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TMI Blog2023 (2) TMI 379X X X X Extracts X X X X X X X X Extracts X X X X ..... s by his vendor on some contingency occurring would only mean that there was no present obligation at all but the obligation arose by reason of some contingency occurring. On the date when the SPA was entered into, there was no contract for sale or purchase of shares under clauses 8.5 and 8.5.1. A contract for sale or purchase of shares would come into being only at a future point of time in the eventuality of Edelweiss, which was granted such option, exercising it in future on the occurrence of a stipulated contingency. Section 18A of SCRA does not purport to invalidate any contract. It starts with a non-obstante clause, i.e., overriding effect over any other law for the time being in force. It provides that notwithstanding anything contained in any other law for the time being in force, the contracts in derivative shall be legal and valid, if such contracts satisfy the conditions mentioned therein. Section 18A of SCRA on its own does not make any particular contract illegal or invalid. What the buyer of an option buys is his right to exercise the option, often with a premium; his counter-party, who gives him such option, receives the option premium and in consideration ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d also because they are options and hence, contracts in derivatives not being traded on stock exchange and hit by Section 18A of SCRA. The Arbitral Tribunal held that clauses 8.5 and 8.5.1 are not enforceable. 3. Before we proceed further, it will be useful to remind us about the scope of an appeal under Section 37 of the said Act, its jurisdiction as an Appellate Court in examining an order, setting aside or refusing to set aside an Award. The Apex Court in UHL Power Company Limited V/s. State of Himachal Pradesh (2022) 4 SCC 116, in paragraph 16 held as under : 16. As it is, the jurisdiction conferred on Courts under Section 34 of the Arbitration Act is fairly narrow, when it comes to the scope of an appeal under Section 37 of the Arbitration Act, the jurisdiction of an Appellate Court in examining an order, setting aside or refusing to set aside an award, is all the more circumscribed. In MMTC Limited v. Vedanta Limited, the reasons for vesting such a limited jurisdiction on the High Court in exercise of powers under Section 34 of the Arbitration Act has been explained in the following words : 11. As far as Section 34 is concerned, the position is well-settled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t group within the period stipulated in the SPA, i.e., 31st December 2007, and therefore, committed breach of the SPA. According to Edelweiss, because of the breach committed by Percept, Edelweiss was entitled to resell the shares for Rs.20 Crores to appellant no.1 for the amount that would yield an internal return rate of 10% of the consideration paid to appellant no.1 under the SPA. Edelweiss extended the time line for execution of the obligations of Percept to a date not later than 30th June 2008 and entered into the Amendment Agreement dated 23rd April 2008. The Amendment Agreement provided that if appellant no.1 breaches its obligations under the conditions subsequent as aforesaid, Edelweiss was entitled to the following remedies under Clause 8.5.1, which read as under : 8.5. In the event of non-fulfillment of the first Condition Subsequent, the Investor shall have the right to: 8.5.1. Re-sell the Shares held by it to the Seller or its Affiliates and the Seller is bound to purchase the same, at a price which would give the Investor an internal rate of return of 10% on the Purchase Consideration; or 8.5.2. Continue as a shareholder of the Company, subject to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned Sole Arbitrator, despite coming to the conclusion that Percept had breached their obligations under the SPA, rejected Edelweiss s claim on the ground that the transaction of share purchase option was illegal and/or unenforceable being in breach of SCRA. 10. On the issue of legality or enforceability of the transaction of repurchase contained in the SPA, the learned Arbitrator firstly held that clauses 8.5 and 8.5.1, which gave an option to Edelweiss to demand repurchase of its shareholding in appellant no.2 by appellant no.1, were illegal because they constituted a forward contract prohibited under Section 16 of SCRA read with the Circular dated 1st March 2000 of SEBI issued thereunder. The learned Arbitrator secondly held that these clauses were also illegal because they contained an option concerning a future purchase of shares and were, thus, a contract in derivatives and not being traded on a recognized stock exchange were illegal under Section 18A (incorrectly typed as Section 20) of SCRA. For these two reasons, the learned Arbitrator had held clauses 8.5 and 8.5.1 of the SPA to be unenforceable. 11. The learned Single Judge by the order and judgment impugned i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r dated 1st March 2000 only permitted spot delivery of shares against payment of price and since there was a postponement of purchase of shares even after exercise of the option by Edelweiss and coming into being of the contract of share purchase, it falls foul with the circular and hence, it is illegal. We do not agree with Mr. Pimple. The learned Single Judge very correctly held that just because the original vendor of securities is given an option to complete repurchase of securities by a particular date, it cannot be said that the contract for repurchase is on any basis other than spot delivery. The relevant portion of letter dated 30th December 2008 read as under : Subject : Invocation under Clause 8.5.1 of the Share Purchase Agreement dated December 8, 2007 entered into by and between Edelweiss Capital Limited (ECL), Percept Finserve Private Limited ( Promoter ) and Percept Pictures Company Limited ( Company ). xxxxxxxxxxxxxxx 5. Since you have not fulfilled the condition subsequent stated above within the stipulated time period ECL is entitled to invoke its right under Clause 8.5 (more particularly under Clause 8.5.1) of the Percept SPA as amended by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide its Notification No.SO 2561, issued under Section 16 of SCRA, prohibited forward contracts and permitted contracts for the sale or purchase of securities, inter alia so long as such contracts qualified as spot delivery contracts; (c) by virtue of the Securities Laws (Amendment) Act, 1995, with effect from 25th January 1995, Section 20 of SCRA containing the prohibition on options in securities, came to be deleted. Although Section 20 was deleted, the 1960 notification continued to be in force prohibiting forward contracts and permitting only spot delivery contracts; (d) by the Securities Laws (Amendment) Act 1999, with effect from 22nd February 2000, Section 18A was introduced in the SCRA to regulate derivative transactions in terms specifying that transactions in derivatives would be legal and valid, if the same were traded on a recognised stock exchange and settled on the clearing house of a recognised stock exchange. Also Section 2 (aa) as it then stood , came to be inserted in the SCRA incorporating a definition of the term derivative. A corresponding amendment was also made to Section 2 (h) which defined securities for the purposes of the SCRA to include deriva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Supra) is not applicable in the present case because in the said case the Court held that options come into existence upon the exercise thereof, however, the Court did not decide the question of legality of buyback arrangements pursuant to put option, vis-a-vis, the provisions of Section 18A and the same was kept open as it was not the ground taken by SEBI in the show cause notice; and (i) clauses 8.5 and 8.5.1 are void part of the SPA and can be properly separated from the rest and the rest of the provisions of the SPA does not become invalid. Mr. Tamboly did not have any issue on this submission. 16. Mr. Tamboly submitted that : (a) though the policy underlying Section 18A of SCRA was to stop speculation/speculative trading, clauses 8.5 and 8.5.1 can never result in speculation because it only gives a right to Edelweiss to exercise an option contained in a contract in shareholders agreements and the notification of 2013 also expressly clarifies that the same shall be valid notwithstanding anything contained in Section 18A; (b) to say that clause 8.5 and 8.5.1 is a contract in derivatives, is ex-facie incorrect and can never be illegal under Section 18A of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ants have not made out any case for interference. We totally agree with the view expressed by the learned Single Judge that the Arbitrator s conclusion that the purchase option contained in clauses 8.5 and 8.5.1 was illegal and unenforceable being a forward contract is an incorrect view. The judgment in MCX (Supra) squarely deals with a purchase option, such as the present, where the purchaser of securities requires the vendor to repurchase on the occurrence of a contingency. As held in MCX (Supra), a contract giving an option to a purchaser to require repurchase of securities by his vendor on some contingency occurring would only mean that there was no present obligation at all but the obligation arose by reason of some contingency occurring. On the date when the SPA was entered into, there was no contract for sale or purchase of shares under clauses 8.5 and 8.5.1. A contract for sale or purchase of shares would come into being only at a future point of time in the eventuality of Edelweiss, which was granted such option, exercising it in future on the occurrence of a stipulated contingency. Clause 8.5 and 8.5.1 clearly indicates that there was no contract of sale or purchase of sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the board, enter into any contract for sale or purchase of securities other than such spot delivery contract or contract for cash or hand delivery or special delivery or contract in derivatives as is permissible under the said Act or the Securities and Exchange Board of India Act, 1992 (15 of 1992) and the rules and regulations made under such Acts and rules, regulations and bye-laws of a recognised stock exchange : Provided that any contracts for sale or purchase of government securities, gold related securities, money market securities and ready forward contracts in debt securities entered into on the recognised stock exchange shall be entered into in accordance with,- (a) the rules or regulations or the bye-laws made under the Securities Contracts (Regulation) Act, 1956 (42 of 1956), or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the directions issued by the Securities and Exchange Board of India under the said Acts; (b) the rules made or guidelines or directions issued under the Reserve Bank of India Act, 1934 (2 of 1934) or the Banking Regulations Act, 1949(10 of 1949) or the Foreign Exchange Regulation Act, 1973 (46 of 1973) by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve trading is governed by Section 18A of SCRA. There are two types of derivative instruments, viz., futures and options. A future or future contract is an agreement between two parties to buy or sell an asset at a certain time in future at a price agreed upon on the date of the agreement. An option, on the other hand, is a contract between a buyer and his seller, which gives a right, but not an obligation, to buy or sell the underlying asset at a stated price on or before a specified date. What the buyer of an option buys is his right to exercise the option, often with a premium; his counter-party, who gives him such option, receives the option premium and in consideration thereof, is obliged to buy or sell the underlying asset against the option exercised by the buyer. Options are, as the Apex Court explained, either of call or put, call option giving the buyer a right to buy and put option giving him a right to sell, in both cases without an obligation, the underlying asset at a given price on or before a given date. Clauses 8.5 and 8.5.1 give Edelweiss the right, though not the obligation, to sell the shares purchased by it under the SPA to appellant no.1, its vendor, who is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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