Case Note & Summary
The appellants, Percept Finserve Private Limited and Percept Limited, entered into a Share Purchase Agreement with Edelweiss Financial Services Limited, which contained clauses 8.5 and 8.5.1 granting put and call options for the purchase and sale of shares. Disputes arose, and the matter was referred to arbitration. The sole Arbitrator passed an award on 6th June 2013, holding that these clauses were not enforceable as they were forward contracts contrary to SEBI circulars issued under Section 16 of the Securities Contracts (Regulation) Act, 1956 (SCRA) and also options in derivatives not traded on a stock exchange, hit by Section 18A of SCRA. Edelweiss challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996 before the Bombay High Court. The learned Single Judge allowed the petition and set aside the award. Percept appealed under Section 37 of the Act. The Division Bench of the Bombay High Court considered the scope of an appeal under Section 37, noting that it is narrow and limited to examining whether the order under Section 34 suffers from patent illegality or perversity. The court analyzed the nature of the put and call options, holding that they are spot delivery contracts settled by actual delivery of shares and payment of consideration within the time stipulated, and thus not forward contracts or derivatives prohibited under SCRA. The court further held that SEBI circulars cannot override the provisions of SCRA, and Section 18A does not apply to such contracts. The court concluded that the learned Single Judge erred in setting aside the award, as the award was not patently illegal or perverse. The appeal was allowed, the order of the Single Judge was set aside, and the arbitral award was restored.
Headnote
A) Arbitration Law - Appeal under Section 37 - Scope of Appellate Court - The jurisdiction of an Appellate Court under Section 37 of the Arbitration and Conciliation Act, 1996 is narrow and limited to examining whether the order under Section 34 suffers from patent illegality or perversity, and does not permit re-appreciation of evidence or merits of the award (Paras 3-5). B) Securities Law - Put and Call Options - Enforceability - Clauses 8.5 and 8.5.1 of a Share Purchase Agreement providing for put and call options are not forward contracts or derivatives prohibited under the Securities Contracts (Regulation) Act, 1956 (SCRA) or SEBI circulars, as they are spot delivery contracts settled by actual delivery of shares and payment of consideration within the time stipulated, and do not require trading on a stock exchange (Paras 6-15). C) Securities Law - SEBI Circulars - Validity - SEBI circulars issued under Section 16 of SCRA cannot override the provisions of SCRA itself; the prohibition on forward contracts and derivatives under SCRA does not extend to spot delivery contracts, and SEBI cannot by circular create a new prohibition not found in the statute (Paras 10-12). D) Securities Law - Section 18A of SCRA - Derivatives - Section 18A of SCRA prohibits derivatives in securities except as regulated by SEBI, but put and call options for transfer of shares in a private company are not 'derivatives' as defined under SCRA, as they are not traded on a stock exchange and are contracts for actual delivery (Paras 13-15).
Issue of Consideration
Whether clauses 8.5 and 8.5.1 of the Share Purchase Agreement, being put and call options, are illegal as forward contracts or derivatives under SCRA and SEBI circulars, and whether the learned Single Judge erred in setting aside the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996
Final Decision
The appeal is allowed. The order and judgment dated 27th March 2019 passed by the learned Single Judge is set aside. The arbitral award dated 6th June 2013 is restored.
Law Points
- Scope of appeal under Section 37 of Arbitration and Conciliation Act
- 1996 is narrow
- Put and call options in share purchase agreements are not forward contracts or derivatives prohibited under SCRA
- SEBI circulars do not override contractual freedom under SCRA
- Section 18A of SCRA does not apply to spot delivery contracts
- Section 16 of SCRA does not empower SEBI to prohibit such contracts
