Section 34 of the Indian Arbitration and Conciliation Act 1996 (the Act) enables the court to set aside an arbitral award on the grounds specified in the section.

Section 111A of the Companies Act, 1956 (Companies Act) provides that shares or debentures or any interest in shares or debentures of a public company, are freely transferable.

Section 9 of the Companies Act provides that, unless provided otherwise, the provisions of the Companies Act shall have effect, notwithstanding anything to the contrary contained in the memorandum or articles of association of a company.

In this case, Western Maharashtra Development Corporation Limited (the petitioner) entered into an Agreement (the Agreement) with Bajaj Auto Limited (the respondent), pursuant to which Maharashtra Scooters Limited (the Company) was incorporated and registered under the Companies Act. The petitioner and respondent had 27% and 24% shareholdings in the Company respectively. The remaining 49% of shares were held by the public. Clause 7 of the Agreement (the ROFR (right of first refusal) Clause) created a right of preemption between the petitioner and the respondent such that if either of them wished to transfer or dispose of its shareholding in the Company, it was obliged to give the other party first refusal for purchase of such shares. The clause also provided that, where the parties could not agree on the price of shares that would be determined by arbitration.

By a letter dated 9 April 2003, the petitioner offered to sell its 27% shareholding in the Company to the respondent. The respondent confirmed its interest in purchasing the shares, but the parties were unable to reach agreement as to the valuation of the shares and this issue was referred to arbitration pursuant to the ROFR clause of the Agreement.

The tribunal directed the trial of a preliminary issue as to the date of valuation of shares. Pending the determination of this issue, the petitioner made an application (the Application) to the tribunal challenging its jurisdiction on the ground, among other things, that the Agreement was in violation of Section 111A read with Section 9 of the Companies Act in that it restricted free transferability of shares of the Company (a public company).

The tribunal rejected the Application on the basis that, since "the so-called restriction" contained in the ROFR clause of the Agreement was also incorporated in the articles of association of the Company, it was not in violation of the Companies Act.

An award was issued on 14 January 2006 valuing the shares at 151.63 Indian Rupees per share as on 3 May 2003 (that being the date on which the respondent had conveyed its intention to purchase the petitioner's shares). This award was challenged by the petitioner under Section 34 of the Act before a single judge of the Bombay High Court.

In deciding whether it was permissible to interfere in the award, the court analysed the Supreme Court judgments of ONGC v. Saw Pipes, Hindustan Zinc v. Friends Coal Carbonisation, and Delhi Development Authority v. R.S. Sharma and Co. which considered the scope of Section 34 of the Act. These judgments enunciated the following principles:

On the basis of these principles, the court went on to consider the respondent's contention that, as the question of the legality of the ROFR clause had been referred to the arbitrator for determination, that question could not now be considered by the court. The court held that the principle of law emerging from previous Supreme Court judgments was that where a question of law had been specifically referred by the parties to arbitration, that question was not open to interference by the court on the ground that there was an error of law apparent on the face of the award. That was the case even when the view of law taken by the arbitrator did not accord with the view of the court, unless the arbitrator had acted illegally in reaching his decision. However, on a proper analysis of the facts of this case, the court noted that the making of the Application, opposed by the respondent, did not by itself amount to reference to arbitration of a specific question of law. Further, there was no evidence to suggest that the parties intended to be bound by the decision of the arbitrator on such question of law. do. The Court therefore held that the issue of the illegality of the ROFR clause had not been specifically referred to arbitration for the purposes of this principle, and the court was entitled to intervene.

Having reached that conclusion, the court proceeded to analyse the petitioner's contention that the Agreement was illegal as the ROFR clause violated Section 111A of the Companies Act. The court held that no restriction could be placed on the free transferability of shares in public companies, even between the shareholders. The court held that the tribunal's reliance on the Supreme Court judgment in Madhusoodhanan v. Kerela Kamundi Pvt. Ltd. in deciding that the ROFR clause was valid, was incorrect in so far as the decision was applicable to private companies and not to public companies. The court, in support of its decision, relied on the Delhi High Court judgment in Smt. Pushpa Katoch v. Manu Maharani Hotels Limited in which it was held that by virtue of Section 111A of the Companies Act, the right of a shareholder to transfer his/her shares in a public company cannot be fettered.

The court thus set aside the award on the ground of the award being patently illegal and in violation of public policy. The arbitrator had lost sight of the very concept of free transferability of shares in a public company by ignoring the provisions of Section 111A and Section 9 of the Companies Act.

This judgment comprehensively summarises the scope of the Indian court's powers of interference under Section 34 of the Act and reaffirms the principle of law that, where a question of law has been specifically referred for determination by an arbitrator, that question cannot be challenged on the ground that the view of the arbitrator is contrary to the view of the courts, provided both parties intended to be bound by such determination. The only ground on which such a determination could be challenged is where it can be proven that the arbitrator had proceeded illegally in his determination.

This judgment is also significant from the perspective of the Companies Act as it has the effect of invalidating the right of first refusal and other shareholder rights privately controlled in the case of public companies. The judgment is under appeal.