In its recent judgment in Vedanta Limited v. Union of India (O.M.P. (COMM) 178/2020 & 208/2020), the Delhi High Court ("Court") considered the enforceability of a Shareholders' Agreement ("SHA") which placed restrictions on transfer of shares and assessed whether such restrictions are in contravention of Section 111A(2) of the Companies Act, 1956 ("1956 Act").
In 2001, the Indian government disinvested 51 per cent of its stake in Bharat Aluminium Company Limited ("BALCO"), a public unlisted company, in favour of Sterlite Industries (India) Limited, which was subsequently renamed Vedanta Limited ("Vedanta"). The definitive agreements governing the transaction were the share purchase agreement under which Vedanta acquired majority control, and the SHA, which provided for the future transfer of the government's remaining shareholding.
The SHA contained a call option, which obligated the government to sell its remaining shares to Vedanta at a price determined through a mutually agreed mechanism, after a lock-in period of three years ("Call Option").
Upon the expiry of the lock-in period, Vedanta invoked the Call Option and issued a notice for the purchase of the remaining shares. The government, however, refused to sell, asserting that the Call Option clause was violative of Section 111A(2) of the 1956 Act, which mandates that shares of a public company be freely transferable. Consequently, Vedanta invoked arbitral proceedings.
During the arbitral proceedings, one of the issues framed by the arbitral tribunal ("Tribunal") was whether the SHA, particularly Clause 5, violated Section 111A of the 1956 Act and Section 23 of the Contract Act, 1872. By a majority award, the Tribunal held that the SHA was void and unenforceable, stating that the SHA has multiple layers of restrictions on the transfer of shares, which effectively negated the statutory right of free transferability. The majority concluded that the SHA created a "closed", quasi-private entity inconsistent with the character of a public company. It was observed that the Call Option and right of first refusal clauses in the SHA (Clauses 5.3–5.8) cumulatively created a situation where the Government could not transfer its shares to third parties, and the SHA established a structure that made Vedanta the inevitable sole purchaser, undermining the concept of a public company. In view of the above, the SHA was held to be void ab initio.
The Tribunal reiterated that any restriction not expressly provided in BALCO's articles of association is unenforceable, and emphasized that both the shareholders of BALCO, namely the government and Vedanta, had voluntarily bound themselves to these restrictions, thus stripping BALCO of its public character.
Justice SP Bharucha, in his minority award, dissented and held that as long as BALCO itself did not restrict the transfer, the contractual restrictions among shareholders did not contravene Section 111A. Justice Bharucha's award relied heavily on the Division Bench judgment of the Bombay High Court in Messer Holdings Ltd. v. Shyam Ruia (Appeal No. 855 of 2003), which had upheld similar clauses as valid between private parties.
Vedanta challenged the majority award on grounds of patent illegality, violation of public policy, and contravention of substantive law before the Court. Vedanta argued that the limits under Section 111A are only on the company's power to refuse registration of transfers and do not prohibit shareholders from entering into voluntary contractual arrangements regarding their shares. It was also argued that call options and pre-emptive rights are recognized in securities law, including under the Securities Contracts (Regulation) Act, 1956. It was further argued that the minority award correctly reflected the evolving law, as Section 58(2) of the Companies Act, 2013 ("2013 Act") expressly provides that any contract or arrangement between two or more persons in respect of the transfer of securities is enforceable as a contract, notwithstanding that the company is a public limited company.
Conversely, the government defended the award and argued that Clause 5 imposed illegal restrictions on transferability and that the Tribunal's award was based on a sound understanding of statutory principles and legal precedents.
The Court concluded that the majority award did not warrant interference and observed that judicial interference with arbitral awards is limited under Section 34 of the Arbitration and Conciliation Act, 1999, and can only be justified when the award is perverse or contrary to the fundamental policy of Indian law. The Court noted that the award must be tested on the basis of the prevailing law of the time, and that any changes to the statute subsequently will not impact the correctness of an award passed that was passed taking into account the prevailing law. The Court further observed that the framework of the SHA imposed a layer of restrictions that goes against the purpose of Section 111A(2) and effectively negates the well-settled right of the shareholder to freely transfer the shares. The Court stated that while this right may be restricted in a private limited company, it cannot be curtailed in a public limited company, as the same would be against public interest and that the company may refuse to accept such a transfer under Section 111A(2). The Court also noted that the award by the Tribunal, that the free transferability rights of the shareholder cannot be waived, is a plausible view.
The Court's treatment of Section 58(2) of the 2013 Act reaffirms the principle that the validity of a contract must be judged by the law as it existed at the time of its execution, not by subsequent statutory developments. The judgment prevents the possibility of using Section 58(2) as a retrospective shield to enforce pre-2013 Act contractual mechanisms such as call options, drag-along clauses, or rights of first refusal in public companies. From a jurisprudential standpoint, the Court's interpretation is consistent with the rule of law, as Section 58(2) changed the law by granting an explicit statutory right to private transfer restrictions. However, the Court's approach also penalized parties who relied on government-approved transaction structures during its strategic disinvestment. The judgment underscores the need for legislative clarity at the intersection of public policy and private autonomy, a need that the proviso of Section 58(2) was designed to address but cannot retroactively fulfil.
About the authors: Ashima Obhan is a Senior Partner and Aakanksha Singh is an Associate at Obhan & Associates.
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