IN THE HIGH COURT OF JUDICATURE AT BOMBAY O. O. C. J. ARBITRATION PETITION NO.174 OF 2006

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 2 nd 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. JUDGMENT : February 15, 2010. The challenge in these proceedings under Section 34 of the Arbitration and Conciliation Act, 1996 is to an arbitral award dated 14 th January 2006 of a sole Arbitrator, Mr.Justice A.V.Savant. The Protocol Agreement :

2 2. On 2 nd 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 9 th 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 3 rd 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 7 th 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 10 th May 2003, the Respondent confirmed that its letter dated 3 rd May 2003, was its response under Clause 7 of the Protocol Agreement to the Petitioner s offer dated 9 th 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 6 th 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 6 th June 2003. By a letter dated 31 st 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

Agreement was to initiate the arbitral process. 7 Reference to Arbitration : 6. On 23 rd 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 27 th 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 29 th

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 10 th January 2004, directions were issued for filing pleadings. On 23 rd 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 3 rd 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 5 th 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 13 th 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 30 th June 2002. The Petitioner by its letter dated 13 th February 2004, denied that there was any agreement, by which the cut off date was to be 30 th June 2002. The Respondent in its letter dated 17 th February 2004, once again reiterated that the parties had agreed to 30 th June 2002 as the relevant date for valuation.

10 8. At the third meeting before the Arbitrator on 6 th 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 6 th 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 2 nd 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 29 th 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 3 rd 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 21 st 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 10 th 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 29 th 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, 30 th 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 3 rd 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 31 st August 2004, the Arbitrator held that the relevant date for valuation of shares would be 3 rd May 2003, when the contract was concluded. 11. The Arbitrator has, in the course of the arbitral award delivered on 29 th December 2005, furnished reasons for accepting 3 rd May 2003 as the date for valuation of shares. The Arbitrator noted that on 9 th 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 3 rd May 2003, clarifying at the same time that the price was not acceptable. The Respondent s subsequent letter dated 10 th May 2003, once again confirmed that the earlier letter of 3 rd 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 9 th April and 6 th 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 3 rd May 2003. The Arbitrator held consequently, the relevant date for the purpose of valuation would be 3 rd 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 14 th 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 3 rd 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 3 rd May 2003. This was clarified by the Respondent by a letter dated 10 th 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 27 th 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 29 th 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 9 th April 2003, on 3 rd 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 6 th 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 6 th 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 arbitral award furnishes a valid basis from the 1 (2003) 5 SCC 705

20 evidence for applying a discount of 30% in the facts of the case. The evidence of Mr.Bansi Mehta suggested that a discount between 28 to 40% would have to be allowed on a conceptual basis whereas on an empirical comparison based on market capitalization, a discount between 56 to 91% would have to be taken. The Arbitrator has held that the discount should be no less than 30% in the facts of this case. The reference by the Arbitrator to the report of Mr.Raghuram indicating a 20 to 40 % discount is erroneous, because this was a reference to the valuation of MSL shares. But merely because one ground which is relied upon by the Arbitrator suffers from an error of fact, would not detract from the validity of the award. There was a wealth of evidence before the Arbitrator in support of the finding that the discount of 30% is valid. The evidence is referred to in the arbitral award itself and the award can be sustained on that basis. The realizable value of an asset is less than the market value in a liquidation valuation; (v) As regards the book value being taken of the non BAL holding, the evidence shows that there was no appreciation in the value of such holding. If the market value was taken, it would have to be discounted, which would then result in a figure even lower than

21 the book value; (vi) The Arbitrator accepted the liquidation basis of valuation from the report of Mr.Bansi Mehta and applied a discount. There is both an adjudication and determination by the Arbitrator. Clause 7 of the Protocol Agreement does not provide any particular method of valuation. Mr.Bansi Mehta, therefore, stated in his cross examination that the classical method has been followed. Clause 7 provides for a fixation of the rate at which the shares would be sold, which lies in the domain of the Arbitrator. In any event, this relates to an appreciation of the evidence; (vii) Parties made a specific reference of a question of law by the application dated 6 th April 2004, which was responded to and decided. The question as regards the legality of Clause 7 of the Protocol Agreement vis a vis Section 111A of the Companies Act, 1956, was not in the original reference. Yet, the question was specifically referred to the Arbitrator during the pendency of the reference. The decision of the Arbitrator was invited as a jurisdictional issue, before the Arbitrator considered the merits of the dispute. Hence, the determination of the Arbitrator is final and cannot be enquired into; (viii) In any event, the Arbitrator has followed the decision of the Supreme Court in

22 M.S.Madhusoodhanan vs. Kerala Kaumudi Pvt.Ltd. 2 9. The restriction in the present case, imposed by Clause 7 of the Protocol Agreement is valid, because it is not one that binds all shareholders, but which binds two shareholders in a specified contingency. The restriction is contained in the Articles of Association. Section 111A of the Companies Act, 1956 does not prohibit agreements entered into between specific shareholders regarding specific shares, particularly when incorporated in the Articles of Association. 15. The challenge to the arbitral award can now be taken up for consideration. Did the Arbitrator exceed his jurisdiction : 16. The submission of the Petitioner is that the Arbitrator acted in excess of his jurisdiction in deciding the date with reference to which the valuation of the shares had to be determined. 2 2003 Vol.117 Company Cases 19

23 17. On 9 th April 2003, the Petitioner addressed a letter to the Respondent by which, it proposed to divest its shareholding of 30,85,712 equity shares in MSL at an offered price of Rs.232.20 per equity share to the Respondent. The Petitioner stated that it was making an offer in accordance with the provisions of Clause 7 of the Protocol Agreement and in view of the decision of the Government of Maharashtra. The Respondent in its reply dated 3 rd May 2003, confirmed its interest in buying shares offered, but recorded that the price was not acceptable. The response of the Respondent was in pursuance of Clause 7 of the Protocol Agreement. By a further letter dated 10 th May 2003, the Respondent confirmed that its earlier response of 3 rd May 2003 was to the offer made by the Petitioner on 9 th April 2003 and was in terms of clause 7 of the Protocol Agreement. The Respondent stated that it has confirmed its intention to purchase the shares offered, but the price offered was not acceptable. 18. The contention of the Petitioner is that the letter of the Respondent dated 3 rd May 2003, was not an unqualified acceptance

24 since a meeting was sought for negotiation to explore a settlement. In dealing with this submission, it is to be noted that on 31 st July 2003, the Respondent sought the initiation of the arbitral process, in the event that its offer of a price of Rs.75 per share was not acceptable. The arbitral process was initiated and on 27 th October 2003, the Petitioner addressed a letter to the Arbitrator, recording that under the Protocol Agreement, the Petitioner had to first make an offer to the Respondent and in turn, the Respondent had to accept or reject that offer. This process, the Petitioner recorded, 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 appoint a sole Arbitrator for the purpose. Following this letter, a joint reference to arbitration was made on 29 th December 2003. The terms of reference contain an express statement of fact that the Respondent had expressed its willingness to buy the stake held by the Petitioner in MSL and that the Petitioner indicated its desire to sell its shareholding in MSL. However, what remained in dispute was the price per share and hence, in accordance with Clause 7 of the Protocol Agreement, the question of rate for the purchase by the Respondent of the equity shares held by the

25 Petitioner in MSL, was being referred. What emerges from the material on record, therefore, is, that in terms of Clause 7 of the Protocol Agreement, the Petitioner had made an offer to sell its shares in MSL, to the Respondent. The Respondent by its letters dated 3 rd May and again 10 th May 2003, accepted the offer to purchase the shares, but indicated that the price suggested by the Petitioner was not acceptable. Parties at that stage and, as would be noted, even later were ad idem on the fact that the contract for the sale of shares, stood concluded by the acceptance of the offer made by the Petitioner. Clause 7 of the Protocol Agreement contemplates that if the party, to whom an offer is made, is willing to purchase the shares, but considers the rate proposed, to be too high or unacceptable, it shall, within thirty days from the receipt of the notice, furnish a written intimation to the offerer of the intention to purchase shares and the question as regards the rate at which the shares are to be sold shall be referred to arbitration. In the present case, the Petitioner by its letter to the Arbitrator dated 27 th October 2003, clearly stated that the process of making of the offer and its acceptance, had been completed and there was no agreement on the value at which the shares would be sold. It is in

26 this context, that the joint reference to the Arbitrator proceeded on the basis that a concluded contract for the sale of shares did exist but there was a dispute about the rate. 19. The Arbitrator, during the course of the second meeting held on 27 th January 2004, called upon the parties to file their statements regarding the valuation of shares and the relevant date for valuation. The date for valuation was regarded as an ingredient of the rate, at which the shares would be sold. There was no dispute about the fact that the contract for the sale of the shares had been concluded. Consequently, until the reference to arbitration was made, parties proceeded on the basis that the agreement for the sale of the shares, was founded on the letters dated 9 th April 2003 and 3 rd /10 th May 2003. This position held the field until January 2004. The Arbitrator directed the parties to file pleadings on the valuation of shares and the relevant date for valuation. The correspondence exchanged between the parties in February 2004, shows that the dispute was on the date of valuation. It was for the first time, in the application filed by the Petitioner before the Arbitrator, on 6 th April 2004, that the

27 Petitioner sought to question as to whether a concluded contract had been arrived at. This was an obvious afterthought and was a clear deviation from the manner in which the Petitioner had understood the course of dealings between the parties. The reference to the date of valuation was introduced by the Arbitrator, when there was no dispute about the date of the contract or about the existence of a concluded contract. When the Arbitrator raised the question as regards the date of valuation, this was only as an ingredient of the fixation of the rate and the premise of the reference to arbitration was the existence of a concluded contract. The Arbitrator was not deciding when the contract was concluded or whether it was concluded. The Arbitrator has, as a matter of fact, ascertained the date of valuation as an ingredient of the fixation of the rate at which the shares held by the Petitioner would be sold to the Respondent. The Arbitrator has held that the relevant date of valuation would be 3 rd May 2003, which was the date on which a concluded contract was arrived at between the parties. In Part I of his Award, the Arbitrator has held that the date of valuation would be the date on which the offer to purchase was accepted. In holding thus, the Arbitrator has not transgressed his

28 jurisdiction. The challenge to the arbitral award on this ground must fail. Scope of challenge under Section 34 of the Arbitration and Conciliation Act, 1996: 20. Section 34 of the Arbitration and Conciliation Act, 1996, defines the parameters of a recourse to a Court against an abitral award. This recourse is, by an application for setting aside the award, in accordance with the provisions of sub sections (2) and (3) of the provision. For this case, the focus on the scope of judicial intervention is on sub clause (iv) of clause (a) and on sub clause (ii) of clause (b) of sub section (2) of Section 34. Under these provisions, an arbitral award may be set aside by the Court, only if (i) The arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration or if it contains decisions on matters beyond the scope of the submission to arbitration; and (ii) If the Court finds that the arbitral award is in conflict with the public policy of India.

29 21. Section 28(1)(a) mandates that the arbitral Tribunal must decide the dispute in accordance with the substantive law in India. Under sub Section (3), the Tribunal has to decide the dispute, in accordance with the terms of the contract and after taking into consideration, the usage of the trade applicable to the transaction. In ONGC vs. Saw Pipes (supra) the Supreme Court held that if an award is in contravention of the provisions of the Act, it is subject to judicial intervention and can be set aside. If the arbitral Tribunal does not follow the mandatory procedure under the Act, it would act in excess of its jurisdiction and the award would be patently illegal. The ground for interference is elucidated thus, by the Supreme Court: 15. The result is if the award is contrary to the substantive provisions of law or the provisions of the Act or against the terms of the contract, it would be patently illegal, which could be interfered under Section 34. However, such failure of procedure should be patent affecting the rights of the parties. The illegality, as the Supreme Court noted, must be such as must go to the root of the matter for if the illegality is of trivial nature, it cannot be held that the award is against public policy. The decision in Saw Pipes lays down that before an award can be set

30 aside, it must be (i) Contrary to the fundamental policy of Indian Law; or (ii) Contrary to the interest of India; or (iii) Contrary to Justice or morality; or (iv) Patently illegal. An award which is so unfair and unreasonable, that it shocks the conscience of the Court, would be liable to be set aside because, then it would be contrary to public policy. The Supreme Court, however, emphasized that if the arbitral Tribunal commits a mere error of fact or law in reaching its conclusion on a disputed question referred to it for adjudication, the Court would have no jurisdiction to interfere with the award. This would depend upon the reference that was made to the Arbitrator. If there is a general reference to the Tribunal for deciding the dispute and if an award is based on an erroneous and illegal proposition, the Court would interfere. In the case of a reasoned award, the Court can set aside the award if on the face of the award, there is an erroneous proposition of law or on its application. However, if a specific question of law is submitted to the Arbitrator an erroneous decision on a point of law does not make the award bad, unless the Court is satisfied that the Arbitrator has proceeded illegally. The decision of the Supreme Court in Saw Pipes (supra) does not contemplate an appellate

31 review of an arbitral award or a reappraisal of the evidence. The Court cannot substitute a conclusion on evidence, which appears to the Court to be just and proper for the conclusion that is arrived at, by the arbitral forum. The emphasis in the judgment in Saw Pipes, is that judicial intervention can be warranted where the arbitral Tribunal has not followed the mandatory procedure prescribed by Sections 24, 28 or 31(3), which affects the rights of the parties or where the award is contrary to the substantive provisions of law; to the provisions of the Act or to the terms of the contract. The emphasis is on a patent illegality. Not every error of law or fact makes an award subject to judicial intervention. 22. The subsequent judgment of the Supreme Court in Delhi Development Authority vs. R.S.Sharma & Co., 3 makes a reference to the earlier judgments of the Court including the judgment in Hindustan Zinc Ltd. vs. Friends Coal Carbibusatuib, 4 which in turn has followed Saw Pipes (supra). In the judgment in Delhi Development Authority (supra), the Bench of two Learned Judges of the Supreme Court has 3 (2008) 13 SCC 80 4 (2006) 4 SCC 445

32 summarized the principle for judicial intervention in arbitral awards, as they emerge from the decided cases, thus: 21. From the above decisions, the following principles emerge: (a) An award, which is (i) contrary to substantive provisions of law; or (ii) the provisions of the Arbitration and Conciliation Act, 1996; or (iii) against the terms of the respective contract; or (iv) patently illegal; or (v) Prejudicial to the rights of the parties; is open to interference by the Court under Section 34(2) of the Act. (b) The award could be set aside if it is contrary to: (a) fundamental policy of Indian law; or (b) the interest of India; or (c) justice or morality. (c) The award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the court. (d) It is open to the court to consider whether the award is against the specific terms of contract and if so, interfere with it on the ground that it is patently illegal and opposed to the public policy of India. At this stage, it would, however, be necessary to note that an arbitral award prejudicial to the rights of the parties is not an independent head of challenge as such, and this is evident both

33 from the decision in Saw Pipes and in the paraphrasing of the principles laid down in that judgment in Hindustan Zinc. In paragraph 13 of the judgment in Saw Pipes, the Supreme Court addressed the issue as to whether an award could be set aside if the arbitral Tribunal has not followed the mandatory procedure prescribed under Sections 24, 28 or 31(3), which affects the rights of parties. In Hindustan Zinc, the Supreme Court held that an award contrary to the substantive provisions of law or the provisions of the Act or the terms of the contract, would be patently illegal and if it affects the rights of the parties would be open to interference of the Court under Section 31(2). 23. The question as to whether a ground for the interference of the Court has been established in the facts of this case, must now be considered, in terms of the law laid down by the Supreme Court. The question of valuation : 24. MSL has an Operating Section and an Investment Section. MSL s Assembly Plant was set up under technical know

34 how from the Respondent. The assembly, the Court is informed, was of the Chetak Scooters of Bajaj. The Investment Section of MSL has holdings in the Bajaj Group of Companies and others. MSL held 3.4% of the equity capital of the Respondent ( the BAL shares ), Bajaj Hindustan Ltd. and Bajaj Auto Finance Ltd. The non Bajaj holding was in fully paid up bonds and Mutual Funds. 25. Principally, two submissions have been urged on behalf of the Petitioner. Firstly, the Arbitrator has selected a particular method of valuation. Whether a valuation on a liquidation basis could at all be adopted for a Company which has a going concern, was sought to be placed in issue and it was urged that MSL is not a Company which is unable to pay its debts. The Respondent had a special interest in the acquisition of the stake held by the Petitioner in MSL. By the acquisition of the equity holding of the Petitioner, the Respondent would acquire a majority holding in MSL, besides the acquisition of 3.4% of the holding in the BAL shares. The second aspect relates to the discounting of the holding of BAL shares.

35 26. The Arbitrator culled out the principles for valuation of shares from the judgments of the Supreme Court in Commissioner of Wealth Tax vs. Mahadeo Jalan, 5 Tax vs. Kusumben D.Mahadevia. 6 and Commissioner of Gift The judgment in Mahadeo Jalan lays down that leaving aside a distress sale, the factors which are likely to affect the value of shares are: (i) The profit earning capacity of the Company; (ii)the capacity of the Company to maintain those profits or a reasonable return for capital invested; (iii) The prospects for capitalization of its earning by declaring bonus shares and in a case of a financially sound Company, the prospects for the issuance of a rights issue where existing shareholders can obtain shares for a price less than the market value, increasing the yield on investment. The Supreme Court, after enunciating various methods of valuation of shares, namely, (i) yield or profit earning method; (ii) the market value method if profit is certain; and (iii) liquidity if profit is uncertain, laid down the principles which emerge. In so far as it is relevant to this case, the propositions (1), (4) and (5) are as follows: 5 (1972) 86 ITR 621 6 (1980) 122 ITR 38 1) Where the shares in a public limited company are quoted on the stock exchange and there are dealings

36 in them, the price prevailing on the valuation date is the value of the shares. 4) Where the dividend yield and earning method break down by reason of the company s inability to earn profits and declare dividends, if the 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 realized by that process. The Arbitrator adverted to certain admitted facts, these being as follows: (i) The principal activity of MSL involved the assembly of scooters for which completely knocked down kits were received from the Respondent. The Respondent and MSL had entered into a technical know how agreement. MSL was assembling Bajaj Chetak Scooters; (ii) Admittedly, the management of MSL was with the Respondent. Five persons on the Board of Directors were to be nominated by the Petitioner and four by the Respondent. The Chairman and Managing Director of the Respondent was to be the Chairman of MSL. Under Clause 154 of the Articles of Association, several important decisions to be taken by MSL, were subject to the

37 approval of the Respondent. Moreover, the Chief Executive of MSL was to be appointed by the Board, out of a panel of names suggested by the Respondent. Key management functions of MSL were virtually integrated with the Respondent. MSL only has an assembly plant by which it cannot manufacture, but can only assemble scooters.; (iii) 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; (iv) 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; (v) MSL requires sales of about 62,000 scooters per year to achieve a break even position, whereas the business plan for the period 2004 09 indicates production and sale of Chetak Scooters of only 12,000 units per year. The Arbitrator noted, while dealing with the question of control premium, that even without the sale of its 27% stake by the Petitioner, the Respondent already had effective managerial control over MSL without boardroom control. The rationale for a control premium would, therefore, not exist in the facts of this case. Moreover, it is an admitted fact that the non

38 core business assets of MSL which consist of unquoted investments and quoted investments, constitute 96.2% of the business assets of MSL. Though the main business of MSL was supposed to be in the operating segment, namely, in the core business assets, that constituted only a negligible operation, namely, 3.8%. Hence, the core business activity of MSL of assembling scooters was insignificant. Having regard to these circumstances, the Arbitrator declined to accept the theory propounded by Mr.Raghuram, the witness for the Petitioner, that a control premium must be accounted for in the facts of this case. The valuation made by Mr.Raghuram was not accepted by the Arbitrator for valid reasons which have been noted above. The reasons on the basis of which the testimony of Mr.Raghuram and his valuation are discarded, are inter alia contained in paragraph 75 of the award. In fairness, it may be recorded here that Learned Senior Counsel appearing on behalf of the Petitioner has not pressed that aspect of the matter. 27. Mr.Bansi Mehta was examined as an expert on valuation by the Respondent. The Arbitrator noted that Mr. Bansi

39 Mehta was cross examined on behalf of the Petitioner, in order to question his justification for adopting the net asset value on a liquidation basis. The award notes that this method was also recommended by the witness of the Petitioner in his first report. Mr.Bansi Mehta worked out two different valuations: (i) A valuation of Rs.125 per share was worked out by applying a 45% discount on the six monthly average value on the National Stock Exchange (NSE); and (ii) A value of Rs.102 per share was worked out on the basis of a 60% discount on a six monthly average taken from NSE. The Arbitrator considered it fit to apply a 30% discount in the facts of the case and considered that this would be just, fair and reasonable and would meet the ends of justice. The six monthly average on the NSE for 33.87 lakh BAL shares was Rs.494 per share on which a 30% discount was applied. Paragraph 100 of the award which reads thus: In the light of the above, I think interests of justice would be met by fixing the rate on the basis of the calculations made by Mr.Bansi Mehta in 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

40 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. 28. The Award on valuation is questioned on the ground that there is a violation of the provisions of Section 28(2) of the Arbitration and Conciliation Act, 1996. Counsel for the Petitioner submitted that Mr.Bansi Mehta applied a discount between 45% to 60% and arrived at the conclusion that the price of a share would vary between Rs.102 to Rs.124. The Arbitrator took a discount of 30% in arriving at a valuation of Rs.151.63 per share on the ground that he considered it just, fair and reasonable and to meet the ends of justice. The submission is that the Arbitrator decided what he thought is fair, just and equitable and this is not permissible under Section 28(2) of the Act which mandates that the decision has to be reasoned. The Arbitrator also furnished the reason that Mr.Raghuram, the witness for the Petitioner, had himself... indicated a discount of 20% to 40% in his first report.

41 It was urged that the discount which Mr.Raghuram suggested in his evidence was on the shares of MSL, whereas the Arbitrator applied this to the valuation of BAL shares. It was urged that the award, therefore, shows no reasoning at all and betrays a nonapplication of mind. The factual basis on which the Arbitrator concluded that a discount of 30% should be applied, was incorrect. As a result of this process, it was submitted that the discount on BAL shares of Rs.50.12 crores was wrongly granted by the Arbitrator. 29. The Arbitrator, in paragraphs 80 and 81 of the Award, considered the report of Mr.Bansi Mehta. The Arbitrator noted that if a conceptual basis is adopted, the value of the investments has to be discounted between 20 to 40%. On the other hand, on an empirical comparison of data on actual valuations, based on market capitalization, a discount of between 56 to 91% is required to be adopted. In Appendix 6A of his report, Mr.Bansi Mehta furnished details of his working in respect of (i) Tata Investments; and (ii) Industrial Investment Trust, where the discounts were 82.85% and 91.4%. In Appendix 6B, where the example of TISCO