and shall also be liable to fine.
(10) For the removal of doubts, it is hereby provided that nothing in this section
shall apply in relation to any securities the instrument of transfer in respect
whereof has been lodged with the company before the commencement of the
Securities Contracts (Regulation) Amendment Act, 1985."
(emphasis supplied)
23. The statement of objects and reasons indicate that the purpose for incorporating
section 22A in the Securities Contracts (Regulation) Act, 1956 was that at the said time,
sections 82 and 111 of the Companies Act, 1956 permitted the Board of Directors of
companies to assume powers under the Articles of Association to refuse registration of
transfer of securities without assigning any reason. Though there was a provision for an
appeal to the Company Law Board against such refusal, it placed an undue burden on
an aggrieved person who often happened to be a small investor. The Legislature also
felt that the position at that time was not conducive to free marketability of listed
securities and healthy growth of the capital markets. In view thereof, the Legislature felt

that unrestricted transferability was particularly necessary for securities of public
companies which are listed on the Stock Exchanges. It was in this context that the
Legislature proposed the amendment to the Securities Contracts (Regulation) Act, 1956
by insertion of section 22A, to ensure free transferability of securities of public
companies whose securities were listed on the Stock Exchanges.
24. On a reading of section 22A as it stood then, it is clear that the provisions therein
applied only to public companies whose shares were listed on the recognised Stock
Exchanges. The provision in section 22A(2) that securities of public companies shall be
freely transferable, was made only as the basis for the consequential provisions in
sections 22A(3) to (9) to provide for free transferability by restricting the entitlement of
public companies (through their Board of 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 clear that section 22A was introduced to ensure that the Board of Directors of
public companies exercising powers under its Articles of Association, do not place an
undue burden on small investors by refusing to transfer shares without assigning any
reason. In light of the language of section 22A as well as the statement of objects and
reasons, we do not read section 22A(2) to mean that it would affect the right of
individual shareholders to deal with their own shares on such terms and conditions as
they deem fit or to enter into any consensual arrangement / agreement regarding their
own shares by way of sale, pledge, pre-emption or otherwise.
26. Once the context in which section 22A had been inserted is understood, it cannot
be said that two individual shareholders entering into a consensual agreement to deal
with their shares in a particular manner, either in praesenti or at a future date, would
impinge or violate the concept of free transferability as contemplated under section
22A(2) . The purpose of the said provision, as we understand it, was to ensure that the
Board of Directors of the company cannot refuse transfer of shares except on the
grounds specified in the said section. This does not mean that if an individual
shareholder enters into a separate agreement with another shareholder to deal with his
specified shares in a particular manner, the same would violate the concept of free
transferability as envisaged under section 22A.
27. We have come to this conclusion because we find that shares of a company are
movable property and the right of the shareholder to deal with his shares and / or to
enter into contracts in relation thereto (either by way of sale, pledge, pre-emption etc.),
is nothing but a shareholder exercising his property rights. Such contracts voluntarily
entered into by a shareholder for his own shares giving rights of pre-emption to a third
party / another shareholder, cannot constitute a restriction on free transferability as
contemplated under section 22A. In fact, such contracts (either by way of sale, pledge
or pre-emption) are entered into by a shareholder in exercise of his right to freely deal
with and / or transfer his own shares.
28. Having said this, we now turn our attention to section 111A of the Companies Act.
By the Depositories Act, 1996 the entire scheme/provisions of section 22A of the
Securities Contracts (Regulation) Act, 1956 were deleted and simultaneously section
111A was inserted in the Companies Act. For ready reference, section 111A as it stood
prior to its amendment in 2003, reads thus:-

111-A. Rectification of register on transfer.(1) In this section, unless the context
otherwise requires, "company" means a company other than a company referred
to in sub-section (14) of Section 111 of this Act.
(2) Subject to the provisions of this section, the shares or debentures and any
interest therein of a company shall be freely transferable:
Provided that if a company without sufficient cause refuses to register transfer
of shares within two months from the date on which the instrument of transfer
or the intimation of transfer, 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) or
regulations made thereunder, or the Sick Industrial Companies (Special
Provisions) Act, 1985 (1 of 1986), or any other law for the time being in force,
within two months from the date of transfer of any shares or debentures held by
a depository or from the date on which the instrument of transfer or the
intimation of the transmission was delivered to the company, as the case may
be, after such inquiry as it thinks fit, direct any depository or company to rectify
its register or records.
(4) The Company Law Board while acting under sub-section (3), may at its
discretion make such interim order as to suspend the voting rights before
making or completing such enquiry.
(5) The provisions of this section shall not restrict the right of a holder of shares
or debentures, to transfer such shares or debentures and any person acquiring
such shares or debentures shall be entitled to voting rights unless the voting
rights have been suspended by an order of the Company Law Board.
(6) Notwithstanding anything contained in this section, any further transfer,
during the pendency of the application with the Company Law Board, of shares
or debentures shall entitle the transferee to voting rights unless the voting rights
in respect of such transferee have also been suspended.
(7) The provisions of sub-sections (5), (7), (9), (10) and (12) of Section 111
shall, so far as may be, apply to the proceedings before the Company Law
Board under this section as they apply to the proceedings under that section.
(emphasis supplied)
By the amendment in 2003, the words "Company Law Board" appearing in section 111A
were substituted with the word "Tribunal". However, this amendment is not germane for
the purposes of the present Appeal.
2 9 . On reading section 111A four things become clear. Firstly, unless the context
otherwise requires, it applies only to public companies [sub-section (1) read with
section 111(14)]. Secondly, subject to the other provisions of section 111A, the shares
or debentures and any interest therein of a company shall be freely transferable [sub-
section (2)]. Thirdly, if a company, without sufficient cause, refuses to register transfer

of shares within two months from the date on which the instrument of transfer or the
intimation of transfer, as the case may be, is delivered to the company, the transferee
may appeal to the Company Law Board and the Company Law Board shall thereafter
direct such company to register the transfer of shares [proviso to sub-section (2)]. In
other words, the company cannot refuse transfer of shares without sufficient cause.
Fourthly, if the transfer of shares or debentures is in contravention of any of the
provisions of SEBI Act, 1992 or SICA, 1985 or any other law for the time being in force,
then the Company Law Board may, after such inquiry as it thinks fit, on an application
made by the depository or company or participant or investor or the Security Exchange
Board of India, direct any depository or company to rectify its register of records [sub-
section (3)]. Sub-sections (4), (5), (6) and (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 Directors of public companies whose securities were listed on the stock
exchange to refuse transfer of shares. The provisions of the said section was not to
restrict the rights of the shareholders to deal with their shares or to enter into
consensual agreements/arrangements regarding their shares either by way of pledge,
sale, pre-emption or otherwise. We find that even the sweep of section 111A of the
Companies Act is the same as section 22A of the Securities Contracts (Regulation) Act,
1956. Sub-section (2) opens with the expression "subject to the provisions of this
section". In other words, it is a provision re-stating that the shares or debentures and
any interest therein of a company shall be freely transferable subject, however, to the
other provisions of section 111A. The proviso to sub-section (2) reinforces that section
111A is to regulate the powers of the Board of Directors of the company regarding
transfer of shares or debentures or any interest therein of a company. As set out in the
proviso to sub-section (2), the Board of Directors can refuse to register transfer of
shares only if sufficient cause to do so is made out. Section 111A and more particularly
sub-section (2) thereof, is not a provision to curtail the rights of the shareholders to
enter into a consensual agreement/arrangement with a purchaser in relation to their
specific shares. The right to enter into a consensual agreement/arrangement must
prevail so long as it is in conformity with the Articles of Association, the provisions of
the Companies Act and Rules, and other governing laws. Therefore, the expression
"freely transferable" appearing in sub-section (2) of section 111A cannot be construed
to mean that it also intends to take away the right of shareholders to enter into
consensual agreements/arrangements with the purchaser in relation to their specific
shares.
31. We are of the view that if the legislature intended to take away that right, it would
have made an express provision in that regard. It is now quite well settled by the
Supreme Court that the Legislature does not interfere with the freedom of contract
generally except when warranted by public policy and the Legislative intent in that
regard is expressly made manifest. [See Byram Pestonji Gariwala Vs. Union Bank of
India MANU/SC/0485/1991 : (1992) 1 SCC 31]. The Supreme Court has also further
expounded that while enacting a statute, Parliament cannot be presumed to have taken
away the right in property and deprivation of a legal right existing in favour of a person.
[See ICICI Bank Ltd. Vs. SIDCO Leathers Ltd. MANU/SC/2337/2006 : (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 dispute were of a public company. Clause 6.1 in the facts of that case also
provided that neither party shall sell any shares in the company held or acquired by it
without first offering the shares to the other party. The offer was to be in writing and
was to set out the price and other terms and conditions. In the event the offeree did not
agree to purchase the shares so offered, the offerer was free to sell the shares to any
person (other than a competitor of the offeree), but at the same price and on the same
terms and conditions as offered to the offeree. The identical argument that was made
before us was also made before the Division Bench in Messer Holdings Ltd. It was
contended before the Division Bench that by virtue of section 111A of the Companies
Act, clause 6.1 itself was illegal and void, as it infracted the principle of free
transferability of shares as set out in section 111A(2). After considering the provisions
of section 22A of the Securities Contracts (Regulation) Act, 1956 (as it stood prior to its
deletion), as well as the provisions of section 111A of the Companies Act, the Division
Bench of this Court negated the aforesaid contention. In paragraph 51 of the judgment,
after reproducing section 111A, the Division Bench held as under:-
"Even the sweep of Section 111A is the same as Section 22A of the Securities
Contracts Act. In that, it is a provision regarding rectification of register on
transfer. Sub-Section (2) opens with the expression "subject to the provisions
of this section" In other words, it is a provision restating that the shares or
debentures and any interest therein of a company shall be freely transferable
subject, however, to the stipulation provided in the other part of Section 111A
of the Act. The proviso to subsection (2) reinforces the position that Section
111A is to regulate the powers of the Board of Directors of the company
regarding transfer of shares or debentures and any interest therein of a
company. The Board of Directors cannot refuse to register transfer of shares
unless there is sufficient cause to do so. In other words, the setting in which
Section 111A is placed in part IV of the Act under heading "transfer of shares
and debentures" it is not a provision to curtail the rights of the shareholders to
enter into consensual arrangement with the purchaser of their specific shares.
The right to enter into consensual arrangement must prevail so long as it is in
conformity with the terms of Articles of Association and other provisions of the
Act and the Rules. Whereas, Section 111A is a provision mandating the Board of
Directors of the company to transfer shares in the name of the transferee,
subject to the stipulations in Section 111A of the Act. The expression "freely
transferable" therein is in the context of the mandate against the Board of
Directors to register the transfer of specified shares of the members in the name
of the transferee, unless there is sufficient cause for not doing so. The said
provision cannot be construed to mean that it also intends to 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 intent is expressly made manifest" Even in the
case of ICICI Bank Ltd. (supra), the Apex Court has in unmistakable terms
expounded that while enacting a Statute, Parliament cannot be presumed to
have taken away a right in property and deprivation of legal right existing in
favour of a person. That cannot be presumed in construing the Statute. In fact,
it is the other way round and a contrary presumption must be raised. The
concept of free transferability of shares of a public company is not affected in
any manner if the shareholder expresses his willingness to sell the shares held
by him to another party with right of first purchase (preemption) at the
prevailing market price at the relevant time. So long as the member agrees to
pay such prevailing market price and abides by other stipulations in the Act,
Rules and Articles of Association there can be no violation. For the sake of free
transferability both the seller and purchaser must agree to the terms of sale.
Freedom to purchase cannot mean obligation on the shareholder to sell his
shares. The shareholder has freedom to transfer his shares on terms defined by
him, such as right of first refusal, provided the terms are consistent with other
regulations including to repurchase the shares at the prevailing market price
when such offer is made. The fact that shares of public company can be
subscribed and there is no prohibition for invitation to the public to subscribe to
shares, unlike in the case of private company, does not whittle down the right of
the shareholder of a public company to arrive at consensual agreement which is
otherwise in conformity with the extant regulations and the governing laws."
(emphasis supplied)
We are in full agreement with the aforesaid reasoning of the Division Bench.
34. It is important to note that the judgment and order impugned before us was also
relied upon by one of the parties before the Division Bench in Messer Holdings Ltd.
After dealing with the same in great detail, the Division Bench at paragraph 57
expressly disagreed with the reasoning given in the judgment and order impugned
before us. The relevant portion reads thus:-
"57.The Learned Single Judge has then distinguished the exposition in
Madhusoodhanan's case on the basis that the Karar referred to therein was an
agreement between particular shareholders relating to the transfer of the
specified shares. It is noted that in that case the company was a private
company and restriction on the right of the shareholders to transfer shares and
prohibit invitation to the public to subscribe for shares and debentures of the
company is materially different. The main thrust is that in case of public
company there can be no restriction whatsoever and if any other argument was
to be accepted, it would mean that Section 111A is being read as being subject
to a contract to the contrary. The notification dated June 27, 1961 has been
discarded on the opinion that, that cannot have any bearing in relation to
Section 111A of the Companies Act as it is issued 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 that the facts in the case of Messer Holdings Ltd. were
materially different than the ones before us. The first distinguishing feature he pointed
out was that, under Clause 6.1 in Messer Holdings Ltd., there was no restriction on
price whereas Clause 7 of the Protocol Agreement before us compelled the Respondent
to sell the shares at a price not determined by the Respondent but determined through
the process of arbitration. According to Mr. Khambatta, this was a very significant
distinguishing feature. We cannot agree. We do not think that this distinguishing feature
can make any difference to the ratio laid down in Messer Holdings Ltd. Once it is held
that consensual agreements/arrangements entered into by the shareholders of a public
company with a third party regarding his own specified shares (either by way of sale,
pre-emption or otherwise), do not impinge on free transferability of shares as
contemplated under section 111A, this so called distinction pails into insignificance. If
the parties are free to enter into a consensual arrangement which does not infract free
transferability as contemplated under section 111A, we see no reason to hold that
merely because the price of the shares is to be determined by the process of arbitration,
the same would to be in violation of section 111A. The fact that the price of the shares
is to be determined by the process of arbitration is also a term of the very same
consensual arrangement which is not violative of the provisions of section 111A(2). We,
therefore, find no substance in this argument.
36. The second distinguishing feature that Mr. Khambatta sought to highlight is that in
the facts of our case, this consensual arrangement as set out in clause 7 of the Protocol
Agreement was also incorporated in Articles of Association of MSL whereas that was not
the case before the Division Bench in the case of Messer Holdings Ltd. In furtherance of
this argument, Mr. Khambatta submitted that the Protocol Agreement and more
particularly Clause 7 thereof, was incorporated into the Articles of MSL and was
therefore subsumed therein and did not independently survive. Once it was subsumed in
the Articles and the same could not be incorporated the Articles of a public company,
the same could not re-emerge in a different avatar, was the submission. We cannot
agree with this argument. Merely because the Protocol Agreement was incorporated into
the Articles of MSL, does not mean that the Protocol Agreement by itself (or clause 7
thereof) ceased to exist. The Protocol Agreement governs the rights and liabilities of the
parties thereto and would continue notwithstanding the fact that they were incorporated
in the Articles of MSL. Therefore, even if we are to assume that such a clause was not
permissible in the Articles of a public company, that would not in any way destroy the
rights created under the said Agreement inter-se between the parties. The rights and
liabilities created under the said Protocol Agreement would continue to bind the parties
thereto. 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 that the said clause will not bind the
company and it is wholly another to contend that the said clause would not bind the
parties thereto. We are, therefore, of the view that notwithstanding the fact that the
Protocol Agreement was incorporated in the Articles of Association of MSL, the same
would not change the nature of that agreement namely being a consensual

agreement/arrangement entered into between the parties determining the manner in
which each party is allowed to dispose of its particular shareholding. At the highest and
assuming everything in favour of the Respondent, it could be only be held that such a
clause would not bind the company. However, it would certainly bind the parties to the
Protocol Agreement. We, therefore, find no substance in this argument.
37. Even otherwise, we find force in the argument of Mr. Chinoy that such a clause
(clause 7), even if incorporated in the Articles of Association of a public company,
would not in any way violate the principles of free transferability of shares as
contemplated under section 111A of the Companies Act. Clause 7 of the Protocol
Agreement and which finds place in the Articles of MSL by virtue of incorporation of the
Protocol Agreement in its Articles, only sets out how the Respondent and the Appellant
are to deal with their respective shareholdings. It is not a blanket pre-emption clause
which binds all the shareholders of MSL to sell their shares only to other members of
MSL, which clauses are incorporated in the Articles of Association of a private company.
Pre-emption clauses in the Articles of a private company are in the nature of a blanket
restriction on all its members, and such clauses if incorporated in the Articles of a
public company would certainly amount to a restriction on free transferability of shares
as envisaged under section 111A. However, that is not the case before us. Clause 7 of
the Protocol Agreement and which has been incorporated in the Articles of Association
of MSL, only relates to the shareholding of the Appellant and the Respondent and their
rights and liabilities in relation thereto. It does not in any way affect the rights and/or
liabilities of the other members of MSL. In this view of the matter, we are of the view
that merely because Clause 7 of the Protocol Agreement was incorporated in the Articles
of MSL, would not invalidate the same. We are also persuaded to take this view because
we find that in today's global reality, joint ventures are extremely common and clauses
similar to Clause 7 of the Protocol Agreement may become necessary to ensure that a
joint promoter of a company does not sell his shareholding to a competitor who then
possibly could get control of his rival. In this view of the matter and looking to the
totality of the facts and circumstances of the case, we are clearly of the view that Clause
7 of the Protocol Agreement does not in any way impinge upon the principle of free
transferability of shares as contemplated under section 111A of the Companies Act,
1956.
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 member in the
company, it shall within a period of thirty days from the date on which the
instrument of transfer, or the intimation of such transmission, as the case may
be, was delivered to the company, send notice of the refusal to the transferor
and the transferee or to the person giving intimation of such transmission, as
the case may be, giving reasons for such refusal.
(2) Without prejudice to sub-section (1), the securities or other interest of any
member in a public company shall be freely transferable:
Provided that any contract or arrangement between two or more persons in
respect of transfer of securities shall be enforceable as a contract.

(3) The transferee may appeal to the Tribunal against the refusal within a period
of thirty days from the date of receipt of the notice or in case no notice has
been sent by the company, within a period of sixty days from the date on which
the instrument of transfer or the intimation of transmission, as the case may be,
was delivered to the company.
(4) If a public company without sufficient cause refuses to register the transfer
of securities within a period of thirty days from the date on which the instrument
of transfer or the intimation of transmission, as the case may be, is delivered to
the company, the transferee may, within a period of sixty days of such refusal
or where no intimation has been received from the company, within ninety days
of the delivery of the instrument of transfer or intimation of transmission, appeal
to the Tribunal.
(5) The Tribunal, while dealing with an appeal made under sub-section (3) or
sub-section (4), may, after hearing the parties, either dismiss the appeal, or by
order
(a) direct that the transfer or transmission shall be registered by the company
and the company shall comply with such order within a period of ten days of the
receipt of the order; or
(b) direct rectification of the register and also direct the company to pay
damages, if any, sustained by any party aggrieved.
(6) If a person contravenes the order of the Tribunal under this section, he shall
be punishable with imprisonment for a term which shall not be less than one
year but which may extend to three years and with fine which shall not be less
than one lakh rupees but which may extend to five lakh rupees."
(emphasis supplied)
39. Sub-section (2) of section 58 specifically provides that without prejudice to sub-
section (1), the securities or other interest of any member in a public company shall be
freely transferable. However, the proviso to the said section stipulates that any contract
or arrangement between two or more persons in respect of transfer of securities shall
be enforceable as a contract. Before the Companies Act, 2013 came into force, the 57th
Report of the Parliamentary Standing Committee on the Companies Bill 2011, at pg. 86
thereof, noted that the proviso to section 58 "simply seeks to codify the
pronouncements made by 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 for sale or purchase of securities other than a contract falling
under any one or more of the following namely:
(a) Spot delivery contract;
(b) contracts for sale or purchase of securities or contracts in derivatives, as
are permissible under the said Act or the Securities and Exchange Board of

India Act, 1992 (15 of 1992) and the rules and regulations made under such
Acts and rules, regulations and bye-laws of a recognised stock exchange;
(c) contracts for pre-emption including right of first refusal, or tag-along or
drag-along rights contained in shareholders agreements or articles of
association of companies or other body corporate;
(d)............................
4 0 . On reading section 58 and the above Notification issued by the Securities and
Exchange Board of India, we are of the view that section 58 merely clarifies and codifies
the existing legal position regarding such pre-emption agreements. In other words,
what was implicit in the provisions of section 111A of the Companies Act, 1956 has now
been made explicit in section 58 of the Companies Act, 2013.
41. For all the reasons set out earlier in this judgement, and coupled with the fact that
the reasoning given in the impugned order before us has been specifically disagreed
with by another Division Bench of this Court in the case of Messer Holdings Ltd., we are
unable to uphold the order of the learned Single Judge insofar as it set aside the
impugned 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, 1956.
4 2 . Having held so, we shall now deal with the judgments relied upon by Mr.
Khambatta. The first two judgments of the Supreme Court relied upon by Mr. Khambatta
are in the case of Needle Industries Ltd2 and Darius Kavasmaneck3. On going through
the aforesaid judgments, we do not find anything therein that supports the contentions
of the Respondent as raised herein. Neither of these judgements decide the issue that
an agreement voluntarily entered into by an individual shareholder giving a right of pre-
emption to a third person regarding his own shares, constitutes a restriction imposed on
the right of a shareholder to transfer his shares and is therefore accordingly
impermissible by virtue of section 111A of the Companies Act. The said two judgments
hold that a private company, by virtue of section 3(1)(iii), must contain provisions in its
Articles of Association placing a restriction on the right of shareholders to transfer their
shares, whilst a public company cannot have such a general restriction on transfer of
shares by its members. We do not see how these judgments can be of any assistance in
deciding the issue raised before us.
43. The next judgment relied upon by Mr. Khambatta was of the Supreme Court in the
case of V.B. Rangaraj.4 On perusing the said judgment, we 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. MANU/SC/0553/2003 : (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 50:25:25 between the sons Madhusoodhanan, Ravi and Srinivasan. This
division of shares was to take place on Madhavi's death. Madhavi died on 2nd
December, 1987 and Madhusoodhanan filed a suit in October 1988 for specific
performance of the terms in the Karar. Thus, the Karar dated 16th January, 1986 was an
agreement to transfer the parents shares in the percentages set out above, at a

subsequent date (i.e. after Madhavi's death). When specific performance of this
agreement was sought by Madhusoodhanan, enforcement thereof was resisted by
relying upon the judgment of the Supreme Court in the case of V.B. Ranagraj.4
Distinguishing the judgment in Ranagraj's case, the Supreme Court pointed out that an
agreement between particular shareholders relating to transfer of specified shares did
not impose a restriction on the transferability of shares. The Supreme Court in
Madhusoodhanan's case held as under-
"139.The respondents cited Article 29 of the Articles of the Company in support
of their argument that Exhibits R-59 and R-60 overrode the Karar insofar as it
required that 50% of the shares of the late K. Sukumaran and Madhavi had to
be transferred to Madhusoodhanan on Madhavi's death. Article 29 says that the
executors or administrators of the deceased sole holder of a share shall be the
only persons recognised by the Company as having any title to the share. It was
the contention of the respondents that insofar as the Karar provided for the
transfer of the shares of the late Sukumaran and Madhavi to Madhusoodhanan,
it was contrary to Article 29 of the Articles of Association of the Company and
could not be enforced. This submission is made on the basis of the decision of
this Court in V.B. Rangaraj v. V.B. Gopalkrishnan [MANU/SC/0076/1992 :
(1992) 1 SCC 160 : AIR 1992 SC 453].
140. That decision must be understood and read after enunciating certain basic
principles relating to the transfer of shares and in the background of earlier
decisions on the subject. It is settled law that shares are movable properties and
are transferable. As far as private companies like Kerala Kaumudi are concerned,
the Articles of Association restrict the shareholder's right to transfer shares and
prohibit any invitations to the public to subscribe for any shares in, or
debentures of, the Company. This is how a "private company" is now defined in
Section 3(1)(iii) of the Companies Act, 1956 and how it was defined in Section
2(13) of the 1913 Act.
141. Subject to this restriction, a holder of shares in a private company may
agree to sell his shares to a person of his choice. Such agreements are
specifically enforceable under Section 10 of the Specific Relief Act, 1963, which
corresponds to Section 12 of the Specific Relief Act, 1877. The section provides
that specific performance of such contracts may be enforced when there exists
no standard for ascertaining the actual 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 Lundia v. Surajmull Sagarmull[MANU/FE/0018/1949
: AIR 1949 FC 211 : 1949 FCR 379], AIR at p. 218).The Privy Council in Bank
of India Ltd. v. Jamsetji A.H. Chinoy [MANU/PR/0035/1949 : AIR 1950 PC 90 :
77 IA 76] (AIR p. 96, para 21) said:
"It is also the opinion of the Board that, having regard to the nature of
the Company and the limited market for its shares, damages would not
be an adequate remedy."

The specific performance of a contract for transfers of shares in a private limited
company could be granted.
145. In Rangaraj case [MANU/SC/0076/1992 : (1992) 1 SCC 160 : AIR 1992 SC
453] relied upon by the respondents, an agreement was entered into between
the members of the family who were the only shareholders of a private
company. The agreement was that for all times to come each of the branches of
the family would always continue to hold equal number of shares and that if any
member in either of the branches wished to sell his share/shares, he would give
the first option of purchase to the members of that branch and only if the offer
so made was not accepted, the shares would be sold to others. This was a
blanket restriction on all the shareholders, present and future. Contrary to the
agreement, one of the shareholders of one branch sold his shares to members
of the second branch. Such sale was challenged in a suit as being void and not
binding on the other shareholders. This Court rejected the challenge holding that
the agreement imposed a restriction on shareholders' rights to transfer shares
which was contrary to the Articles of Association of the Company. It was,
therefore, held that such a restriction was not binding on the Company or its
shareholders. The decision is entirely distinguishable on facts. There is no such
restriction on the transferability of shares in the Karar. It was an agreement
between particular shareholders relating to the transfer of specified shares,
namely, those inherited from the late Sukumaran and Madhavi, inter se. It was
unnecessary for the Company or the other shareholders to be a party to the
agreement. As provided in clause 10 of the Karar, Exhibits R-59 and R-60 did
not obviate compliance with the Karar. Both Exts. R-59 and R-60 were executed
on 15-7-1985, several months prior to the Karar. The parties who had
consciously entered into the agreement regarding the transfer of their parents'
shares are, therefore, obliged to act in terms of the Karar. The defence of Ravi
and Srinivasan based on Exts. R-59 and R-60 should not, in the circumstances,
have been accepted by the Division Bench. Having regard to the nature of the
shareholding, on the basis of the law as enunciated by the Federal Court and the
Privy Council in the decisions noted above, it must be held that the Karar was
specifically performable.
(emphasis supplied)
44. We must mention here that the Division Bench of this Court in Messer Holdings
Ltd.1 has relied 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.
MANU/SC/0051/2012 : (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
2 6 1 . Share holders' Agreement (for short "SHA") is essentially a contract
between some or all other shareholders in a company, the purpose of which is
to confer rights and impose obligations over and above those provided by the
company law. SHA is a private contract between the shareholders compared to
the articles of association of the company, which is a public document. Being a

private document it binds parties thereof and not the other remaining
shareholders in the company. Advantage of SHA is that it gives greater
flexibility, unlike the articles of association. It also makes provisions for
resolution of any dispute between the shareholders and also how the future
capital contributions have to be made. Provisions of the SHA may also go
contrary to the provisions of the articles of association, in that event, naturally
provisions of the articles of association would govern and not the provisions
made in SHA.
262. The nature of SHA was considered by a two-Judge Bench of this Court in
V.B. Rangaraj v. V.B. Gopalakrishnan [MANU/SC/0076/1992 : (1992) 1 SCC
160]. In that case, an agreement was entered into between shareholders of a
private company wherein a restriction was imposed on a living member of the
company to transfer his shares only to a member of his own branch of the
family, such restrictions were, however, not envisaged or provided for within
the articles of association. This Court has taken the view that provisions of the
shareholders' agreement imposing restrictions even when consistent with
company legislation, are to be authorised only when they are incorporated in
the articles of association, a view we do not subscribe to."
(emphasis supplied)
In view of the above discussion, we find that the reliance placed by the Respondent on
the judgement of the Supreme Court in Rangaraj's case is wholly misplaced.
46. In this view of the matter, we are clearly of the view that the order of the learned
Single Judge is unsustainable, insofar as it set aside the impugned award on the ground
that the effect of Clause 7 of the Protocol Agreement was to impose a restriction on the
free transferability of shares as contemplated under section 111A of the Companies Act.
This is more so since the reasoning given by the learned Single Judge has been
specifically disapproved by another Division Bench of this Court in the case of Messer
Holdings Ltd.1 Appeal No. 153 of 2010 will therefore have to allowed.
CROSS OBJECTIONS LODG No. 13 OF 2010
47. Having held so, we will now have to examine the Cross Objections that have been
filed by the Respondent. In a nutshell the Cross Objections were filed because the
learned Single Judge negated all the other contentions raised by the Respondent
(original Petitioner) in the section 34 Petition filed by it to challenge the arbitral award.
48. In the Cross Objections, the Respondent has challenged the award mainly on two
grounds. The first ground of challenge to the impugned award is on the issue 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 Companies Act 1956; (c) section 23 of

the Indian Contract Act, 1872 and (d) section 10(1) of the Sale of Goods Act 1930. To
decide these objections the Arbitrator in paragraph 13 of the award framed five points
for consideration which were as under :-
"13.In the light of the submissions advanced before me, the following points
arise for my consideration :
i) Whether the joint reference made to this Tribunal by the parties by
their letter dated 29th December 2003 is illegal, and whether this
Tribunal has jurisdiction ?
ii) Whether the Protocol Agreement dated 2nd October 1974 executed
between WMDC and BAL is illegal and/or void on account of violation
of section 16 of the Securities Contract (Regulations) Act 1956 (SCRA);
iii) Whether the said Protocol Agreement is illegal on account of
violation of the provisions of Section 111A read with Section 9 of the
Companies Act 1956 ?
iv) Whether the said Protocol Agreement is illegal on account of
violation of the provisions of section 23 of the Indian Contract Act 1872
?
v) Whether the said Protocol Agreement is illegal on account of
violation of the provisions of section 10 of the Sale of Goods Act
1930?"
50. For the reasons that followed in paragraphs 14 to 29 of the award, all the aforesaid
five points were answered in the negative and against the Respondent.
51. Be that as it may, when the award was challenged by filing a petition under section
34 of the Arbitration and Conciliation Act 1996, on the issue of jurisdiction, the
arguments canvassed before the learned Single Judge were that (i) the Arbitrator had
exceeded his jurisdiction in deciding the "date" for valuation of shares of MSL, proposed
to be transferred by the Respondent to the Appellant [paragraph 13(i) of the impugned
order]; (ii) the fixation of the "date" for valuation by the Arbitrator was beyond the
scope of the submission [paragraph 13(viii) of the impugned order]; and (iii) the
Protocol Agreement was illegal and any determination under the Agreement was void.
This argument was canvassed on the basis that the shares of a public company by virtue
of section 111A of the Companies Act are to be freely transferable and the Articles of
Association of MSL must yield to the principle of free transferability embodied in section
111A. [paragraph 13(ix) of the impugned order]. As far as the objection relating to
section 111A is concerned, we have already given detailed findings in that respect,
earlier in this judgment. As noted earlier, this last objection regarding section 111A
appealed to the learned Single Judge on the basis of which the award was set aside. As
set out earlier, we have set aside the impugned order in so far as it set aside the
arbitral award on the ground that clause 7 of the Protocol 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 dated 29th December, 2003 and clause 7 of the Protocol Agreement
left no manner of doubt that the length and breadth of the Arbitrator's jurisdiction was
limited only to the determination of the "rate". Clause 7 of the Protocol Agreement
alongwith the joint reference, did not empower the Arbitrator to decide any incidental
question, especially in view of the fact that clause 7 of the Protocol Agreement was
limited in its sphere, was the submission of Mr. Samdani. He submitted that the scope
of clause 7 of the Protocol Agreement being limited, is also borne out from the fact that
the Protocol Agreement itself contained another arbitration clause (i.e. clause 19) that
conferred a much wider jurisdiction on the Arbitrator and which was admittedly not
invoked by any of the parties.
5 3 . Mr. Samdani submitted that valuation, being a matter of contract between the
parties, requires that they be at ad-idem on the "date" with respect to which the
valuation was required to be done. According to him, the parties undisputedly were not
at ad-idem inasmuch as the Respondent had taken a stand that no "date" has been
agreed, and therefore there was no concluded contract. In addition thereto, he
submitted that the Appellant had taken a stand before the Arbitrator that the date of
valuation should be as on 30th June, 2002 and in the alternative 3rd May, 2003. In light
of the stand taken by the Appellant as well as the Respondent, it was clear that there
was no agreed "date" and therefore the Arbitrator, under Clause 7 of the Protocol
Agreement read with the joint reference dated 29th December 2003, did not possess
jurisdiction to adjudicate the said issue. He submitted that this contention is further
fortified by the fact that the Arbitrator had to direct the Appellant and the Respondent to
file their respective pleadings in reference to what would be the "relevant date" for the
purposes of valuing the Respondent's 27% shareholding in MSL. According to Mr.
Samdani, it was also the Appellant's own case before the Arbitrator that without an
agreed "relevant date" for valuation, the Respondent could not have made its offer and
the Appellant could not have accepted the said offer. All these facts, according to Mr.
Samdani, therefore clearly indicated that parties were not ad-idem on the "date" on
which the shareholding of the Respondent was to be valued, and this exercise of
determining the "date" was outside the scope of the joint reference made to the
Arbitrator.
5 4 . 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. Clause 7 further contemplated that on receiving notice
from the party desiring to sell its shareholding (or any part thereof), the other party

was required within 30 days of receipt of such notice (i) either agree to such proposal
and purchase the shares or (ii) give written intimation of its intention to purchase the
shares and the question of rate at which the said shares would be sold, be referred to
arbitration or (iii) decline/fail to accept the proposal made by the party selling the
shares, in which event that party was free to sell the shares to anyone else but only at a
rate not less than the rate offered to the other party. In the present case, the Appellant
by their letter dated 3rd May, 2003 clearly stated their intention to purchase the
shareholding of the Respondent in MSL, but considered the rate at which the said
shareholding was to be purchased, as too high and/or unacceptable. By their letter
dated 10th May, 2003, the Appellant confirmed that their letter dated 3rd May, 2003
was under Clause 7 of the Protocol Agreement and was their confirmation to purchase
the shares offered, though the price at which they were offered was not acceptable to
them. This was again reiterated by their letters dated 6th June 2003 and 31st July,
2003. On reading this correspondence, it is clear that there was a concluded contract
between the parties as contemplated under Clause 7 of the Protocol Agreement. This is
in fact how the parties also understood it. It is for this very reason that the Respondent
by their letter dated 27th October, 2003 initiated the arbitral process by addressing a
letter to the Sole Arbitrator stating therein as under :-
"As per the Protocol Agreement, the Corporation has to make the first offer to
Bajaj Auto Ltd. and in turn Bajaj Auto Ltd. has to accept or reject that offer.
This process has been completed and since no agreement has been reached on
the value of the share, as per the Agreement, the parties involved have to
proceed to appoint a Sole Arbitrator for the purpose.
The Govt. of Maharashtra, Industries, Energy and Labour Department has
suggested to appoint your goodself as the Sole Arbitrator and this has well been
received and agreed to by M/s. Bajaj Auto Ltd. and this Corporation.
You are, therefore, requested to be kind enough to kindly forward your
acceptance to be appointed as the Sole Arbitrator for this assignment and also
communicate the retainer-ship charges and venue suitable to you for the
purpose of Arbitration. The detail Terms of Reference would be communicated to
you later."
(emphasis supplied)
56. Thereafter, a joint reference was made to the Arbitrator on 29th December, 2003
wherein it was stated thus :-
"2. BAL had expressed its 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 agreement has been reached on the value of the share, as per
the Agreement, the parties involved have to appoint a Sole Arbitrator for the purpose."
58. Following the letter of 27th October 2003, a joint reference to arbitration was made
on 29th December, 2003. The terms of reference contained an express statement of fact
that the Appellant had expressed its willingness to buy the stake held by the
Respondent in MSL and that the Respondent indicated its desire to sell its stake in MSL.
However, what remained in dispute was the price per share to be determined, and
hence, in accordance with Clause 7 of the Protocol Agreement, the "question of rate" at
which the Appellant was to purchase the equity shares held by the Respondent in MSL,
was being referred. All this material would clearly indicate that there was a concluded
contract between the parties as on 3rd May, 2003 and looking at the letter dated 27th
October, 2003 as well as the joint reference dated 29th December 2003, clearly
establishes that even the parties understood it to be so. If according to the Respondent
there was no concluded contract, then there would have been no occasion to either
address the letter dated 27th October, 2003 to the Arbitrator or make a joint reference
to him under clause 7 of the Protocol Agreement for determining the "rate" at which the
shareholding of the Respondent would be sold to the Appellant. It is only for the first
time in the application filed by the Respondent before the Arbitrator on 6th April 2004,
that the Respondent sought to question as to whether a concluded contract had been
arrived at. This to our mind was obviously an after-thought and was a clear deviation
from the manner in which the Respondent had understood the course of dealings
between the parties. We therefore have no hesitation in holding that on the basis of the
correspondence exchanged between the parties and the Arbitrator, there was a
concluded contract for sale of the Respondent's 27% shareholding in MSL to the
Appellant. The only question that the Arbitrator had to decide was the "rate" at which
the said shares were to be sold as contemplated under Clause 7 of the Protocol
Agreement and it was on this basis that a joint reference was made to the Arbitrator.
We, therefore, are unable to agree with the submission of Mr. Samdani that on reading
the correspondence between the parties viz. the letters dated 9th April 2003, 3rd May
2003, 10th May, 2003 and 6th June, 2003 it was established that there was no
concluded contract as on 3rd May, 2003.
59. We are also unable to agree with the submission of Mr. Samdani that because the
parties were not ad-idem with respect to the "date" on which the valuation 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 dated 29th December,
2003 which specifically states that the Arbitrator shall take into account the Protocol
Agreement covenants and all other concerned factors which may have an impact on the
share price of MSL shares while giving the arbitral award. It cannot seriously be
disputed that the "date" of valuation would certainly be one of the factors which would
have an impact on the share price of MSL shares.

6 1 . The Arbitrator held that the relevant date of valuation would be 3rd May 2003,
which was the date on which the concluded contract was arrived at between the parties.
In our view, in holding so, the Arbitrator had not transgressed and / or exceeded his
jurisdiction, and the determination of the "date" on which the valuation was to be done,
was very much within the scope of the joint reference dated 29th December, 2003. We
find that the Arbitrator has correctly taken the "date" as 3rd May, 2003 being the date
when a concluded contract was arrived at between the parties for the sale of the
Respondent's 27% shareholding in MSL to the Appellant. We find that the Arbitrator has
dealt with this issue in detail from paragraphs 30 to 36 of the award. We do not find
any perversity in the same. Similarly, we find that the learned Single Judge has dealt
with this issue in paragraphs 16 to 19 of the impugned order and we are in full
agreement with the reasoning contained therein. This contention, therefore, of Mr.
Samdani will also have to be rejected.
CHALLENGE TO VALUATION ON MERITS
62. This brings us to the next objection of Mr. Samdani regarding the valuation of the
shares of MSL. Mr. Samdani submitted that MSL has been wrongly valued on a
"liquidation basis" although admittedly MSL was a profit making "going concern" and
was not ripe for winding up.
6 3 . In support of the above submission, Mr. Samdani adverted to the fact that Mr.
Raghuram of CRISIL, as on 30th June, 2002 valued the shares of MSL on the "Net Asset
Value" (NAV) method on a "going concern" basis (hereinafter referred to as "the first
report"). He submitted that after examining different scenarios, Mr. Raghuram accepted
the historical break-even level of sales (Scenario III in the first report) and carried out
the valuation on that basis. Mr. Raghuram did not apply any discounts and valued the
MSL shares at Rs.227/-per share. Whilst doing so, Mr. Raghuram also stated that in
case the "going concern" assumption did not remain valid, then MSL could be valued on
the "liquidation basis". On this liquidation basis, Mr. Raghuram gave discounts only on
workmen's dues and contingent liability and accordingly, valued the MSL shares at
Rs.204/-per share, was the submission. Mr. Samdani 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. According to Mr.
Samdani, Mr. Raghuram based his "going concern" assumption on the relevant
accounting standards followed by MSL. On the other hand, Mr. Bansi Mehta valued the
MSL shares on the NAV method on a "liquidation basis". Mr. Samdani submitted that Mr.
Bansi Mehta's report did not contain any explanation as to why the "going concern"
basis was discarded and the "liquidation basis" was followed. He submitted that this
was more so when it was not even in the contemplation of the parties that MSL was
liable to be wound up or was ripe for winding up. He submitted that the Arbitrator
himself had held and accepted that the NAV method had two streams, viz. (1) valuation
on a "going concern" basis and (2) valuation on a "liquidation basis". Mr. Samdani

submitted that the Arbitrator, without applying his mind and without any material on
record, held that MSL is a loss making company and the valuation of MSL on
"liquidation basis" was therefore justified. According to Mr. Samdani, the aforesaid
findings were totally perverse and revealed a complete non-application of mind
disregarding the material on record. He submitted that the Arbitrator committed a
fundamental error by ignoring the fact that MSL was in fact a profit making company.
This in itself takes away the very foundation of the Arbitrator's decision for valuing MSL
on a "liquidation basis", was the submission of Mr. Samdani. He submitted that while
one segment of MSL (Operating Segment) was making operating losses, the Investment
Segment was extremely profitable and MSL was thereby making profits. This fact has
been ignored by the Arbitrator which makes the award vulnerable to challenge, was the
submission of Mr. Samdani. For all the aforesaid reasons, Mr. Samdani submitted that
the Arbitrator was in fundamental error in accepting Mr. Bansi Mehta's valuation that
valued the MSL shares using the NAV method on a "liquidation basis".
65. From what has been argued at the bar, it appears that the real grievance of the
Respondent is that though the valuers viz. Mr. Raghuram and Mr. Bansi Mehta both
adopted the NAV method, Mr. Bansi Mehta in his report had taken into account certain
discounts whilst arriving at his valuation. Mr. Samdani submitted that when the shares
of a company are valued on the NAV method on a "going concern" basis, there is no
question of giving any discounts whereas if it is valued on a "liquidation basis", the
only discounts that can be given are workmen's dues, contingent liabilities and capital
gains tax liability. The real dispute therefore really revolves around the discounts given
by Bansi Mehta whilst arriving at his valuation, and which have been accepted by the
Arbitrator (with certain modifications).
6 6 . 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 MANU/SC/0305/1972 : (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 are of a public limited company which are not
quoted on a stock exchange or of a private limited company the value is
determined by reference to the dividends if any reflecting the profit-
earning capacity on a reasonable commercial basis. But where they do
not then the amount of yield on that basis will determine the value of
the shares. In other words, the profits which the company has been
making and should be making will ordinarily determine the value, the
dividend and earning method or yield method are not mutually
exclusive; both should help in ascertaining the profit-earning capacity as
indicated above. If the results of the two methods differ, an

intermediate figure may have to be computed by adjustment of
unreasonable expenses and adopting a reasonable proportion of profits.
(3) In the case of a private limited company also where the expenses
are incurred out of all proportion to the Commercial venture, they will
be added back to the profits of the company in computing the yield. In
such companies the restriction on share transfers will also be taken into
consideration as earlier indicated in arriving at a valuation.
(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
set back is temporary then it is perhaps possible to take the estimate of
the value of the shares before set back and discount it by a percentage
corresponding to the proportionate fall in the price of quoted shares of
companies which have suffered similar reverses.
(5) Where the company is ripe for winding up then the break-up value
method determines what would be realised by that process.
(6) As in Attorney-General of Ceylon v. Mackie (supra), a valuation of
reference to the assets would be justified where as in that case the
fluctuations of profits and uncertainty of the conditions at the date of
the valuation prevented any reasonable estimation of prospective profits
and dividends.
12. In setting out the above principles, we have not tried to lay down any hard
and fast rule because ultimately the facts and circumstances of each case, the
nature of the business, the prospects of profitability and such other
considerations will have to be taken into account as will be applicable to the
facts of each case. But one thing is clear, the market value unless in exceptional
circumstances to which we have referred, cannot be determined on the
hypotheses that because in a private limited company one holder can bring it
into liquidation, it should be valued as on liquidation by the break-up method.
The yield method is the 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 valued it on a
"liquidation basis" and for the purposes of valuation, took into account certain
discounts. In the aforesaid judgment, the Supreme Court has also stated that where the
company is ripe for winding up, then the break up value method would determine what
would be realized by that process. The Supreme Court has further stated that a
valuation with reference to the assets of a company would be justified where the
fluctuation of profits and uncertainty of the conditions on the date of the valuation,

prevented any reasonable estimation of prospective profits and dividends. Therefore,
the Supreme Court in the aforesaid judgment has inter alia laid down that the NAV
method can be adopted either where a company is ripe for winding up or where the
fluctuation of profits and uncertainty of conditions on the date of valuation prevent any
reasonable estimation of prospective profits and dividends.
68. The other leading decision on valuation is the judgment of the Supreme Court in
the case of Commissioner of Gift Tax, Bombay v/s Smt. Kusumben D. Mahadevia.
MANU/SC/0300/1979 : (1980) 2 SCC 238 After referring to the principles laid down in
Mahadeo Jalan's case, the Supreme Court in Kusumben's case at paragraph 5 summed
up as under :-
"5.The Revenue then pointed out that the principles of valuation set out by the
Court in Mahadeo Jalan case [MANU/SC/0305/1972 : (1973) 3 SCC 157 : 1973
SCC (Tax) 103 : (1972) 86 ITR 621] were merely broad guide-lines and they
did not obviate the necessity of considering each case on its own facts and
circumstances and in support of this contention the Revenue relied on the
observation made by the Court that in setting out these principles, the Court had
not "tried to lay down any hard and fast rule because ultimately the facts and
circumstances of each case, the nature of the business, the prospects of
profitability and such other considerations will have to be taken into account as
will be applicable to the facts of each case". Now it is true, as observed by the
Court, that there cannot be any hard and fast rule in the matter of valuation of
shares in a limited company and ultimately the valuation must depend upon the
facts and circumstances of each case, but that does not mean that there are no
well-settled principles of valuation applicable in specific fact-situations and
whenever a question of valuation of shares arises, the taxing authority is in an
uncharted sea and it has to innovate new methods of valuation according to the
facts and circumstances of each case. The principles of valuation as formulated
by the Court are clear and well-defined and it is only in 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 formulated by the Supreme 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.
70. In the facts of the present case, as stated earlier, Mr. Raghuram as well as Mr.
Bansi Mehta both preferred to adopt the NAV method (which is really speaking the
break-up value method, or valuation with reference to the assets of the company)
subject to one distinction, viz. that Mr. Raghuram adopted the NAV method on a "going
concern" basis without taking into account any discounts, whereas Mr. Bansi Mehta

adopted the NAV method on a "liquidation basis" and took into account certain
discounts for the purposes of valuation. This was done by Mr. Bansi Mehta in view of
the peculiar circumstances of MSL's functioning and the fact that its operating segment
was not only making repeated losses over the years but that admittedly it was incapable
of making any profits. Both the aforesaid reports were considered in detail by the
Arbitrator. In doing so, the Arbitrator firstly adverted to certain admitted facts which
were as follows :-
(i) The principal activity of MSL involved the assembly of scooters for which
completely knocked down kits were received from the Appellant;
(ii) The Appellant and the Respondent had entered into a technical know-how
agreement under which MSL was assembling Bajaj Chetak Scooters;
(iii) Admittedly, under the provisions of the Protocol Agreement, the
management of MSL was with the Appellant. Five persons on the Board of
Directors were to be nominated by the Respondent and four by the Appellant.
The Chairman and Managing Director of the Appellant was to be the Chairman
of MSL. Even under the Articles of Association of MSL, several important
decisions to be taken by MSL, were subject to approval of the Appellant.
Moreover, the Chief Executive of MSL was to be appointed by the Board out of a
panel of names suggested by the Appellant. Furthermore, key management
functions of MSL were virtually integrated with the Appellant and MSL only had
an assembly plant by which it could not manufacture, but only assemble
scooters;
(iv) As a result of customer preference for motorcycles, the market for scooters
had shown a declining trend, adversely affecting the operations of MSL. MSL
had suffered operating losses for financial years 2001-02, 2002-03 and 2003-
04;
(v) The market share of geared scooters with which MSL is concerned, had
gone down from 23.5% in 1999-2000 to 4.9% in 2003-04.
(vi) To 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 from paragraphs 54 to 74 of the impugned
award and thereafter discarded the valuation of Mr. Raghuram given in his second
report. The Arbitrator in paragraph 75 of the arbitral award held as under :-

"75.It is interesting to note that the market value of MSL shares as on 2nd May
2003 (since 3rd May 2003 was Saturday and a holiday) was Rs.62.35 per share
as stated by Mr. Raghuram in answer to Q. 145. However, in his second report
at pages 30 to 32, Mr. Raghuram talks of a control premium of 84.85 % and
adds it, not to market value of Rs.62,35, but to the fair value of Rs.227/-as
calculated by him. It is difficult to appreciate this inconsistent and contradictory
approach. When confronted with this, he gives inconsistent and evasive
answers as to what is meant by equity value and market value. Further, when
he was asked about minimum alternate tax which WMDC will have to pay on the
gain that it would make on the sale of shares to BAL, he concedes that he was
not sure of the position as to the liability to pay minimum alternate tax and/or
capital gains tax since he was not a tax expert. In view of the severe criticism
leveled by Mr. J.J. Bhatt and the glaring inconsistencies and contradictions in
the evidence of Mr. Raghuram, it is not possible for me to accept the evidence
of Mr. Raghuram for more than one reason. I may mention some of them as
under :
(i) the extent to which Mr. Raghuram can be called an independent and
objective expert is extremely doubtful. Without meaning any disrespect to the
professional, it is not possible to accept that he is an independent expert
witness in the facts of the present case.
(ii) he had already four different assignments in which, he undoubtedly
represented the interests of WMDC.
(a) he was a member of the State Govt. Committee to advise the State
Govt. on disinvestment of WMDC shares in MSL.
(b) he prepared the first report regarding valuation as on 30th June
2002.
(c) he advised WMDC regarding BAL's attempted purchase of MSL
shares.
(d) he gave the second report regarding valuation as on 3rd May 2003.
(iii) In his evidence, Mr. Raghuram admits that he was jointly advising both
WMDC and BAL in the 3rd assignment mentioned above namely item (c) -
advising WMDC regarding BAL's purchase of MSL shares.
(iv) There are glaring inconsistencies in the two reports of Mr. Raghuram. The
inconsistencies and contradictions are so glaring and so many that it is difficult
to reconcile the two 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.
(ix) The concept of MSL being a going concern on the assumption that the
production of 62,000 scooter units per year was the breakeven requirement, is
admittedly a non existent assumption since the production had been brought
down to 12,000 scooter units per year.
(x) The question of payment of capital gain tax and minimum alternate tax has
been conveniently glossed over by the witness in his second report and also in
his unconvincing answers in the course of his cross-examination.
(xi) The factor of VRS has been totally ignored by Mr. Raghuram though
admittedly, on a prior occasion, VRS was offered by MSL in 2001-02.
These are some of the reasons, which I am mentioning for discarding the
evidence of Mr. Raghuram. In view of the same, it is not possible to accept the
contentions raised by Mr. Rohit Kapadia for accepting the said evidence."
7 2 . After rejecting the report and evidence of Mr. Raghuram, the Arbitrator, from
paragraph 76 onwards, analyzed the valuation report and evidence led by Mr. Bansi
Mehta and came to the conclusion that the evidence of Mr. Bansi Mehta ought to be
accepted subject to two changes. In paragraphs 100 & 101 of the arbitral award, the
Arbitrator has held as under :-
"100.In the light of the above, I think interests of justice would be met by fixing
the rate on the basis of the calculations made by Mr. Bansi Mehta in Appendix-8
and 9 to his report subject, however, to two changes. In Appendix 9, he has
calculated discount of 60% on the six monthly average rate on National Stock
Exchange, namely discount of Rs.296.40 on the rate of Rs.494/-per share. This
results in the value of a share being Rs.102.46. In Appendix-8, he has calculated
45% discount on the six monthly average rate on National Stock Exchange
namely discount of Rs.222.30 on the rate of Rs.494/-per share. This results in
the value of a share being Rs.124.42. As reiterated above, Mr. Raghuram
himself has indicated a discount of 20% to 40% in his first report. In the facts of
the case, I think that fixing 30 % discount would be just, fair and reasonable
and would meet the ends of justice in Appendices 8 and 9, VRS payment has
been taken at Rs.6 lacs per employee. I am of the opinion that it would be just,
fair and reasonable to consider the VRS payment at Rs.5 lacs per employee. This
would also be consistent with the limits under the Income Tax Law (though an
employer may offer 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.

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 May 2003 for the
purpose of sale to BAL, should be Rs.151.63 per share."
(emphasis supplied)
73. The abbreviations "OS" stand for operating segment and "IS" stand for investment
segment. After going through the arbitral award in great detail, we find that the learned
Arbitrator has given cogent and plausible reasons for rejecting Mr. Raghuram's second
valuation report and accepting the valuation report of Mr. Bansi Mehta. After taking into
consideration the totality of the facts of the case and the peculiar circumstances of
MSL's functioning and the fact that its operating segment (core business) was not only
making repeated losses over the years, but admittedly it was incapable of making any
profits, the Arbitrator accepted the valuation of Mr. Bansi Mehta, which valued the
shares of MSL on the NAV method on "liquidation basis". It has come on record that the
net profit of a company of this magnitude for the financial year 2003, was merely Rs. 34
lacs after adjusting the operating loss of Rs.5 Crores against the income received from
the investments. As stated earlier, the core business of MSL (assembling scooters) was
not only suffering repeated losses over the years but was not even in a position to
break-even, let alone make any profits. We, therefore, find that the learned Arbitrator
committed no error in accepting Mr. Bansi Mehta's valuation report which values the
shares of MSL on the NAV method on a "liquidation basis". The Arbitrator has accepted
said report of Mr. Bansi Mehta after carefully taking into consideration the evidence of
Mr. Bansi Mehta as well as his cross examination. Looking to the reasoning and the
analysis of the evidence done by the Arbitrator, we do not think that the arbitral award
suffers from any patent illegality or perversity either entitling the learned single judge
(under section 34) or us (under section 37) to interfere with the same. We therefore
find that the learned Single Judge rightly declined to interfere with the arbitral award on
this issue. We must also mention here that the only distinction that was sought to be
made by Mr. Samdani between the "going concern" valuation and the "liquidation basis"
valuation was that when the valuation was done on the NAV method on a "going
concern" basis, there was no question of taking into account any discounts, whilst
arriving at the valuation. However, Mr. Samdani 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. According to Mr. Samdani, the only discounts that could be taken
into consideration were (a) workmen's compensation; (b) contingent liabilities if any;
and (c) liability towards capital gains tax. He submitted that the discounts that were
taken into account by Mr. Bansi Mehta and which were accepted by the Arbitrator, were
not in consonance with the discounts that were permissible under a valuation on the
NAV method on a "liquidation basis". The first discount that was assailed by Mr.
Samdani was with reference to an amount of Rs.30 crores towards VRS (Voluntary
Retirement Scheme). The second discount which was assailed by Mr. Samdani was a
discount of 30% on the sale value of BAL (Bajaj Auto Ltd.) shares held by MSL. Mr.
Samdani also took exception to the fact that Mr. Bansi Mehta had valued the non-BAL
shares/investments on a book value basis and not on their market value. He submitted
that all these were errors apparent on the face of the award and therefore the award
was liable to be set aside under section 34 of the Arbitration and Conciliation Act 1996.
7 5 . Before we deal with these points separately, it would be apposite to refer to a
judgment of the Supreme Court in the case of G.L. Sultania and another v/s Securities
and Exchange Board of India and others. MANU/SC/7659/2007 : (2007) 5 SCC 133 In
the said judgment, the Supreme Court has inter alia laid down the principle that
valuation of shares is not only a question of fact but also raises technical and complex
issues which may appropriately be left to the wisdom of experts, having regard to the
many imponderables which enter into the process of valuation of shares. If the valuer
adopts the method of valuation prescribed, or in the absence of any prescribed method,
adopts any recognised method of valuation, his valuation cannot be assailed unless it is
shown that the valuation was made on a fundamentally erroneous basis or that a patent
mistake had been committed, or the valuer adopted a demonstrably wrong approach or
a fundamental error going to the root of the matter. The Supreme Court further opined
that it must therefore follow that the weight-age to be given to the different factors that
go into the process of valuation must be left to the wisdom, experience and knowledge
of the experts in the field of share valuation. Such being the method of share valuation
involving subjective and objective considerations, there 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 valuer
adopted a demonstrably wrong approach or a fundamental error going to the
root of the matter. Where a method of valuation is prescribed the valuation must
be made by adopting scrupulously the method prescribed, taking into account all
relevant factors which may be enumerated as relevant for arriving at the
valuation.
37. It may also be observed that not any one of the parameters is in itself
decisive. All the factors have to be considered and the valuation arrived at. The
Regulation itself does not prescribe the weightage to be assigned to different
enumerated parameters. As noticed earlier, many imponderables enter into the
exercise of share valuation. It must therefore follow that the weightage to be
given to the different factors that go into the process of valuation, must be left
to the wisdom, experience and knowledge of the experts in the field of share
valuation. Such being the method of share valuation which involves subjective
and objective considerations, there 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, yet the valuations may differ. Mathematical precision and exactitude are
not the attributes of share valuation, for at best the valuation arrived at by an
expert is only his opinion as to what the value of the share should be. No doubt
the variation may not be very wide between two valuations prepared honestly by
two valuers applying the correct approach and the correct principles, but some
variation is unavoidable."
(emphasis supplied)
7 6 . In the facts of the present case, we have already found that Mr. Bansi Mehta
adopted a recognised method of valuation which was accepted by the Arbitrator and did
not proceed on a fundamentally erroneous basis so that the said valuation could be
assailed. As stated earlier, Mr. Bansi Mehta chose to value the shares of MSL by
adopting the NAV method on a "liquidation basis" looking to the peculiar functioning of
MSL and the facts and circumstances of the case. Furthermore, it is not as if Mr. Bansi
Mehta's valuation report was treated as gospel truth and accepted by the Arbitrator. The
Arbitrator took into account the first and the second valuation reports of Mr. Raghuram
as well as the valuation report of Mr. Bansi Mehta and after analyzing the detailed
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
paragraph 13 of the impugned order and there is no mention of this contention. This is
probably why we find no discussion on this issue in the impugned judgment. We would
therefore be justified in not allowing Mr. Samdani to urge this contention for the first
time before us. However, lest it be said that we have not dealt with the argument of Mr.
Samdani, we proceed to deal with this contention.
78. As stated earlier, the valuation of MSL shares was done on the NAV method (also
known as the break-up method) on a "liquidation basis". This means that the assets of
MSL would be broken up and notionally sold. In doing so, disbursement and paying of
the labour dues would be a necessary condition for any notional sale of its plant and
fixed assets. Accordingly, expenditure incurred on such labour dues / VRS would
necessarily have to be adjusted / deducted from the current market value of the assets.
This is in fact the reasoning given by by Mr. Bansi Mehta in his cross-examination in
answer to Question no. 27 as well as in answer to Question no. 93. In answer to
Question no. 27, Mr. Bansi Mehta has stated as follows :-
"........... Likewise, I have considered that if the plant and machinery etc. are to
be sold, then the workers have to be paid out and another adjustment that I
have made is about an estimated sum that would be required for settling the
matter with workers....."
In answer to Question no. 93, Mr. Bansi Mehta has once again stated thus:-
"For the purposes of valuation, we have to proceed on the basis that hard
assets are to be encashed, which can only be done if the workforce is
disbanded......."
79. We therefore find credible evidence on record of Mr. Bansi Mehta as to why this
adjustment / discount was required to be made and/or taken into consideration.
80. In addition to the aforesaid, we may also note that Mr. Raghuram himself in his
first report (as on 30th June 2002), considering the value of MSL shares on the NAV
method on a "liquidation basis", had also provided for an adjustment of Rs.222.44
million towards VRS costs. This in fact has been taken note of even by the Arbitrator in
paragraph 60 of the arbitral award. We therefore do not find any illegality or perversity
in the arbitral award when this adjustment towards VRS was taken into account for the
purpose of arriving at the valuation of MSL shares. This argument of Mr. Samdani will
therefore have 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.
8 2 . 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 the break-up value of its assets on a
notional liquidation, what has to be worked out is what a shareholder can expect to get
if the investee company (in this case, MSL) were to realize its investment, and in
abstract theory distribute the entire proceeds of such asset sale to its shareholders.
83. In this regard, it would be appropriate to note the contents of paragraph 5.4 of the
valuation report of Mr. Bansi Mehta and his answer to Question No. 147 in cross
examination. Paragraph 5.4 reads thus:-
"5.4 On a conceptual basis, we have set out in Appendix-7 what a shareholder
can expect to get if the Investee Company were to realize its investment and, in
abstract theory, distributes the entire proceeds to the shareholders, from which
it will be evident what a shareholder can hope to achieve is no more than 72%
of the gain. This to 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"'s shareholding in BAL valued at the six-monthly average rate set out in
Appendix-5 should be further discounted by no less than 30%."
(emphasis supplied)
Question No. 147 and the answer thereto reads thus:-
"Q.147. Please see paragraph 5.3 of your Report. Could you explain the
relevance of Appendices 6A, 6B and 6C ?
A. We call it the "CDE" approach. 'C' deals with Constraint 'D' deals with
Distance and 'E' deals with Empirical Data. Some time 'C' is also understood as
'common sense', which tell us that a bird in hand is worth two in the bush. In
other words, if I am offered that I will get two birds, which are not down on
earth but some where in the bush, it would be unrealistic to expect that I would
consider the prospect of having access to two birds as equivalent to one bird
that I may have to part with on earth. The second thing about "C" is constraint.
Constraint is what exists in a Company is not necessarily what its owner will
hope to receive. To illustrate this case, if MSL were to sell BAL's shares on May
3, 2003, they will have to pay capital gains tax, which roughly was about
10.5% then. Besides, the companies Act requires that before declaring any
dividend, at least 10% of the profit has to be transferred to reserves and only
the balance can be distributed as dividend. Even while declaring a dividend, the
Company has first to 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 in the value of the
Company's shareholding in other Companies. According to our workings, the
discount in the case of TATA Investment is 82.58% of the market value of
shares in other Companies. Similar percentage for IIT is 91.41%. Let me now
go to Appendix 6B, which deals with the workings for TISCO. As is known,
TISCO holds very significant investments in other Companies. On a similar
exercise, we find that for TISCO, the market places a discount of 56% on the
market value of the shareholdings of TISCO in other Companies. Appendix 6C
by some coincidence, deals with BAL itself, BAL also holds a very substantial
shareholding in another Company called 'Bajaj Tempo Ltd.'. On a similar
exercise, we are somewhat surprised that nothing is reflected in BAL's share
values quoted on the Stock Exchange which can be related to the appreciation
in respect of its shareholding in Bajaj Tempo Ltd. It is after this CDE analysis,
that we have stated in paragraph 6.1 that one discount factor that suggests
itself is 45%. However, as you will observe, we have also worked the value if
the discount was 60% which is closer to TISCO's case."
84. The Arbitrator, after taking note of all the material on record, held that if MSL was
to sell the BAL shares held by it, MSL would have to pay 10.5% towards capital gains
tax, would have to transfer 10% of the receipt to Reserves and would have to pay
12.5% plus surcharge as the dividend tax. It is on this basis, and after carefully
considering the evidence of Mr. Bansi Mehta, that the Arbitrator has discounted sale
value of BAL shares by 30%. We also find that if the shares of MSL were required to be
valued on the basis of the NAV method on a notional sale / liquidation basis, the value
amount realized by a notional sale of its assets, would necessarily have to be
discounted/reduced by the costs which would have to be statutorily incurred on such
notional sale.
85. Whilst taking this view, we are supported by a judgment of the Single Judge of the
Delhi High Court in the case of Kidarsons Industries Pvt. Ltd. V/s Hansa Industries Pvt.
Ltd. MANU/DE/0145/1993 : ILR (1993) 2 DELHI 109 The Delhi High Court, after
referring to the judgement of the Supreme Court in Mahadeo Jalan's case, held as
under:-
"37.The valuers have for purposes of the report taken into consideration the
value of the assets of the company as on 1st July, 1988. The 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 no actual sale or transfer

of the immovable assets of the company involved, yet the question remains
when the market value of the fixed assets is taken into consideration as against
their book value, whether the concept of capital gains tax automatically comes
into play or not. According to the learned counsel for the objector since there is
no sale or transfer of the fixed assets of the company, there is no occasion to
take notional liability on account of capital gains tax into consideration. In
support of this submission he has made reference to provisions under the
Income Tax Act, particularly sections 45 and 46 of the said Act and has cited
certain judgments to the effect that in case of distribution of assets of a
company in liquidation to the shareholders, there is no sale or transfer of the
assets of the company and, therefore, capital gains tax does not become
payable by the company. These judgments are CIT v. RM. Amin,
MANU/SC/0257/1976 : 106 ITR 368(10)CIT v. Madurai Mills Co. Ltd.,
MANU/SC/0211/1973 : 89 ITR 45(11)and Madurai Mills Co. Ltd. v. CIT
MANU/TN/0254/1969 : 74 ITR 623.(12)
39. The objector has approached the question of capital gains fax from the
angle of distribution of assets of a company in liquidation to its members. He
has not considered or adverted to the other aspect of the matter which is as
stated before, when market value of the assets is considered as against their
book value, does the liability on account of capital gains tax gets automatically
involved or not? I do not consider necessary to discuss the aforesaid authorities
because I am in agreement with the objector that no actual sale or transfer of
the assets of the company is involved. However, I find myself unable to ignore
the question of capital gains tax getting impregnated in the market value of the
property the moment the same as taken into consideration as against the book
value of the assets of the company. Counsel for the plaintiff has strongly urged
that the moment market value of any asset is taken into consideration, the cost
of realisation of the market value and the tax liability get attracted and the true
market value of the asset will be ascertainable only after deductions on this
account. According to the learned counsel these things are an essential element
of the market value. The moment one talks of market value of a property these
elements cannot be left out or ignored. In other words they are impregnated 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 unrealistic to take book
values of different assets of a company particularly fixed assets if the

values have changed materially since the date of their acquisition. In
such cases, therefore, realisable value of the assets should be
ascertained, if necessary, with the help of expert valuers. Normally,
such value of assets would be taken after taking into account the cost of
realisation, as well as the capital gains and other taxes which the
company may have to pay on such realisation."
Therefore, even when there is no actual sale or transfer of assets of a company,
for purposes of arriving at market value of its assets such notional deduction
have to be made.
41. For all these reasons I find nothing wrong in the deduction made by the
valuers on account of liability towards capital gains tax and realisation charges
of the assets, though notional. All the objections in this connection are
rejected."
(emphasis supplied)
86. Looking to the valuation report and the evidence of Mr. Bansi Mehta, as well as the
detailed reasoning of the Arbitrator on this aspect, we are unable to agree with Mr.
Samdani that the Arbitrator committed any fundamental error whilst accepting the
discount of 30% on the sale value of BAL shares. We do not find any perversity or
patent illegality or any error apparent on the face of the award that makes it vulnerable
to challenge on this aspect. This argument of Mr. Samdani would therefore also have to
be rejected.
87. Mr. Samdani next submitted that the arbitral award is in violation of Section 28(2)
of the Arbitration and Conciliation Act, 1996, as the Arbitrator was not empowered
under the Protocol Agreement to base his award on any equitable considerations and/or
on what he thought was just, fair and reasonable. He submitted that looking at
paragraph 100 of the arbitral award, it was clear that fixing the 30% discount on the
sale value of BAL shares was done on the basis that it would be "just, fair and
reasonable and would meet the ends of justice.............", in the opinion of the
Arbitrator. He submitted that the Arbitrator had to decide the dispute as per the contract
between the parties and there was no question of any just and equitable considerations
being taken into account whilst fixing the 30% discount on the sale value of BAL shares.
88. Section 28(2) of the Arbitration and Conciliation Act, 1996 reads as under:-
"28.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.
9 0 . 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% is directly traceable to the evidence of Mr. Bansi Mehta, who has in
categorical terms stated that the discount should be no less than the 30%. The
observations of the Arbitrator in paragraph 100 of the arbitral award fixing the 30%
discount on the ground that it should be just, fair and reasonable and would meet the
ends of justice, cannot be read in isolation or be utilized to suggest that the Arbitrator
was applying his own notion of what was fair, equitable and just. We, therefore, do not
find any substance in this argument.
91. However, whilst we are dealing with paragraph 100 of the arbitral award, it would
be important to mention that in one area, there is an error of fact on the part of the
Arbitrator where he refers to the first report of Raghuram as having indicated a discount
of 30% to 40%. Admittedly, the discount that was referred to in the first report of
Raghuram dealt with the discount on MSL's shares and not BAL shares. On this aspect,
the Arbitrator has clearly made a mistake. However, we do not think that the mistake is
such that would vitiate the entire arbitral award. As discussed earlier, there was a
wealth of evidence before the Arbitrator and which was accepted by him, to
demonstrate that a discount of 30% on the sale value of BAL shares was sustainable,
both on a conceptual as well as an empirical basis. On this aspect, it would be apposite
to refer to the judgment of the Supreme Court in the case of Madhya Pradesh Housing
Board V/s Progressive Writers and Publishers MANU/SC/0418/2009 : (2009) 5 SCC 678
and more particularly paragraphs 43 and 44 thereof which read as under:-
"43.It is true that the arbitrator took judicial note of certain facts which were in
the realm of conjectures and surmises to conclude that the second agreement
dated 4-5-1977 was entered into under political pressure and the depositor was
compelled to execute the said agreement under such pressure. But the question
is what is the effect of the same. In our considered opinion even this surmise
and conjecture is ignored and not taken into consideration, the award of the
arbitrator continues to be valid and binding on the parties.
44. The findings recorded by the arbitrator that the specific performance of the
second agreement is barred by limitation; that the agreement is itself
unconscionable; that the agreement ceases to subsist after the 1980 agreement
and was not revived 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 will see Appendix 8 of
my report, you will find that I have segregated MSL's holding of shares in BAL,
which I have valued keeping in view the average market value of BAL's shares.
As far as other assets comprised in IS are concerned, I have taken the book
value as at March 31, 2003 since I believe that there may not be any material
difference between the market value and the carrying value of these pure
financial assets. However, I would also like to invite your attention to Appendix
8 in which as far as MSL's holding in BAL is concerned, I have taken a certain
percentage of the full market value. I thought that because of the negative
valuation of the operating segment, any realization of IS attributable to non BAL
share holding would be eaten up within the company so as not to attract the
timing and tax consequences that would apply to amounts that are in the nature
of surplus.
128. Q. In the 2nd sentence in paragraph 5.1 of your report, you have stated
"Adopting the book value as the realisable value, the value of that component
would correspond to such book value". What exactly do you mean by this? A.
This is a normal practice for assets that are in the nature of liquid instruments
since they are presumed to have been acquired to earn a recurring rather than
the maturity return.
129. Q. Please see the Appendix 4 of your report. The mutual fund units
mentioned in your appendix, would they be liquid instruments presumed to have
been acquired to earn a recurring rather than a maturity return?
A. Yes. If you will please see Appendix 4, the mutual fund units appear to be
based on deriving recurring income. However, I would also like to invite your
attention to the fact that the total market value at March 31, 2003 of all quoted
investments which includes mutual fund units there is an appreciation of around
Rs.90 Crores. If you will please refer to the earlier page of Appendix 4, MSL was
holding 3.38 million shares of BAL. If you will please refer to Appendix 5, you
will note that the average market rate as of March 31, 2003 was Rs. 481.5 per
share. Prima facie, therefore, almost the entire appreciation may have arisen on
account of MSL's shareholding in BAL, which we have considered separately
after considering the average market rate for BAL's shares."
(emphasis supplied)
94. Mr. Bansi Mehta, therefore, has stated his reasons for 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 would have
been lower than their book value. This is the justification given by Mr. Bansi Mehta for
valuing the non-BAL shares/investments on their book value as opposed to their market
value.
95. On going through the evidence of Mr. Bansi Mehta as well as the reasoning of the
Arbitrator, we do not find any fundamental error in the approach of Mr. Bansi Mehta in
valuing the non-BAL shares/investments on a book value basis as opposed to their
market value. There is cogent justification with evidence for valuing the non-BAL
shares/investments on their book value as opposed to their market value. We also find
that the learned Single Judge has followed the same reasoning in paragraph 31 of the
impugned order and we fully agree with the reasoning contained therein. We, therefore,
are unable to agree with the submissions of Mr. Samdani that because the non-BAL
shares/investments were valued at their book value, the same was a fundamental error
in the approach of valuation that opened up the arbitral award to challenge. This
argument of Mr. Samdani would also therefore have to be rejected.
9 6 . That brings us to the last point urged by Mr. Samdani on the issue of control
premium. Mr. Samdani submitted that Mr. Raghuram in his second valuation report had
added 84.85% to the fair value of MSL's shares as on 03.05.2003 towards control
premium, and accordingly, valued MSL's shares at Rs.420.50 per share. On the other
hand, Mr. Bansi Mehta as well as the Arbitrator ignored the aspect of control premium.
Mr. Samdani submitted that the fair value of the Respondent's share holding in MSL had
to be determined by taking into consideration that the Appellant, by purchasing the
Respondent's shareholding in MSL, effectively gained full control of MSL (51%) and
MSL would become a subsidiary of the Appellant. He, therefore, submitted that the
Respondent's 27% stake in MSL was of special interest to the Appellant. This according
to Mr. Samdani, would certainly have a bearing on the price of MSL's shares being sold
to the Appellant, and therefore, the Arbitrator was in great error in coming to the
conclusion that control premium was not to be taken into account in the facts of the
present case.
97. On the aspect of control premium, we note that this issue has been discussed in
great detail by the Arbitrator in paragraphs 59, 65, 74 and 75 of the arbitral award. 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 alternative potential buyer to compensate the incumbent for
the lack of effective control. The market discount as suggested by empirical
studies is normally 20% -40 % of the market value and can be decided only
through negotiations between WMDCL and BAL. We have accordingly not
factored the control premium in our analysis."
9 8 . Having opined in his first valuation report that instead of any control premium
being applied, the circumstances called for a discount being given on account of the fact
that the Appellant was already having management control, Mr. Raghuram in his second
report did a complete turn around and concluded that in the same circumstances as
stated above, a control premium to the extent of 84.85 % would be applicable and that
too on the fair value of share and not the market value thereof, which at that time was
approximately Rs.65/-per share. The Arbitrator considered all these factors (especially
in paragraphs 59, 65, 70, 74 and 75 of the award) and concluded that there was no
basis for the inclusion / addition of any control premium. We find that the Arbitrator has
considered all the relevant evidence placed before him and then come to the conclusion
that the rationale for control premium would, therefore, not exist in the facts of this
case. We do not think that the findings of the Arbitrator on this aspect suffer from any
perversity or patent illegality, entitling us to interfere with the same under section 34 of
the Arbitration and Conciliation Act, 1996.
99. For the reasons stated earlier in this judgment, we do not find any merit in the
Cross Objections. We must mention here that under the arbitral award, the Arbitrator
directed that the 30,85,712 equity shares of MSL held by the Respondent herein, are to
be valued for the purpose of sale to the Appellant at Rs.151.63/-per share. As per the
said direction, the amount that would have to be paid by the Appellant to the
Respondent for the purchase of the said 30,85,712 equity shares would come to
Rs.46,78,86,510.56. In the peculiar facts and circumstances of the case, and
considering the fact that this amount has admittedly not been paid till date by the
Appellant to the Respondent herein, we think that the interests of justice would be
served, if this amount is paid by the Appellant to the Respondent together with simple
interest @ 18% per annum from the date of the Award (14th January, 2006) till
payment.
100. In conclusion, we hold that Appeal No. 153 of 2010 is allowed and the impugned
order dated 15th February 2010 is set aside insofar as it set aside the arbitral award on
the ground that Clause 7 of the Protocol Agreement was in the nature of a restriction on
free transferability of the shares and was therefore contrary to section 111A of the
Companies Act, 1956. The Cross Objections (L) No. 13 of 2010 filed by the Respondent
have no merit and therefore stand dismissed. The Appellant, for the purchase of the
30,85,712 equity shares of MSL, shall pay to the Respondent a sum of Rs.
46,78,86,510.56/-together with simple interest @ 18% per annum from 14th January,
2006 till payment. Appeal No. 153 of 2010 and Cross Objections (L) No. 13 of 2010 are
disposed of in the aforesaid terms. In the facts and circumstances of the case, we leave
the parties to bear their own costs.
1 Judgement of the Supreme Court dated 28.10.2014 in Civil Appeal No. 2481 of 2014)

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MANU/MH/0820/2015

IN THE HIGH COURT OF BOMBAY

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