Wednesday, January 26, 2011

Balco Arbitration Award: Section 111A of the Companies Act

A CNBC-TV 18 report and interview indicate that an arbitration panel has rejected Sterlite’s right to acquire the balance 49% in Balco by way of exercise of a call option. The report states:
The arbitration panel comprised of two former chief justices of India and a third senior judge. When Sterlite acquired Balco’s 51% stake for Rs 550 crore in 2001 it was all fine, it had a call option to buy the remaining 49% but things changed for the company and they changed politically.

In May 2004 after the UPA came to power it referred the call option, which is the right to buy the governments balance shareholding to the attorney general who said that the call option was not legal under the companies act and that it violated Section 111A of the Companies Act …
Although it is possible to embark upon an analysis of the legal position adopted the arbitrators only when the details of the award are available, several questions and concerns do arise at this stage.

First, the award seems to put to rest the initial euphoria generated by the Bombay High Court judgment in the Messer Holdings case, which provided some recognition to arrangements such as transfer restrictions among shareholders of a company. It is not clear if the Messer Holdings judgment was considered by the arbitrators, but the award goes against the approach adopted by the Bombay High Court.

Second, issues involving put and call options need to be tested against the provisions of the Securities Contracts (Regulation) Act, 1956 (SCRA) (particularly section 16) and notifications issued thereunder. It would be interesting to see if the award throws light on the enforceability of options under SCRA, which continues to be a vexed issue. A SEBI order involving the MCX Stock Exchange examined these issues in a fair amount of detail, although that case involved buyback arrangements or forward contracts, and not options.

Third, in terms of concerns, the award tends to muddy the waters further regarding enforceability of shareholders agreements (and similar arrangements) under Indian law rather than to lend clarity and certainty.

1 comment:

Anonymous said...

where the hell is section 111a involved here??!!

hw cn b d author so stupid?