Bombay High Court Hears Employer’s Petition under Section 34 of Arbitration Act Challenging Arbitral Award Directing Allotment of ESOP Shares to Ex-Employee. Questions Arise on Whether Absence of Formal ESOP Scheme Under Companies Act, 2013 Invalidates Contractual Vesting of Options and Whether Specific Performance Was Appropriate Remedy.

Petition under Section 34 of the Arbitration and Conciliation Act, 1996 to set aside an arbitral award that directed specific performance of a contract for allotment of equity shares to an ex-employee.

The petitioner (employer) sought to set aside the arbitral award dated 18 December 2024, which directed the petitioner to allot 31,878 shares to the respondent and pay costs of Rs.15,51,265.

The petitioner alleged that the award is in contravention of public policy and suffers from patent illegality, as it ignored mandatory company law provisions, misconstrued the contract, granted inappropriate relief of specific performance, and failed to consider the respondent's conduct.

Arbitral Tribunal (sole arbitrator constituted by High Court order dated 6 July 2021 in Comm Arbitration Application No. 95 of 2021) passed an award on 18 December 2024 allowing the respondent’s claim for specific performance and costs.

Whether the arbitral award is patently illegal for ignoring the mandatory provisions of Sections 53 and 62 of the Companies Act, 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014, which require a formal ESOP scheme. Whether the arbitrator misconstrued the terms of the appointment letter and grant letter and effectively rewrote the contract between the parties. Whether the arbitrator erred in law by granting specific performance of the share allotment without considering the adequacy of damages and the equitable factors, such as the loss of confidence in an ex-employee becoming a shareholder after years. Whether the arbitrator failed to appreciate the three distinct stages of an ESOP (grant, vesting, exercise) and erroneously held that vesting had occurred before resignation. Whether the respondent’s conduct in not demanding shares earlier should have been considered to deny relief.

Petitioner argued that the award contravenes Section 53 of the Companies Act, 2013 (prohibition on issuing shares at discount) and Section 62 read with Rule 12 (requirement of an ESOP scheme) and is thus patently illegal. Petitioner contended that the arbitrator selectively read Clause 3 of the appointment letter and ignored termination clauses that mandated relinquishment of vested shares upon cessation of employment, thereby rewriting the contract (reliance on Indian Railways Catering And Tourism Corp Ltd vs Brandavan Food Products, 2025 SCC OnLine SC 2369). Petitioner submitted that the arbitrator failed to distinguish between grant of options, vesting, and exercise, and wrongly concluded that vesting had occurred prior to resignation. Petitioner argued that specific performance of a contract for shares was inappropriate as damages would be an adequate remedy, and the arbitrator did not evaluate the equitable considerations of introducing an ex-employee as a shareholder after eight years (reliance on P. Daivasigamani vs S. Sambandan, (2024) 14 SCC 793). Petitioner submitted that the respondent’s conduct in not seeking shares until after resignation was not considered. Respondent argued that the petitioner did not raise these grounds before the arbitral tribunal and, having proceeded on the premise that the only issue was whether the appointment letter and grant letter constituted vesting, is now estopped from raising new objections. Respondent supported the award, stating that the arbitrator’s interpretation was plausible and that vesting had indeed occurred before resignation, with the absence of a formal ESOP policy being irrelevant given the parties’ agreement.

The learned Arbitrator was of the view that the vesting of options in favour of the Claimant had already taken place in view of the Appointment Letter read with the Grant Letter and in accordance with Rule 12 of the Companies (Share, Capital and Debentures) Rules, 2014. The absence of the policy in regard to Employees Stock Option Plan did not constitute an impediment to the vesting of the subject shares in the Claimant. Mr. Rai submitted that, the patent illegality in the impugned Award is manifest in the incorrect invocation of law in the matter of grant of discretionary relief of specific performance.

The respondent joined the petitioner company in August 2011. A Grant Letter was issued on 1 March 2017. The respondent remained absent from 4 August 2017 and later resigned; resignation accepted effective 1 September 2017. Dispute arose when respondent demanded allotment of shares; petitioner refused. Respondent invoked arbitration under Clause 12 of the appointment letter. By order dated 6 July 2021 in Commercial Arbitration Application No. 95 of 2021, the High Court constituted a sole arbitrator. After pleadings and evidence, the arbitral tribunal passed an award on 18 December 2024 in favour of the respondent, directing specific performance and costs. The petitioner filed the present Section 34 petition challenging the award. The matter was heard on 15 July 2026 and judgment reserved. The text of the judgment provided ends during the submissions, without recording the court's analysis or final order.

• Arbitration and Conciliation Act, 1996: Section 34
• Companies Act, 2013: Section 53, Section 62
• Companies (Share Capital and Debentures) Rules, 2014: Rule 12
• Companies Act, 1956: