The Delhi High Court has upheld the arbitral award that had declared the BALCO Shareholders’ Agreement (SHA) between the Union of India and Sterlite Industries, as void for violating Section 111A(2) of the Companies Act, 1956. Justice Subramonium Prasad held that the arbitral tribunal’s interpretation of “free transferability” was erroneous and contrary to the legislative intent and commercial reality governing shareholder agreements.
The dispute traces back to the Government of India’s 2001 disinvestment of Bharat Aluminium Company Limited (BALCO). In a subsequent bid, Sterlite Industries (India) Limited was selected as the successful bidder and acquired 51% of BALCO’s equity shareholding under a Share Purchase Agreement (SPA) and a concurrently executed Shareholders’ Agreement (SHA), while the Government retained the remaining 49% stake.
The SHA contained a Call Option permitting Sterlite to require the Government to sell its remaining shares after a three-year lock-in. When the Government later refused to honour this clause, arbitration ensued before a tribunal of three former Supreme Court judges, namely, Justices B.P. Jeevan Reddy, S.P. Bharucha, and V.N. Khare.
The tribunal, with a majority held the ‘Call Option’ unenforceable, finding that the SHA’s restrictions violated the principle of free transferability of shares under Section 111A(2) and effectively converted BALCO, a public company, into a closed entity. Justice Bharucha’s minority opinion disagreed.
Aggrieved by the award, Sterlite. approached the Delhi High Court under Section 34 of the Arbitration and Conciliation Act, 1996, challenging it on multiple grounds. The company argued that the majority had misconstrued Section 111A(2) of the Companies Act, which was intended only to prevent a company’s board from refusing registration of share transfers and not to invalidate private contractual arrangements between shareholders. It contended that the Call Option was a legitimate commercial mechanism, voluntarily agreed to by the parties, and formed an integral part of the Government’s disinvestment policy that envisaged a phased exit of the State.
Sterlite further submitted that the majority ignored subsequent legal developments, including Section 58(2) of the Companies Act, 2013, which expressly recognises the enforceability of contracts for transfer of securities. The company also cited the Supreme Court’s judgment in Vodafone International Holdings BV v. Union of India (2012) 6 SCC 613, arguing that the Court’s observations in that case had weakened the earlier ruling in V.B. Rangaraj v. V.B. Gopalakrishnan (1992) 1 SCC 160), on which the arbitral tribunal had relied. Sterlite contended that VB Rangaraj no longer reflected the correct position of law and that the tribunal erred in treating it as a binding precedent to strike down the Call Option clause.
The Union of India opposed this challenge, asserting that the tribunal had undertaken a detailed and reasoned analysis of the SHA, and its conclusion that the Call Option and related clauses destroyed the company’s public character was a possible and legally sustainable view. They further submitted that the award did not suffer from any perversity or patent illegality warranting interference under Section 34 of the Act.
Justice Prasad, after analysing the award and the legislative history of Section 111A, held that the findings of the arbitral tribunal were neither perverse nor patently illegal. The Court observed that the majority view of the arbitral tribunal represented a plausible and legally sustainable interpretation of Section 111A(2) of the Companies Act, 1956, which mandates free transferability of shares in public companies.
The Company’s reliance on Vodafone International Holdings BV v. Union of India (2012) 6 SCC 613 was found to be misplaced, with the Court observing that the judgment dealt with tax implications of offshore share transfers and did not alter the settled position of law regarding free transferability under Section 111A(2). Similarly, Section 58(2) of the Companies Act, 2013, which subsequently recognised the enforceability of shareholder agreements, was held to be prospective and inapplicable to an agreement executed in 2001.
The Court, while referring to Associate Builders v. DDA, (2015) 3 SCC 49, Delhi Development Authority v. R. S. Sharma and Company, New Delhi, (2008) 13 SCC 80, and Oil and Natural Gas Corporation Limited v. Western GECO International Limited, 2014 9 SCC 263, had reiterated that an award can be declared perverse and set aside if it is (i) based on no evidence; (ii) based on irrelevant material and; (iii) ignores vital evidence. Holding that, the award passed in this case is neither against the Public Policy of India, interest of the country, justice, morality and also there is no patent illegality, and therefore the court has upheld the arbitral award and dismissed the petition filed by Sterlite Industries.
The Union of India also filed a petition seeking to set aside certain observations/findings of the Arbitral Tribunal. The following questions arose for consideration before the Delhi High Court:
(i) Whether the Arbitral Tribunal has the power and to grant the relief of specific performance of contract;
(ii) Whether the first and second report given by the SBI Caps can be countenanced to determine the true and fair market value of the shares which formed the basis of the relief of specific performance of contract;
(iii) Whether the Petitioner, i.e. the Claimant, is entitled to purchase the shares at a lesser price as provided in Clause 5.7 of the SHA.
On the first issue, Justice Subramonium Prasad held that the Arbitral Tribunal did not exceed its jurisdiction in examining the relief of specific performance.
On the second issue, relating to the valuation reports of SBI Caps, the Court held that the Arbitral Tribunal was justified in declining to rely on the said reports for determining the fair market value of the Government’s shares. The Court noted that since the Tribunal ultimately found the clause 5.8 itself void, the question now becomes academic in nature, and therefore in the absence of anything contrary before this Court that the valuation was wrong, this Court is not going into the issue as to whether the valuation of shares is wrong or not.
On the third issue, the Court found no ground to disturb the Tribunal’s reasoning. Justice Subramonium Prasad observed that the Tribunal had treated the Union of India’s objection as “technical in nature” and held that the purpose of Clause 5.7 had been satisfied by the claimant’s notice dated 9 May 2006. The Court, however, noted that the reasoning was not so perverse as to warrant interference with the award.
The Court held that the Union of India’s objections were “devoid of merit” and that the Tribunal’s findings did not warrant interference under Section 34 of the Arbitration and Conciliation Act.
Accordingly, the Court dismissed both connected petitions by UOI and Sterlite Industries and upheld the arbitral award in favour of the Union of India.
Appearances
Petitioner- Mr. Chetan Sharma, ASG with Mr. Kirtiman Singh, Sr. Advocate, Mr. Suman Jyoti Khaitan, Mr. Vikas Kumar, Mr. Ayush Kapur, Mr. Amit Gupta, Mr. RV Prabhat, Mr. Saurabh Tirpathi, Mr. Shubham Sharma, Mr. Vihaan Kumar, Mr. Maulik Khurana, Mr. Vinay Yadav, Ms. Laavanya Kaushik, GP, Mr. Anil Chawdhary, Advocates Mr. Vivek Kumar Sharma, Director, Ministry of Mines.
Respondent- Mr. Gourab Banerji, Sr. Advocate with Ms. Saman Ahsan, Ms. Srijata Majumdar, Mr. Rahul Sangwan, Mr Rakesh Talukdar, Mr Sundaram, Advocates.
