1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY O. O. C. J. ARBITRATION PETITION NO.174 OF 2006 Western Maharashtra Development Corpn.Ltd., having its registered office at 2nd Fllor, Kubera Chambers, Dr.Rajendra Prasad Road, Shivaji Nagar, Pune-411 005. ...Petitioner. Vs. Bajaj Auto Limited, having its registered office at Bombay Pune Road, Akurdi, Pune-411 035 and its office at Bajaj Bhavan, 11 Floor, 26, Nariman Point, Mumbai-400 021. ...Respondent. .... Mr. Rohit Kapadia, Sr. Advocate with Mr.Pravin Samdani, Sr. Advocate and Ms.Bindi Dave, Mr.Kunal Vajani and Mr.Ankit Virmani i/b.M/s.Wadia Ghandy & Co. for the Petitioner. Mr. Aspi Chinoy, Sr.Advocate with Mr.J.J. Bhat, Sr.Advocate, Mr.Snehal Shah, Mr.Shiraj Dhru, Mrs.Lata Dhru and Ms.Ranju Yadav i/b. Dhru & Co. for the Respondent. ..... CORAM : DR.D.Y.CHANDRACHUD, J. February 15, 2010. JUDGMENT : The challenge in these proceedings under Section 34 of the Arbitration and Conciliation Act, 1996 is to an arbitral award dated 14th January 2006 of a sole Arbitrator, Mr.Justice A.V.Savant. The Protocol Agreement : 2 2. On 2nd October 1974, a Protocol Agreement was entered into between the Petitioner and the Respondent pursuant to which Maharashtra Scooters Ltd. (MSL) was incorporated and registered under the provisions of the Companies’ Act, 1956. MSL is a Public Company and its shares are listed on the Bombay Stock Exchange and the National Stock Exchange. The Petitioner is an undertaking of the government of Maharashtra. In accordance with the terms of the Protocol Agreement, the Petitioner holds 27% of shareholding of MSL while the Respondent continues to hold 24%. The balance 49% is held by the public. The recitals to the agreement state that the Petitioner was desirous of availing of the experience and know how of the Respondent in the manufacture of two wheeler scooters, for the installation of plant and machinery and the establishment of a Scooter Project. The Respondent agreed to participate in the equity capital of a new manufacturing Company – MSL. The initial authorized capital of MSL was Rs.200 lakhs consisting of Rs.150 lakhs in equity shares and Rs.50 lakhs in cumulative redeemable preference shares. By the agreement, it was agreed that the shareholding of the Petitioner, the Respondent and of the public shall be in the proportion set out earlier. Neither 3 party to the agreement could allow the structure of MSL, the number of shares or the rights, privileges, restrictions or qualifications of any class of shares to be altered or any further issue of capital to be made without the specific prior consent of the other party. Any further issue of capital was to be made in a manner that would ensure that the participation by the party in the total issued equity share capital shall remain in the same proportion. Neither party was entitled to increase or reduce directly or indirectly its proportion of the shareholding in the equity share capital of MSL or to deal with its shareholding so as to lose its absolute control over voting rights. The intent was that the parties to the agreement shall, between them, control at least 51% of the equity capital of MSL. Clause 7 : 3. Clause 7 of the agreement upon which the dispute in the present case centers, was to the following effect: “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 Limited, 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 4 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.” 4. The agreement stipulated that of the seven signatories to the Memorandum and Articles of Association, four would be nominated by the Petitioner and three by the Respondent. The Board of Directors was to consist of nine Directors, of which five were to be nominees of the Petitioner and four of the Respondent. The appointment of the Chairman of the Board had to be made from the names suggested by the Respondent. Though the 5 management of MSL was to vest in the Board, the day-to-day work of the Company was to be carried out by the Chief Executive, to be appointed by the Board of MSL. The selection of the Chief Executive was to be made from a panel to be suggested by the Respondent. The parties undertook to ensure that MSL would enter into an agreement with the Respondent for obtaining technical know how. The ‘offer’ and ‘acceptance’: 5. Between 1986 and 2003, the Respondent had been requesting the Petitioner to divest its shareholding in MSL in its favour. By a letter dated 9th April 2003, the Petitioner offered to sell its shares to the Respondent, at a price of Rs.232.20 per share. By a reply dated 3rd May 2003, the Respondent confirmed its interest in buying the shares, but stated that the price that was offered by the Petitioner, was not acceptable. The Respondent requested that a meeting be called of a High Level Committee to carry forward the negotiations in order to reach a fair and amicable settlement. On 7th May 2003, the Petitioner addressed a letter to 6 the Respondent stating that the Respondent was required to respond to an offer within one month of the receipt of the letter and called upon the Respondent to confirm whether this constituted a letter in response to a buy back by the Respondent. If not, the Respondent was called upon to ensure that the requisite response was submitted to the Petitioner by the appointed date. By its response dated 10th May 2003, the Respondent confirmed that its letter dated 3rd May 2003, was its response under Clause 7 of the Protocol Agreement to the Petitioner’s offer dated 9th April 2003. The Respondent confirmed that by its letter, it has confirmed its intention to purchase the shares offered, but stated that the price offered was not acceptable to the Respondent. The Respondent once again renewed its request for a meeting of a High Level Committee to negotiate upon and resolve the price. On 6th June 2003, the Respondent made a counter offer on the price of Rs.75/- per equity share of MSL stating that it reflected a premium of 5.6% over the prevailing market price as on 6th June 2003. By a letter dated 31st July 2003, the Respondent stated that in the event that the price offered of Rs.75/- per share was not acceptable to the Petitioner, the next step in terms of clause 7 of the Protocol 7 Agreement was to initiate the arbitral process. Reference to Arbitration : 6. On 23rd September 2003, the Principal Secretary in the Industries, Energy and Labour Department of the State Government, forwarded a set of names of former Judges of this Court for appointment of an Arbitrator. On 27th October 2003, the Petitioner addressed a letter to Mr.Justice A.V.Savant, stating that under the Protocol Agreement, the Petitioner had to make the first offer to the Respondent and in turn, the Respondent had to accept or reject the offer made by the Petitioner for divesting its holding in MSL. The letter recorded that “this process has been completed and since no agreement has been reached, on the value of the shares, as per the agreement, the parties involved have to proceed to appoint a sole Arbitrator for the purpose”. Accordingly, Mr.Justice A.V.Savant was informed that the Government of Maharashtra had suggested his appointment as a sole Arbitrator, which had been agreed to, by the Respondent and by the Petitioner. Correspondence ensued between the parties. On 29th 8 December 2003, a joint reference to arbitration was made by the Petitioner and by the Respondent to Mr.Justice A.V.Savant. The terms of reference inter alia were as follows: “1. The appointment of “Sole Arbitrator” is made jointly by BAL and WMDC, in terms of the Clause no.7 of the “Protocol Agreement” dated 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.” Arbitral Proceedings : 7. At the first meeting before the Arbitrator on 10th January 2004, directions were issued for filing pleadings. On 23rd January 2004, an application was filed by the Petitioner that the Respondent should be treated as the claimant to the arbitral proceedings and should be directed to file its statement of claim. 9 At the second meeting before the Arbitrator, directions were issued to the parties to file their statements regarding the valuation of shares and the relevant date for valuation. The Petitioner by its letter dated 3rd February 2004, sought a meeting with the Respondent, on the ground that certain issues “need to be clarified”, while drafting the statement of claim. On 5th February 2004, the Petitioner, in a letter to the Respondent, claimed that there was an agreement between the parties that the valuation of the shares should be, as on the last quarter of 2003 and suggested that a specific date, as opposed to the period of the last quarter, should be agreed. The Respondent by its letter dated 13th February 2004 denied that there was any such agreement on the relevant date for valuation of shares, as suggested and set up a case that the relevant date for valuation would be 30th June 2002. The Petitioner by its letter dated 13th February 2004, denied that there was any agreement, by which the cut off date was to be 30th June 2002. The Respondent in its letter dated 17th February 2004, once again reiterated that the parties had agreed to 30th June 2002 as the relevant date for valuation. 10 8. At the third meeting before the Arbitrator on 6th March 2004, it was agreed that parties would urge their submissions on the preliminary issue as to what should be the relevant date for valuation. The challenge to jurisdiction : 9. On 6th April 2004, an application was filed by the Petitioner, questioning the jurisdiction of the Arbitrator. The contention of the Petitioner was that (i) The Protocol Agreement dated 2nd October 1994 was illegal and void on the ground that (a) the agreement was a forward contract prohibited by the Securities Contract Regulation Act; and (b) The agreement contained restrictions on the transferability of the shareholding of MSL which were violative of the provisions of Section 111A read with Section 9 of the Companies’ Act, 1956 and hence, void; (ii) The joint reference dated 29th December 2003, was void inter alia on the ground that it proceeded on the premise that a concluded contract existed between the Petitioner and the Respondent though as a matter of fact, no contract had been arrived at since neither of the parties accepted the offer, nor had they agreed to a cut off date for 11 valuation of shares. The Respondent filed a reply, opposing the application and inter alia contended that by its letter dated 3rd May 2003, the offer of the Petitioner had been formally accepted, but had clarified that the rate was not acceptable. The Respondent contended that in fact and in law, an offer was made by the Petitioner for the sale of its 27% stake and the Respondent had accepted the offer to purchase the holding of the Petitioner. There was, it was urged, a concluded contract with the rate to be ascertained through the arbitral process. Hence, according to the Respondent, a contract for the sale of the shareholding of the Petitioner had been concluded and what remained to be determined, was the rate at which the shares would be valued, in terms of clause 7 of the Protocol Agreement. Arbitral Meetings on (i) preliminary objection and (ii) date for valuation: 10. The Arbitrator ruled on the preliminary objection to his jurisdiction, on 21st July 2004. While rejecting the application, the Arbitrator stated that the reasons for the rejection would follow 12 and form part of the award. On 10th August 2004, an application was filed by the Petitioner seeking relief to the effect that the Arbitral Tribunal should “determine and declare the date of 29th December 2003, being the date of the joint reference made” by the parties “as the relevant date for the purpose of valuation of the said shares proposed to be sold” by the Petitioner to the Respondent. By its reply, the Respondent submitted that the relevant date for valuation should be, 30th June 2002 or, in the alternative, assuming that there was no such agreement between the parties on that date, the relevant date for valuation should be 3rd May 2003, which was the date on which, the Respondent had accepted the offer of the Petitioner, in terms of clause 7 of the Protocol Agreement. On 31st August 2004, the Arbitrator held that the relevant date for valuation of shares would be 3rd May 2003, when the contract was concluded. 11. The Arbitrator has, in the course of the arbitral award delivered on 29th December 2005, furnished reasons for accepting 3rd May 2003 as the date for valuation of shares. The Arbitrator noted that on 9th April 2003, the Petitioner made a specific offer to 13 the Respondent in terms of clause 7 of the Protocol Agreement and in terms of the decision of the Government of Maharashtra to sell its equity shareholding in MSL to the Respondent at Rs.232.20 per share. The price of Rs.232.20 was based on a valuation report submitted by Crisil Advisory Services on 3rd September 2002. In response to the offer of the Petitioner, the Respondent conveyed its acceptance on 3rd May 2003, clarifying at the same time that the price was not acceptable. The Respondent’s subsequent letter dated 10th May 2003, once again confirmed that the earlier letter of 3rd May 2003, was in response to the offer in terms of clause 7 of the Protocol Agreement and that by its letter, the Respondent had confirmed its intention to accept the offer though the price was not acceptable. The Arbitrator held that the correspondence exchanged between the parties, between 9th April and 6th June 2003, left no manner of doubt that there was a concluded contract under which the Petitioner was to sell its shares to the Respondent and the Respondent was to purchase those shares and the contract was concluded on 3rd May 2003. The Arbitrator held consequently, the relevant date for the purpose of valuation would be 3rd May 2003, which was the date on which the contract was 14 concluded. At this stage, it may also be necessary to note that in the Part-I Award, the Arbitrator referred to the provisions of Sections 9 and 10 of the Sale of Goods Act and relied upon two English judgments and upon a judgment of the Supreme Court in support of his conclusion that the date of valuation would be the date of the acceptance of the offer to purchase. Award: 12. By his arbitral award dated 14th January 2006, the Arbitrator declared that the rate at which 30,85,712 equity shares of MSL, held by the Petitioner are to be valued as on 3rd May 2003, for the purposes of sale to the Respondent, is Rs.151.63 per share. Challenge to the Award Submissions of Petitioner: 13. In assailing the award under Section 34 of the Arbitration and Conciliation Act, 1996, Counsel appearing on behalf of the Petitioner urged the following submissions: -(i) The Arbitrator exceeded his jurisdiction in deciding 15 the date for valuation of the shares of MSL, proposed to be transferred by the Petitioner to the Respondent; (ii) MSL held 3.4% of the equity capital of Bajaj Auto Ltd. (the Respondent), Bajaj Auto Finance Ltd. and Bajaj Hindustan Ltd. MSL also held investment in fully paid bonds and mutual funds. In valuing the shares of MSL, the Arbitrator applied a discount of 30% on the value of the shares held by MSL in the Respondent (“the BAL shares”). The Arbitrator neither adjudicated upon, nor decided why a discount should be applied to the BAL shares. The Petitioner was selling 27% stake in MSL to the Respondent as a result of which the Respondent would obtain a majority holding in MSL and would also as a result obtain 3.4% of the equity capital in BAL. Hence, the value of the BAL shares held by MSL cannot be subjected to a discount, particularly since the Respondent had a special interest in the acquisition of a 27% stake in MSL; (iii) Neither the Arbitrator, nor the valuer whose evidence is accepted by the Arbitrator, have decided why only the book value of the non-BAL quoted investments, be taken and not the market value; (iv) No adjudication or determination has been rendered by the Arbitrator at all on valuation. The Arbitrator merely stated that fixing of a 30% discount would be 16 just, fair and reasonable and would meet the ends of justice. This constitutes an error apparent on the face of the record, since the Arbitrator has proceeded on a basis which is not permitted by section 28(2); (v) The invocation of a rationale of a 20 to 40% discount as a reason by the Arbitrator to apply a 30% discount discloses a total non-application of mind or perversity, on the part of the Arbitrator, considering the context in which the discount of 20 to 40% came to be stated. The fact that 20 to 40% of the discounted price of MSL shares is translated to a percentage discount in the holding of BAL shares is such as to shock the conscience of the Court; (vi) The application of a discount to the BAL holding and the use of only the book value in the non-BAL holding affects the rights of the Petitioner and causes a direct financial loss and injury. The value of the discount applied is Rs.50 crores in the shares of BAL alone; (vii) The evidence of Mr.Bansi Mehta was liable to be considered irrelevant, non-germane and extraneous to the reference after his answer to questions 14 to 16 in the course of his evidence. The Arbitrator has to decide a civil dispute on a balance of probabilities and he must of necessity decide on some evidence. If the evidence of one side is discarded 17 and the evidence of the other side is admittedly not under Clause 7 of the Protocol Agreement, on which he is called upon to make a valuation, the Arbitrator should have come to the conclusion that on the evidence, he could not value at all; (viii) The fixation of the date for valuation by the Arbitrator is beyond the scope of the submission; and (ix) The Protocol Agreement is illegal and any determination under the agreement is void. The effect of the Protocol Agreement is to create a right and preemption in MSL which is a listed Company. The Protocol Agreement is incorporated in the Articles of Association of MSL. The shares of a Public Company are declared by Section 111A of the Companies’ Act, 1956 to be freely transferable. The Articles of Association must yield to the principle of free transferability embodied in Section 111A and the preemptive right is inoperable. On this defence, there was virtually no adjudication by the Arbitrator. Submissions of Respondent : 14. On the other hand, it was urged on behalf of the Respondent that (i) In pursuance of the formal offer made by the Petitioner under clause 7 of the Protocol Agreement to divest itself 18 of its 27% holding in MSL and to transfer it to the Respondent, the Respondent accepted the offer by its letter dated 3rd May 2003. This was clarified by the Respondent by a letter dated 10th May 2003, by which the Respondent stated that the earlier letter was in terms of clause 7 of the Protocol Agreement but the price offered by the Petitioner was not acceptable. In fact, the letter addressed by the Petitioner to the Arbitrator on 27th October 2003 clearly establishes that the process had been completed though there was no agreement on the value of the shares to be sold. The joint reference by the parties to the Arbitrator on 29th December 2003 postulates that a contract for the sale of the Petitioner’s holding in MSL to the Respondent existed though there was a dispute about the rate. The Minutes of the Meeting before the Arbitrator show that the date for valuation was regarded as an ingredient of the rate and there was never any dispute about the date of the contract. The tenor of the correspondence which was exchanged between the parties also shows that all the letters related to the date of valuation and there was no dispute about the date of the contract. Until the reference was made to arbitration, the common premise was that the agreement was arrived at, with reference to 19 the offer dated 9th April 2003, on 3rd May 2003. This was the position until January 2004. The Arbitrator directed the pleadings to be filed on the valuation of the shares and the relevant date. It was only in the application of 6th April 2004 that the Petitioner sought to raise a dispute on whether a concluded contract has come into existence. Hence, the question as regards the date of valuation was raised not in the context of the contract not being concluded, but as an ingredient of the rate and it was only in the application of 6th April 2004 that the Petitioner sought to link the date of valuation to the submission that the contract had not been concluded; (ii) In so far as the question of valuation is concerned, the only ground which has been raised in the Arbitration Petition (Ground AA) relates to the discounting of the value of BAL shares held by MSL; (iii) Considering the scope of Section 34 of the Arbitration and Conciliation Act, 1996, an appellate review of an arbitral award is not permissible in law. The decision of the Supreme Court in ONGC Ltd. Vs. Saw Pipes Ltd.,1 does not contemplate an appellate review or suggest a reappraisal of evidence; (iv) The