Balco Disinvestment: Delhi High Court Upholds Arbitral Award Voiding Centre & Vedanta Shareholder's Pact

After over a decade of legal tussle, the Delhi High Court recently upheld an arbitral award declaring the Shareholders' Agreement (SHA) between Vedanta Limited (then Sterlite Industries) and the Union of India void, which had given Vedanta the exclusive right to buy the government's remaining 49% stake in Bharat Aluminium Company Limited (BALCO) after a three-year lock-in period.

The court agreed with the arbitral tribunal that the agreement's clauses restricting the sale of shares violated provisions of Companies Act, 1956, which guarantees free transferability of shares in a public company.

In a Judgement dated October 8, a single bench of Justice Subramonium Prasad observed,

“In the opinion of this Court, the Award which is under consideration is neither against the Public Policy of India, interest of the country, justice, morality and also there is no patent illegality i.e., contravention of substantive law of India or contravention of Arbitration and Conciliation Act, 1996. The challenge, therefore, fails."

The court further observed that the arbitral tribunal's conclusions were a “plausible view” and that the award did not warrant interference.

The dispute arose from the government's 2001 disinvestment of BALCO. Vedanta (then Sterlite Industries) acquired 51% of the company's shares under a Share Purchase Agreement, and the SHA included a Call Option allowing Vedanta to compel the government to sell its remaining 49% shares after three years. The government refused, arguing that Clause 5 of the SHA, which gave Vedanta the exclusive right to purchase the remaining shares, was in teeth of Section 111A(2) of the Companies Act and hence is null, void and unenforceable.

An arbitral tribunal of three retired Supreme Court judges ruled in 2011 that the SHA was void because the restrictions affect the free transferability of shares of a public listed company.

Subsequently, Vedanta approached the High Court in appeal.

It argued that Section 111A(2) of the Companies Act which mandates free transferability of shares only restricts a company's board and does not prevent shareholders from structuring agreements. The company contended that the Government cannot resile from an agreement entered with full knowledge and consent. It further argued that the award ignored commercial realities, as call options and pre-emptive rights are standard in public company transactions.

The Center countered arguing that the restrictions effectively turned public company into a private entity. It further argued that there cannot be estoppel against a statute when the agreement violates Companies Act.

The Court agreed with the arbitral tribunal's reasoning. It observed, “These layers of restriction go behind the ethos of Section 111A(2) of the Companies Act, 1956 and affect the purpose of introducing Section 111A, which is free transferability of shares.”

It also noted that just because the agreement was executed with the President of India's approval, it did not confer any “special status” or make it immune from statutory law.

Ultimately, it dismissed both Vedanta's plea challenging the award and the Union of India's petition contesting certain findings of the tribunal

Case Title: Vedanta Ltd v Union of India

Case Number: O.M.P. (COMM) 208/2020 , O.M.P. (COMM) 208/2020

For Appellants: Senior Advocate Gourab Banerji with Advocates Saman Ahsan, Srijat Majumdar, Rahul Sangwan, Rakesh Talukdar, Sundaram,

For Respondents: Additional Solicitor General Chetan Sharma, with Senior Advocate Advocate Kirtiman Singh and Advocates Suman Jyoti Khaitan, Vikas Kumar, Ayush Kapur, Amit Gupta, RV Prabhat, Saurabh Tirpathi, Shubham Sharma, Vihaan Kumar, Maulik Khurana, Vinay Yadav, Laavanya Kaushik, Anil Chawdhary

Click here to read/download Judgment