Predatory Pricing

In common parlance, Predatory pricing may be defined as pricing below an appropriate measure of cost for the purpose of eliminating competitors in the short run and reducing competition in the long run. It is a practice that harms both competitors and competition.  Normally price cutting is aimed simply at increasing market share, predatory pricing has as its aim the elimination of competition and creating monopoly.

·         Concept and determining Predatory Pricing

The concept of predatory pricing is difficult to define in precise economic terms. In simple terms it is sacrificing of present revenues for the purpose of driving competitors from the market with the intent of recouping lost revenues through monopoly profits thereafter.

Determining Predatory pricing

In order to prevail as a matter of law, a plaintiff must at least show that either (1) a competitor is charging a price below his average variable cost in the competitive market or (2) the competitor is charging a price below its short-run, profit-maximizing price and barriers to entry are great enough to enable the discriminator to reap the benefits of predation before new entry is possible. 1

It was further clarified that, the standard of profit maximization price should be applied only when the barriers to entry are extremely high i.e. if the barriers for an entry in a specified are lower the firm set the price closer to the marginal cost. For instance, Entry barriers for setting food outlet are very low, hence the prices charged for edible food at these food outlet is nearly close to the marginal cost.

Case No. 1

·         Fast Track Call Cab Pvt. Ltd. and Ors. (Informant). vs. ANI Technologies Pvt. Ltd.(Respondent) dated July 19,2017

Facts of the case

The aforesaid case adjudged by Competition Commission of India (“Commission”) dated July 19, 2017. The Informant alleged that the Respondent has abused the dominant position and offered the relevant market by offering heavy discounts to the passengers and incentives to the cab drivers associated with them which amounts to predatory pricing. The Commission directed the Director General (“DG”) to conduct detailed investigation into the matter.


Observation and Findings

The issue before the DG under this case were:- (i) whether, Respondent held a dominant position in the relevant market or not; and (ii) if it held a dominant position, whether its conduct would amount to abusive practice (predatory pricing) within the meaning of Section 4(2)(a)(ii) of the Indian Competition Act(“Act”).


The DG has opined that for a player to have a dominant position in the relevant market, it should be able to hold its market share for a reasonable period of time whereas the market share of the Respondent declined due to entry of another participant i.e. Uber.


The DG noted that in the absence of dominance of an entity, the question of abuse would not arise. However, the DG analyzed the pricing strategy of Respondent vis-à-vis its competitors and rather found Uber to be a more aggressive player, in terms of below-cost pricing, in the relevant market than the Respondent. Thus, DG opined that both Respondent and Uber have adopted ‘below-cost pricing strategy’. However, since the scheme of the Act only attracts the provisions of Section 4 when an incumbent is found to be dominant, the DG stated that OP can be said to have indulged in abuse by way of predatory pricing, only if it is found to be dominant in the relevant market. Since OP was not found to be dominant, the DG concluded that Respondent did not contravene the provisions of Section 4 of the Act.


The Informant contended placing reliance on General Court’s decision in Astra Zeneca v. Commission (Case T-321/05) and British Airways plc v. Commission (Case T-219/99) case, wherein it was noted that decline in the market share cannot be taken as an evidence that the entity is not dominant. The Informant further contented that dominant position cannot be judged based on the fact that enterprises ability to increase price but also on the ability of the enterprise to suppress it for a longer period of time which adversely affects the competition. In the alternative, the Informants have stated that it is not necessary that only one entity can be dominant in a particular relevant market. There is a possibility of two entities exercising dominance at the same time.




·         A new entrant armed with new idea, superior technology or a superior product or technological solution that challenges the status quo in a market and shifts a large consumer base in its favour would cannot always be as held dominant.


·         If we analyze the provision of the Act i.e. Section 4 it is restricted to the dominant position held by only one enterprise or one group. In the present case presence of more than one dominant entity (i.e. OLA and UBER) none of those entities would be able to act independent of one another.


Case No. 2

·         Deutsche Post AG (Case COMP/35.141) Commission Decision of March 20, 2001


Facts of the case

Deutsche Post AG (“DPAG”) activity was  delivery of letter post. DPAG has a statutory exclusive right to the “speciifed area”, that is to say the conveyance of letters. The revenue generated by DPAG is substantial and amounted to significantly to its total turnover.

United Parcel Service (“UPS”) alleged that  DPAG was using revenue from its profitable letter-post monopoly to finance a strategy of below-cost selling in parcel services, which are open to competition. Without the cross-subsidies from the specified  area, DPAG would not have been able to finance below-cost selling there for any length of time. UPS therefore called for a prohibition of sales below cost and the structural separation of the reserved area and the parcel services open to competition.

Observation and Findings

The Commission observed the DPAG revenue for the specified period and observed that the cost charged by DPAG was below the incremental costs of providing this specific service. This would mean that every sale of parcel services business represented a loss which comprises all the capacity-maintenance costs and at least part of the additional costs of providing the service.


Every sale not only would entail the loss of at least part of additional costs, but made no contribution towards covering the carrier’s capacity-maintenance costs i.e. variable cost. In the medium term, such a pricing policy is not in the DPAG’s own economic interest. DPAG could increase its overall result by either raising prices to cover the additional costs of providing the service.


Additionally it was observed that DPAG adopted a strategy of fidelity rebates which had the same effect as the exclusive purchase obligations. The strategy in relation to fidelity rebates deterred mail-order traders from setting up alternative delivery structures as that might conflict with their duty of fidelity and thus jeopardise the special price. This prevented the development of potential competition from alternative infrastructures.



·                An interesting concept in relation to Cross Subsidization is highlighted herein. In common parlance cross subsidization would occur when revenue from a specific service does not match with the cost involved in providing such specific service and the service for which revenue exceeds stand-alone cost is the source of the cross subsidy for the specific  service in which revenue does not cover the costs. This concept was also discussed is an order issued by CCI in June 2011 2 wherein it was opined that  :-


“Cross subsidisation itself has no connection to leveraging by dominance in one relevant market, as it is basically a fiscal or financial transfer from any source.”


·                Loyalty Rebates may lead to benefit for consumers. Such loyalty rebates would be anti competitive only if they prevent large share of the relevant market such that they exclude rivals or act as a substantial restrictions to entry and/or expansion.




Predatory Pricing is a complex form of an anti-competitive conduct. The prevailing market conditions play a vital role in determining predatory pricing i.e. entry conditions in the market, abuse of dominance, monopolization conduct etc.. Predatory pricing shall not be only strategy adopted by firms to gain market dominance. Firms may also enter into strategy of non price predatory pricing i.e. raising the cost of competitors or acting in collaboration with competitors in price cutting strategy.


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1 – International Air Industries, Inc. v. American Excelsior Co. 517 F.2d 714, 724 (5th Cir. 1975)


2 – MCX Stock Exchange Ltd. Vs National Stock Exchange of India Ltd. & Dot Ex International Ltd.

Indemnity Clause – Showstopper of Contract


Indemnity Clause is governed under Section 124 of Indian Contract Act, which is defined as a contract by which one party promises to save the other from loss caused to him by the conduct of the promise himself, or by the conduct of any other person, is called a “contract of indemnity”. Thus the section is clear that if promisee suffers any loss by conduct of the promisor or by conduct of any other person in respect of which indemnity is furnished by the promisee would be entitled to indemnify such loss against the promisor.

  • Fundamentals of Indemnity Clause

The fundamental principle of an Indemnity Clause is indemnifier is liable for damages or compensation which is relatable to or arising from the contract or on tort.

  • Classification of Indemnity

In general, all contractual indemnity provisions would fall under following classifications:-

  1. The first type of provision is that which provides expressly and clearly that the indemnitor is to indemnify the indemnitee for, among other things, the negligence of the indemnitee i.e. the person to Be Protected. Under this type of provision, the indemnitee is indemnified whether his liability has arisen as the result of his negligence alone or whether his liability has arisen as the result of his co-negligence with the indemnitor.


  1. The second type of provision is that which provides that the indemnitor is to indemnify the indemnitee for the indemnitee’s liability “arising from the use of services of the indemnitee” or “which might arise in connection with the agreed work”.


  1. The third type of contractual provision is that which provides that the indemnitor is to indemnify the indemnitee for the indemnitee’s liabilities caused by the indemnitor (e.g. Breach of terms of Contract), but which does not provide that the indemnitor is to indemnify the indemnitee for the indemnitee’s liabilities that were caused by other than the indemnitor (e.g. No indemnification for Third party claims). Under this type of provision, any negligence on the part of the indemnitee, either active or passive, will bar indemnification against the indemnitor irrespective of whether the indemnitor may also have been a cause of the indemnitee’s liability.


  1. Under this type of indemnity provision, the indemnitee is indemnified; from his own acts of passive negligence that solely or contributorily cause his liability, but is not indemnified for his own acts of active negligence that solely or contributorily cause his liability.


  • Indemnity and Guarantee


In a common parlance, Guarantee is where a surety is discharged from his liability under the guarantee if the principal promisor pays the debt or performs the obligation which the surety has guaranteed, whereas in case Indemnity, the surety may not necessarily be discharged by reason of the performance of the principal promisor of his obligations, or otherwise, by discharge of the principal promisor


The key difference between indemnity and guarantee is that while a guarantor’s liability is collateral to and dependent upon the liability and default of the principal debtor, an indemnifier’s liability is original and independent. This is related to the principle of co-extensiveness, which holds that a guarantor’s liability is generally co-extensive with the principal promisor’s liability in terms of the amount, time of payment and conditions under which the principal promisor is liable. This principle does not applies in case of Indemnity.


Where the liability of a promisor under an agreement exceeds that of the primary debtor, in that, for example, he may be liable when the primary debtor is not, or for an amount for which he is not, then the agreement is not a guarantee, and the promisor undertakes primary liability himself. In such circumstances the contract in question can only be viewed as an indemnity.


In S Y Technology Inc. vs. Pacific Recreation Pvt. Ltd. It was adjudged by the Singapore Court that :-  (21.03.2007 – SGHC)  CWU 68/2006 Decided On: 21.03.2007


“An indemnity is a contract by one party to keep the other harmless against loss, but a contract of guarantee is a contract to answer for the debt, default or miscarriage of another who is to be primarily responsible to the promisee.  The essential differences are, therefore, that a guarantee gives rise to a secondary, whereas an indemnity gives rise to a primary obligation and that there are, therefore, three parties to a guarantee, the creditor, the debtor and the guarantor, who promises to answer for “the debt, default or miscarriage of another”, whereas there are only two parties to an indemnity and if it is a promise to indemnify a debtor it is owed to the debtor only, and not because he has failed to perform his obligation, but because he has performed it.”


  • Implied Indemnity

Implied Indemnity has its roots under Section 69 of Indian Contract Act, Under this Section of the, a person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other. It shall be noted that the word bound by law to pay ‘ under Section 69 does not exclude those obligations of law which arose inter-parties whether by contract or tort.

The principle as regards implied indemnities as stated in Chitty on Contracts, Twenty-second Edition, Volume II, in para. 1035 at page 455 is as under:-

In many cases the law implies a promise to indemnify. If the circumstances are such that the law imposes on any person a legal or equitable duty to indemnify, it will imply a promise on his part to do that which under the circumstances he ought to do.

The implied indemnity piece was discussed by the Judicial Committee and on page 1821 :-

A right to indemnify generally arises from contract express or implied, but it is not confined to cases of contract. A right to indemnity exists where the relation between the parties is such that either in law or in equity there is an obligation upon the one party to indemnify the other. There are, for instance, cases in which the state of circumstances is such that the law attaches a legal or equitable duty to indemnify arising from an assumed promise by a person to do that which, under the circumstances, he ought to do. The right to indemnity need not arise by contract; it may (to) give other instances) arise by statute; it may arise upon the notion of a request made under circumstances from which the law implies that the common intention is that the party requested shall be indemnified by the party requesting him.

  • Indemnity and Insurance

Contracts of insurance are considered really as contracts of indemnity and the principle of subrogation is applied to it being an equitable arrangement incidental to all contracts of indemnity and to payments on account of the indemnity.

Contracts of Insurance are generally in the nature of contracts of indemnity. Except in the case of contracts of Life Insurance, personal accident and sickness or contracts of contingency insurance, all other contracts of insurance entitle the assured for the reimbursement of actual loss that is proved to have been suffered by him. The happening of the event against which insurance cover has been taken does not by itself entitle the assured to claim the amount stipulated in the policy. It is only upon proof of the actual loss, that the assured can claim reimbursement of the loss to the extent it is established, not exceeding the amount stipulated in the contract of Insurance which signifies the outer limit of the insurance company’s liability. 2

The amount mentioned in the policy does not signify that the insurance company guarantees payment of the said amount regardless of the actual loss suffered by the insured.

The law on the subject in this country is no different from that prevalent in England; which has been summed up in Halsbury’s Laws of England – 4th Edition in the following words: The happening of the event does not of itself entitle the assured to payment of the sum stipulated in the policy; the event must, in fact, result in a pecuniary loss to the assured, who then becomes entitled to be indemnified subject to the limitations of his contract. He cannot recover more than the sum insured for that sum is all that he has stipulated for by his premiums and it fixes the maximum liability of the insurers. Even with in that limit, however, he cannot recover more than what he establishes to be the actual amount of his loss. The contract being one of indemnity only, he can recover the actual amount of his loss and no more, whatever may have been his estimate of what his loss would be likely to be, and whatever the premiums he may have paid, calculated on the basis of that estimate.3

  • Rights of Indemnity Holder


If the indemnity holder had incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and pay it off.


Under an Indian judgement it was reiterated under Para 40:-


“On this view, an indemnity holder is entitled to sue the indemnifier even before he has incurred any damage, provided of course the indemnity holder is able to satisfy the Court about the existence of a clear enforceable claim against him and is able to show that it is in respect of such a clear enforceable claim that a contract of indemnity has been executed. … that the rights of the indemnity holder should not and need not be confined to those mentioned in S. 125, Contract Act. Even before damage is incurred by the indemnity holder, it would be open to him to sue for the specific performance of the contract of indemnity, provided of course it is shown that an absolute liability has been incurred by him and that the contract of indemnity covers the said liability.”4


  • Indemnity and Damages


Indemnity must be carefully distinguished from damages. A right to indemnity is given by the original contract as agreed between parties, whereas a right to damages arises in consequence of the breach of that contract. These two terms are confounded and one reason for the confusion is, that when a contract is broken, indemnity is often found to coincide with the measure of damages. These two terms express fundamentally two different legal ideas.




Hence to conclude the rules on interpretation of Contract of Indemnity can considered as under unless agreed otherwise:-

(i) Upon an indemnity against liability, expressly, or in other equivalent terms, the person indemnified is entitled to recover upon becoming liable; (ii) Upon an indemnity against claims, or demands, or damages, or costs, expressly, or in other equivalent terms, the person indemnified is not entitled to recover without payment thereof; (iii) An indemnity against claims, or demands, or liability, expressly, or in other equivalent terms, embraces the costs of defense against such claims, demands, or liability incurred in good faith, and in the exercise of a reasonable discretion; (iv) The person indemnifying is bound, on request of the person indemnified, to defend actions or proceedings brought against the latter in respect to the matters embraced by the indemnity, but the person indemnified has the right to conduct such defenses, if the person chooses to do so.5

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  1. – Eastern Shipping Co. v. Quah Beng Kee (1924) A.C. 177


  1. – Trustees of the Port of Madras vs. Home Insurance Co. Ltd. dated September 20,1967 – AIR 1970 Mad 48


  1. – Para 19  – United India Insurance Company Ltd. vs. Kantika Colour Lab. and Ors. dated May 6,2010 (Bench: D.K. Jain, T.S. Thakur)


  1. – Reliance Industries Limited vs. Balasore Alloys Limited dated January 10, 2014 (Bench : R.D. Dhanuka, J.


  1. – United States Elevator Corp. v. Pacific Investment Co. (1994) No. B070891. Second Dist., Div. Four. Nov 17, 1994

The Curious Case of Damages

Definition of Damages in paragraph 383 at page 216, Halsbury’s Laws of England, Third Edition, Volume II, which reads as follows:

Damages may be defined as the pecuniary compensation which the law awards to a person for the injury he has sustained by reason of the act or default of another, whether that act or default is a breach of contract or a tort; or, put more shortly, damages are the recompense given by process of law to a person for the wrong that another has done him.

In paragraph 404 of Halsbury’s Laws of England, Third Edition, Volume II, the following passage occurs:

Damages normally limited to actual loss: The measure of damages will normally permit the recovery of damages in respect of damage, injury or loss which arises naturally and directly from the act or omission complained of, but this is to be regarded as establishing a maximum. Where damages are capable of computation in money, and the damage actually suffered is less than such as might naturally have arisen from the act or omission complained of, only such damages as have actually accrued can be awarded.

Types of Damages

v  Exemplary damages or Punitive Damages

Exemplary damages or Punitive Damages are not compensatory but are awarded to punish the defendant and to deter others from similar behavior in the future.

Under English law, The House of Lords1 has devised three categories under which such damages can be levied:-

a. Oppressive, arbitrary or unconstitutional action any the servants of the government;

b. Wrongful conduct by the defendant which has been calculated by him for himself which may well exceed the compensation payable to the claimant; and

c. Any case where exemplary damages are authorised by the statute.

The later decision2upheld the categories for awarding exemplary contract and made important observations. The Relevant extract is reproduced below:-

“ (i) that the burden of proof rests on the plaintiff to establish the facts necessary to bring the case within the categories,

(ii) That the mere fact that the case falls within the categories does not of itself entitle the jury to award damages purely exemplary in character. They can and should award nothing unless

(iii) they are satisfied that the punitive or exemplary element is not sufficiently met within the figure which they have arrived at for the plaintiff’s solatium in the sense I have explained and

(iv) that, in assessing the total sum which the defendant should pay, the total figure awarded should be in substitution for and not in addition to the smaller figure which would have been treated as adequate solatium, that is to say, should be a round sum larger than the latter and satisfying the jury’s idea of what the defendant ought to pay.”

Compensatory Damages

“Compensatory damages” means damages intended to make good the loss of an injured party, and no more.  The term includes general and special damages and does not include nominal, exemplary or punitive damages.

Requirements for proving Compensatory Damages:-

1.       Causation of Damage

In a suit for damages, ‘causation of damage’ is the crucial question and the burden is on the plaintiff to prove that the damage was caused by the wrongful act of the defendants.

2.       Foreseeability of damage

Foreseeability of damage is relevant to decide whether the act complained of was negligent or not, but the liability for damages is not restricted to foreseeable damage but extends to all the damage directly traceable to the negligent act.3

3.       Remoteness of Damage

In Common parlance remoteness of damages can be stated only such loss may be compensated as the parties could have contemplated at the time of entering into the contract. The party held liable to compensation shall be obliged to compensate for such losses as directly flow from its breach under the Contract.

4.       Mitigation of Damages

In English jurisprudence, under conclusion of Legal principle in Para 64 it was held that : – “Whilst a mitigation analysis requires a sufficient causal connection between the breach and the mitigating step, it is not sufficient merely to show in two stages that there is (a) a causative nexus between breach and mitigating step and (b) a causative nexus between mitigating step and benefit. The inquiry is also for a direct causative connection between breach and benefit (Palatine), in cases approached by a mitigation analysis no less than in cases adopting a measure of loss approach. Accordingly, benefits flowing from a step taken in reasonable mitigation of loss are to be taken into account only if and to the extent that they are caused by the breach”.4

Liquidated and Unliquidated damages

There is no qualitative difference between liquidated damages and unliquidated damages. Save and except that in case of liquidated damages no compensation is payable in excess of sum stipulated in the Contract. Both liquidated and unliquidated damages are to be proved, hence the damages are been proved the parties are not entitled for any award.

1.       Liquidated Damages and Penalty5

The parties to a contract may at the time of entering into it provide, that in case of breach the party in default is to pay to the other a sum certain specified in, or ascertainable from, the contract.
When a contract contains a term which, not being an integral part of the contract, is introduced only for the purpose of securing the performance of the contract, that term is penal, and, as such, a penalty is a term which is extraneous and collateral to the actual contract. A penal clause, therefore, must be one which imposes, some penalty for the default, that is to say, which puts the defaulter in a worse position than he would occupy if there were no penal clause.
Principle of Liquidated damages is the liability to pay damages accrues and arises when the claim is either accepted by parties in a dispute or matter is finally judicially determined upon.6
Principle of Penalty is if in making provision for breach of contract, the promisee puts in a stipulation not by way of reasonable compensation to the promisee on the breach of contract but in order that by reason of its burdensome or oppressive character that it“may operate in terrorem i.e. meant as a punishment inflicted on party committing default over the promisor so as to drive him to fulfil the contract, then the stipulation is one by way of penalty.”
2.       Distinction between Penalty and Liquidated Damages7

·         The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages. Where the parties themselves, call the sum made payable a penalty, the onus lies on those who seek to show that it is liquidated damages to prove that such was the intention.

·          It will be held to be a penalty, if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.

·         It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid.

·         There is a presumption (but no more) that it is a penalty when “a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage i.e. unimportant”.

·            Where a contract contains a variety of stipulations, and the amount of damages for the breach of each stipulation is unascertainable, or not readily ascertainable, then the sum payable on the breach of any of the stipulations is liquidated damages.

·            Where a contract contains only a single stipulation, on the breach of which a specified sum, whether large or small, is to become payable, such a sum is liquidated damages especially where there is no adequate means of ascertaining the precise damage which may result from the breach; but if the single stipulation is very insignificant or can only give rise to nominal damages, and the sum payable is considerable, the disproportion between the two may be so great as to make it plain that the sum was fixed as a penalty.

3.       Test for Determining Penalty8


·         Various Courts in India have laid down a number of tests. The most important test to determine whether the stipulation amounts to penalty or not, is the question as to whether or not the payment of money was in terrorem i.e. it was meant as a punishment to be inflicted on the party committing default. This, therefore, envisages that there must be two agreements, the primary agreement and the subsidiary agreement.


·         To determine whether a particular clause is penal or not would be the fact as to whether the damages fixed are much more in proportion to the actual breach caused.


·         Another test that has to be applied is as to whether If the parties are placed in the same position as they were the party committing default, is put in a worse position or not.

These tests may not be conclusive one way or the other but they may give the Court a general idea in particular case to determine whether the clause in dispute amounts to penalty or not.

Consequential damages

The concept of “consequential damages” in contract law relates to the concept of foreseeability at the time the contract is executed and not as the petitioner would have it, foreseeability at the time of the breach.

The assertion of “examples” of circumstances per se where “foreseeability does not of itself, and automatically, lead to a duty of care”. In other words, it can be stated that there is a prima facie duty of care whenever, in the reasonable contemplation of a person in the sense of what can be reasonably viewed or foreseen, carelessness on other party’s part may be likely to cause damage to another.

It was held in this judgement9:-

“The defendant is liable only for ‘natural and proximate consequences of a breach or those consequences which were in the contract’. The above quoted phrases are words of art and usually represent two ways of expressing a single requirement. Proximate and natural consequences are those that flow directly or closely from the breach in the usual and normal course of events – those which a ‘reasonable man’ or a person or ordinary prudence would when the bargain is made foresee, as expectable results of later breach. Brevity and clarity are better served by abandoning these traditional phrases of legal art and using instead that gist of their meaning. We propose the following statement of the rule. The defendant is liable only for reasonably foreseeable losses – those that a normally prudent person, standing in his place possessing his information when contracting would have had reason to foresee as probable consequences of future breach.”

v  Disgorgement Damages

Black’s Law Dictionary defines disgorgement as “The act of giving up something (such as profits illegally obtained) on demand or by legal compulsion.”

In commercial terms, disgorgement is the forced giving up of profits obtained by illegal or unethical acts. It is a repayment of ill-gotten gains that is imposed on wrongdoers by the courts. Disgorgement is a monetary equitable remedy that is designed to prevent a wrongdoer from unjustly enriching himself as a result of his illegal conduct. It is not a punishment nor is it concerned with the damages sustained by the victims of the unlawful conduct. Only such wrongdoers who have made gains as a result of their illegal act(s) could be asked to do so. Since the chief purpose of ordering disgorgement is to make sure that the wrongdoers do not profit from their wrongdoing, it would follow that the disgorgement amount should not exceed the total profits realized as the result of the unlawful activity.10

v  Calculating disgorgement damages

Damages can be perused by adopting a “two-step burden-shifting framework” for calculating disgorgement, which “requires the FTC to first ‘show that its calculations reasonably approximated’ the amount of the defendant’s unjust gains, after which the ‘burden shifts to the defendants to show that those figures were inaccurate1

In case of IPR infringement, the owner must prove these four elements required for recovery of lost profit :-  (1) Demand for the patented product, (2) Absence of acceptable non-infringing substitutes, (3) Manufacturing and marketing capability to exploit the demand, and (4) The amount of the profit owner would have made.12

v  Nominal and Substantial damages

“Nominal damages” are defined in Bouvier’s Law Dictionary as “a trifling sum awarded where a breach of duty or an infraction of the plaintiff’s right is shown, but no serious loss is proved to have been sustained”; or “where, from the nature of the case, some injury has been done, the amount of which the proofs fail entirely to show”.

They are given not as an equivalent for the wrong but in recognition of a technical injury, and by way of declaring the right.

“Substantial damages” on the contrary are those damages which a plaintiff with a good cause of action, is entitled to receive as a fair and adequate compensation for the damage he has suffered from the wrongful act of the defendant. The principle of  restitutio in integrum is more faithfully adhered to. The Court will endeavour to get that sum of money which will put the party who has been injured in the same position in which he would have been but for the wrongful act of the defendant.13

v  Conclusion

The essential requirement for claiming damages are loss must be foreseeable at time of conclusion of contract, loss must by proved by aggrieved party and loss is caused despite aggrieved party taking steps to mitigate the risk. Damages remains a civil and not a criminal remedy, hence the judiciary shall not lose sight of the fact that in while awarding damages they are putting money in plaintiff’s pockets. Hence judiciary shall take a holistic view in awarding Damages.

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1-      Rookes v. Barnard. [1964] 1 All ER 367)

2-      Cassell & Co. Ltd. v. Broome, 1972 AC 1027

3-      United India Insurance Company Limited vs. P.N. Thomas and Ors. (27.11.1998 – 2000 ACJ 536)

4-       Fulton Shipping Inc of Panama v Globalia Business Travel S.A.U. (formerly Travelplan S.A.U) of Spain, May 21,2014

5-      Union Of India (UOI) vs Vasudeo Agarwal and Anr. on 23 September, 1958 AIR 1960 Pat 87)

6-      Kaveri Engg. Industries Ltd. vs. Deputy Commissioner of Income Tax (31.07.1992)

7-      ( Para 30 –  Union Of India (UOI) vs Vasudeo Agarwal and Anr. on 23 September, 1958 AIR 1960 Pat 87)

8-      Pandit Janki Nath Zutshi and Anr. vs. Ghulam Qadir Mir and Ors. (04.09.1963 – JKHC))

9-      Titanium Tantalum Products Ltd. vs Shriram Alkali and Chemicals on 11 May, 2006 2006 (2) ARBLR 366 Delhi)

10-   Karvy Stock Broking Ltd. vs Securities And Exchange Board Of … on 2 May, 2008 2008 84 SCL 208 SAT)

11-    Federal Trade Commission Vs. Bluehippo Funding dated August 12,2014 – 2nd Circuit)

12-    Panduit Corp. Vs. Stahlin Bros. Fibre Works dated April 25, 1978 – 6th Circuit)

13-    Indian Hume Pipe Co. Ltd. vs. Vendra Venkanna, Proprietor of Jai Bharathi Cement Works, Penugonda,October 13,1961








Standard Form of Contracts – Take it or Leave it?

A Standard form of Contracts or Adhesion Contracts are contracts which are generally drafted unilaterally by any entities and these contracts is generally not bargained for, but is imposed on the recipient for a necessary service on a take or leave it basis.

However to take a stand that a contract is in a printed form and offered on a “take-it-or-leave-it” basis, those facts alone do not cause it to be a standard form of contract.It is necessary that the parties were greatly disparate in bargaining power, that there was no opportunity for negotiation, or that the services could not have been obtained elsewhere.

1.       Principle of “Consensus ad idem”

The principle of Consensus ad idem means meeting of minds. It can be articulated both the parties shall have the meeting of minds at the same thing and most importantly in the same sense

A criterion for a valid contract is Offer and Acceptance; Free consent of the parties;Competence of the parties to a contract;Lawful Object and lawful consideration and not expressly declared void by law

It is pertinent to note that the notification of acceptance to the person who makes the offer is considered essential only to ensure that the two minds may come together. The two minds, when remain apart, there is no expected consensus which is necessary to constitute a contract.

Considering supra of Judgement1, where in Para 10 High Court considered that: – “The first requisite of any valid contract is that there should be mutual agreement –consensus ad idem — between the parties. So to form any binding contract there must be a definite promise by one party and an acceptance by the other. Negotiations may carry on for a considerable time between them, but no valid contract can come into being until one accepts without qualification the final proposal of the other.”

Supra of another Judgement2 wherein it was held that: – “the absence of consensus ad idem on the material terms of the contract to be entered into between the parties, there emerged no concluded contract.”

2.       Enforceability of Standard Form of Contract

The Standard Form of Contract normally is a theory which is a basis for modifying or nullifying harsh terms which defeat the reasonable expectations of the parties.The Standard Form of Contract will not be enforced unless they are conscionable and within reasonable expectations of parties.

In United States, Service CorporationInternational, Et Al., V.Daniel Lopez and Consuelo Lopez, wherein defendant had put forth its contention that arbitration agreement in contract was not a negotiated term, but merely part of a standardized form contract, which was a contract of adhesion. It was further stated thatthe contracts of adhesion will not be enforced unless they are conscionable and within the reasonable expectations of the parties.

It was further cited that in Texas law in H.E. Butt Grocery Co., 17 S.W.3d 360, 370-71 (Tex. App. Houston [14th Dist.], adhesion contract is defined as a contract in which one party has absolutely no bargaining power or ability to change the contract terms. Hence it was held that contract of cannot be enforced

However additionallyIn re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 574 (Tex. 1999) (orig. proceeding) the Supreme Court stated that adhesion contracts are not automatically unconscionable or void. In other words, the party seeking to avoid the clauses must prove more than that the contract was offered on a take it or leave it basis.

Under Indian Judiciary, Superintendence Company of India Pvt. limited vs Krishan Murgai datedMay 9, 19803

The Apex Court in aforesaid judgement held that :- “……..employees covenants should be carefully scrutinised because there is inequality of bargaining power between the parties; indeed no bargaining power may occur because the employee is presented with a standard form of contract to accept or reject. At the time of the agreement, the employee may have given little thought to the restriction because of his eagerness for a job; such contracts “tempt improvident persons, for the sake of present gain, to deprive themselves of the power to make future acquisitions, and expose them to imposition and oppression.”

The Court herein disfavored restrictive standard covenant by an employee not to engage in a business similar to or competitive with that of the employer after the termination of his contract of employment.

3.       Doctrine of Blue Pencil4

This doctrine has been evolved to aid to severe the illegal and void provisions from the contract in order to enforce the rest of it.

The `doctrine of blue pencil’ was evolved by the English and American Courts. In Halsbury’s Laws of England (4th Edn. Vol.9), p.297, para 430, it is stated:

“430. Severance of illegal and void provisions – A contract will rarely be totally illegal or void and certain parts of it may be entirely lawful in themselves. The question therefore arises whether the illegal or void parts may be separated or “severed” from the contract and the rest of the contract enforced without them. Nearly all the cases arise in the context of restraint of trade, but the following principles are applicable to contracts in general”

In P. Ramanatha Aiyar’s Advanced Law Lexicon, 3rd Edn. 2005, Vol. l,p.553-554, it is stated:

“Blue pencil doctrine (test). A judicial standard for deciding whether to invalidate the whole contract or only the offending words. Under this standard, only the offending words are invalidated if it would be possible to delete them simply by running a blue pencil through them, as opposed to changing, adding, or rearranging words. (Black, 7th Edn., 1999) This doctrine holds that if Courts can render an unreasonable restraint reasonable by scratching out the offensive portions of the covenant, they should do so and then enforce the remainder. Traditionally, the doctrine is applicable only if the covenant in question is applicable, so that the unreasonable portions may be separated. E.P.I, of Cleveland, Inc. v. Basler, 12 Ohio App2d 16:230 NE2d 552, 556”

4.       Doctrine of Contra Proferentem

The Doctrine of Contra Proferentem clearly stipulates that when a provision of the contract can be interpreted in more than one way, the Court will prefer that interpretation which is more favourable to the party who has not drafted the agreement. To put it differently, Court will prefer the interpretation which goes against the party who has inserted/ insisted on inclusion of the alleged ambiguous clause in the agreement.

Hence in common parlance the doctrine of contra proferentem is based on the commonsense notion that ambiguous language should be interpreted against the drafter because that party was in the best position to prevent the ambiguity; that is, “the provision should be construed less favorably to that party which selected the contractual language.

In United India Insurance Co. Ltd vs M/S. Orient Treasures Pvt. Ltd.5 It was adjudged by the Court that:-

“It was held that there is no ambiguity in the insurance policy and so the rule of contra proferentem was not applicable. A standard policy of insurance is different from other Contracts and in a claim under a standard policy the rule of contra proferentem is to be applied. The Policy in this case is in a standard form. If there is any ambiguity or doubt the clause in the Policy should be interpreted in favour of the insured. But we see no ambiguity in the relevant clause of the policy and the rule of contra proferentem is not applicable.”

In National Highways Authority of India vs  M/S. Lanco Infratech Ltd.6.It was argued by the learned counsel that:-

“No circumstance warranting the application of the contra proferentem rule, as the respondent was – or was atleast deemed to be – fully aware of all the terms of the contract and had sufficient opportunities to seek clarification before it even bid for the tender.Rule of contra proferentem ought to not have been applied in this matter as it was a commercial contract signed by the parties after all terms have been understood fully. Thus, it is contended that there is no mandate to construe the terms of the contract against the appellant. Indeed, it is a well-established principle of construction of contract that if the terms employed by one party are unclear, an interpretation against that party will be preferred”

Judicial Pronouncement

·         D.C.M. Ltd. And Anr. vs Assistant Engineer dated April 22,19877

In this case a Division Bench had to consider the question whether the Rajasthan State Electricity Board functioning under the Electricity Act of 1910 and the Electricity (Supply) Act, 1948 could in exercise of its powers under Section 49 of the Supply Act require the consumer- appellant before them to pay by way of minimum charges at nearly three times the normal rate charged from other consumers being heavy industries consuming heavy demand of 25 MW. Even though the appellant before them, D.C.M. Ltd., had entered into such an agreement with the Board it was held that the said term in the agreement was unreasonable and consequently the demand of such excessive minimum consumption charges was not justified and could not be tolerated on the touchstone of Article 14 of the Constitution of India as the Electricity Board was an instrumentality of the State. The Court in this connection had to consider the nature of the written agreements entered into by the consumers of the electricity with the Board which was a monopolist and the further question whether an apparently inconceivable and unjust term in the written contract could be enforced by the Board against the consumer

Para 24 of the Judgement the Court Observed that:- “… We may further add that for the reasons already given it is obvious that the giving of such an undertaking by execution of the agreement was no doubt a conscious act of the petitioner, but in the circumstances it cannot be held to indicate the petitioner’s willingness to be bound by such an onerous condition, if it had the option. It is obvious that there was no option to the petitioner and therefore, it cannot be said that the petitioner voluntarily and willingly chose and accepted the more onerous condition of a higher rate instead of the normal rate for payment of minimum charges. The willingness to accept such an onerous term with free consent can be assumed only where a consumer has an option or in other words he can get the supply of electricity he wants even without agreeing to any such term specified by the Board for being incorporated in the written contract without execution of which the consumer cannot insist on supply of electricity to him. It is not the Board’s case that it was willing to honour the petitioner’s requisition and make the supply even without the petitioner undertaking in writing to pay minimum charges according to Cl. 16(c). How can it then be said that the petitioner willingly accepted this term when the fact is that it had no option in the matter…..”

·         Kedar Nath Motani and Ors. vs Prahlad Rai and Ors. dated September 25, 19598

In this case, the Apex Court in Para 22 held that :- “The correct position in law, in our opinion, is that what one has to see is whether the illegality goes so much to the root of the matter that the plaintiff cannot bring his action without relying upon the illegal transaction into which he had entered. If the illegality be trivial or venial, as stated by Williston and the plaintiff is not required to rest his case upon that illegality, then public policy demands that the defendant should not be allowed to take advantage of the position. A strict view, of course, must be taken of the plaintiff’s conduct, and he should not be allowed to circumvent the illegality by resorting to some subterfuge or by mis-stating the facts. If, however, the matters is clear and the illegality is not required to be pleaded or proved as part of the cause of action and the plaintiff recanted before the illegal purpose was achieved, then, unless it be of such a gross nature as to outrage the conscience of the Court, the plea of the defendant should not prevail.”


Hence there are legislative rules and judicial judgements against unfair terms in standard terms of contract. The Party advancing standard for of contract shall ensure that rights and liability of other party should not fall within the ambit of unfair terms under a contract.

.                                                                                                               .

1 – The Life Insurance Corporation of India vs Mrs. Prasanna Devaraj dated August 18, 1994 AIR 1995 Ker 88, 1995 82 CompCas 611 Ker

2. – U.P. Rajkiya Nirman Nigam Ltd. Vs. Indure Pvt. Ltd. & Ors [1996] dated February 9,1996 1996 AIR 1373 1996 SCC (2) 667 JT 1996 (2) 322 1996 SCALE (2)247

3.- Superintendence Company of India Pvt. limited vs Krishan Murgai datedMay 9, 19801980 AIR 1717, 1980 SCR (3)1278

4.-Beed District Central Co-Operative Bank Ltd. vs State Of Maharashtra And Ors dated September 29, 2006, (Supreme Court of India – Bench: S.B. Sinha, Dalveer Bhandari)

5.- United India Insurance Co. Ltd. v. Orient Treasures (P) Ltd

6.-National Highways Authority of Indiavs M/S. Lanco Infratech Ltd dated  March 7, 2014(Delhi High Court – Coram : Hon’ble Mr. Justice S. Ravindra Bhat Hon’ble Mr. Justice Najmi Waziri)

7.- D.C.M. Ltd. And Anr. vs Assistant Engineer(Hmt Sub-division), Rajasthan State Electricity Board, Kota and anr dated April 22,1987 AIR 1988 Raj 64, 1987 (2) WLN 538

8.-  Kedar Nath Motani And Ors. vs Prahlad Rai And Ors. dated  September 25, 1959AIR 1960 SC 213, 1960 1 SCR 861

Alternate Dispute Resolution vis-a-vis Allied Case laws

Indian law encompasses five types of Alternate Dispute Resolution (“ADR”) procedures, made up of one adjudicatory process (arbitration) and four negotiatory (non-adjudicator y) processes–conci liation, mediation, judicial settlement and Lok Adalat settlement.

Arbitration and Conciliation are being governed by Arbitration and Conciliation Act 1996 and the two other ADR processes Lok Adalat settlement and mediation will be governed by the Legal Services Authorities Act 1987. In case of Judicial Settlement is not governed by any enactment and the court will follow such procedure as may be prescribed

What is difference between Arbitration and other for four ADR ?

The difference between Arbitration and other for four ADR is , In Arbitration the case goes out of the stream of court and becomes an independent proceeding before an Arbitral Tribunal and since Arbitration is a adjudicatory process it will end with a decision. The award of Arbitration can be enforced as decree of court under Section 36 of Arbitration and Conciliation Act.

The other four ADR processes are non- adjudicatory and the case does not go out of the stream of the court when a reference is made to such a non- adjudicatory ADR forum. The court retains its control and jurisdiction over the case, even when the matter is before the ADR forum. The matter in case of conciliation is placed before the court for recording it and disposal in terms.

Key Arbitration Aspects

Section 5 – Extent of judicial intervention.
Notwithstanding anything contained in any other law for the time being in force, in matter governed by this Part, no judicial authority shall intervene except where so provided in this Part.

This sections is a non – obstante clause , it limits judicial intervention in any Cases

Non – Obstante means that the provision contained therein have an overriding effect upon the provisions even if the other  provisions provide to the contrary

However there are certain exception to this , Supra of Judgement :- “Though Section 5 of the Arbitration and Conciliation Act bars the jurisdiction of judicial authority, the said Section shall not be pressed into service to exclude the power of judicial review under Article 226/227.” 1

Judicial review, as the words imply, is not an appeal from a decision, but a review of the manner in which the decision was made. In other words, judicial review is concerned with reviewing not the merits of the decision but the decision-making process itself.

Section 7 – Arbitration Agreement
Arbitration agreement’ as an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not

Arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement & shall be in writing

Query :- Is an Arbitration Clause drafted in specific form ?

It is not essential to draft Arbitration Clause in any specific form , however following supra identifies what shall be taken into consideration for drafting :-

“…….an arbitration clause is not required to be stated in any particular form. If the intention of the parties to refer the dispute to arbitration can be clearly ascertained from the terms of the agreement, it is immaterial whether or not the expression arbitration or ‘arbitrator’ or ‘arbitrators’ has been used in the agreement.”
But mere use of the word ‘arbitration’ or ‘arbitrator’ in a clause will not make it an arbitration agreement, if it requires or contemplates a further or fresh consent of the parties for reference to arbitration.2

Use of words such as “parties can, if they so desire, refer their disputes to arbitration” or “in the event of any dispute, the parties may also agree to refer the same to arbitration” or “if any disputes arise between the parties, they should consider settlement by arbitration” in a clause relating to settlement of disputes, indicate that the clause is not intended to be an arbitration agreement.
Similarly, a clause which states that “if the parties so decide, the disputes shall be referred to arbitration” or “any disputes between parties, if they so agree, shall be referred to arbitration” is not an arbitration agreement. Such clauses merely indicate a desire or hope to have the disputes settled by arbitration, or a tentative arrangement to explore arbitration as a mode of settlement if and when a dispute arises3.
Such clauses require the parties to arrive at a further agreement to go to arbitration, as and when the disputes arise. Any agreement or clause in an agreement requiring or contemplating a further consent or consensus before a reference to arbitration, is not an arbitration agreement, but an agreement to enter into an arbitration agreement in future.
Section 16 – Competence of arbitral tribunal to rule on its jurisdiction4

Doctrine of Kompetenz-kompet enz, or competence-compe tence, is a jurisprudential doctrine whereby a legal body, such as a court or arbitral tribunal, may have competence, or jurisdiction, to rule as to the extent of its own competence on an issue before it.

Section 16(1) is based on the Doctrine of Kompetenz-kompet enz ,

Section 16(1)(a) the legislature makes it clear that while considering any objection with regard to the existence or validity of the arbitration agreement, the arbitration clause, which formed part of the contract, had to be treated as an agreement independent of the other terms of the contract

Section 16(1)(b) of the 1996 Act, the arbitration clause continues to be enforceable, notwithstanding a declaration that the contract was null and void

Query :- Where does this both principle work ?

If there is any dispute between the parties to the agreement arising out of or in relation to the subject matter of the Agreement(i.e wherein the Clause is) The argument of the respondent that the disputes cannot be referred to the arbitration as the agreement is not in existence as of today is therefore devoid of merit.”

Section 11 – Appointment of Arbitrators

The Procedure of Appointment of Arbitrators is left open to parties in Agreement
Judicial Intervention i.e. Chief Justice is sought only when there is a failure of appointment of Arbitrators among the parties
The Decisions of matter entrusted to Chief Justice or the person or institution designated by him is final
Query :- So is the decision made by Chief Justice a administrative or Judicial nature ?

The stand taken by Court is that in 2002 is the only function of the Chief Justice or his designate under Section 11 is to fill the gap left by a party to the arbitration agreement or by the two arbitrators appointed by the parties and nominate an arbitrator. It is open for party to challenge appointment under Section 12 and procedure adopted under Section 135
However the above decision was overruled wherein it was held that proceeding before the Chief Justice while entertaining an application under Section 11(6) of the Act is adjudicatory, then obviously, the outcome of that adjudication is a judicial order. The Delegation of power by Chief Justice can be done to Judge of Supreme or High Court. The intention apparently was to confer the power on the highest judicial authority in the State and in the country, on Chief Justices of High Courts and on the Chief Justice of India. Such a provision is necessarily intended to add the greatest credibility to the arbitral process6
Section 20 – Place of arbitration.

The parties are free to agree on the place of arbitration.
In case if place of Arbitration is not specified then Arbitral Tribunal shall determine the place based on circumstance of case and convenience of parties.
No where in Section 20 restricts the parties to subsequently agree to another place as the seat of arbitration
Clause :- “18…….. If the dispute, controversy or difference is not resolved through mutual consultation within 30 days after commencement of discussions or such longer period as the Parties may agree in writing, any Party may refer dispute(s), controversy(ies) or difference(s) for resolution to an arbitral tribunal to consist of three (3) arbitrators, of who one will be appointed by each of the Licensor and the Licensee and the arbitrator appointed by Licensor shall also act as the presiding arbitrator.
“18.3 A proceedings in such arbitration shall be conducted in English. The venue of the arbitration proceedings shall be in London. The arbitrators may (but shall not be obliged to) award costs and reasonable expenses (including reasonable-fees of counsel) to the Party (ies) that substantially prevail on merit. The provisions of Indian Arbitration and Conciliation Act, 1996 shall apply.”7
Query :- So is there any distinction between Venue and Seat of Arbitration ?


Just because venue is London it does not tantamount to be seat of Arbitration as since the parties intended to be governed only by the Indian Arbitration Act, 1996. The clause uses the word Presiding Arbitrator and not Chairman; this language is expressly used in Sections 11 and 29 of the Indian Arbitration Act, 1996 as distinct from Section 30 of the English Arbitration Act.
Substantive law of the contract is Indian law; law governing the arbitration is Indian Arbitration law; curial law (i.e. law governing the arbitration proceedings) is that of India;
Even if the seat is considered as London , it would create lot of confusion , chaos the Indian Arbitration Act, 1996 would apply to the process of appointment under Section 11; English Arbitration Act would apply to the arbitration proceedings , challenge of award would under English Arbitration Act and enforcement of award would Indian Arbitration Act.
Governing Law for Arbitration.

Since the party has freedom in an International commercial Agreements , incorporating provisions in all these three aspects is very essential :-

Governing law of the contract which defines the substantive rights and obligations of the parties
Law which governs the arbitration agreement. This includes questions as to whether the dispute is arbitrable; the jurisdiction of the arbitral tribunal to make an award and the validity of the award itself
Curial law of arbitration which governs the manner in which the arbitrator would conduct the arbitral proceedings and would extend to procedural matters and the regulation of the conduct of the arbitration
Query :- (i) Substantive law is Indian law; (ii) Venue of arbitration at Kuala Lumpur (iii) Law governing Arbitration Agreement is England, Curial Law is not specified , What is seat of Arbitration ?

Answer :- Laws of England , in cases of international commercial arbitrations held out of India provisions of Part-I would apply unless the parties by agreement, express or implied, exclude all or any of its provisions. In that case laws or rules chosen by the parties would prevail. Thus if the parties have agreed to be governed by any law other than Indian law in cases of international commercial arbitration, same would prevail8

When Arbitrator is Employee

While vetting Arbitration Clauses of PSU we come across obligations where appointment of Arbitrator is a person who is interested in Agreement. That is the person who is employee ; or a person who holds equity ; or retired professional of Company

It was held that :- If a party, with open eyes and full knowledge and comprehension of the said provision enters into a contract with a Government/statu tory corporation/publ ic sector undertaking containing an arbitration agreement providing that one of its Secretaries/Dire ctors shall be the arbitrator, he can not subsequently turn around and contend that he is agreeable for settlement of the disputes by arbitration, but not by the named arbitrator who is an employee of the other party.

Paragraph 48 :- If circumstances exist, giving rise to justifiable doubts as to the independence and impartiality of the person nominated, or if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, the Chief Justice or his designate may, for reasons to be recorded ignore the designated arbitrator and appoint someone else.”9

So to conclude ignoring the named Arbitrator and nominating an Independent Arbitrator is an exception to agreed procedure only if valid reason is resorted

Section 34 – Setting aside of Award

Arbitral Award can be set aside on following grounds as per provision :-

Incapacity i.e. mental incapacity, minority and such like circumstances.10
Arbitration agreement not valid
No proper notice of appointment of arbitrator or arbitral proceedings ,Supreme Court had held in a case that parties should not only prove that he was not given proper notice, but also to show that he was seriously prejudiced thereby.11
Arbitral award outside the scope of the agreement
Composition of arbitral tribunal or procedure not in accordance with agreement of the parties
Court finds that subject matter of dispute is not capable of settlement by arbitration under the law or arbitral award is in conflict with “public policy of India”
Principle of Natural Justice

In many contract we may a situation in which the Arbitrators appointed are generally interested individuals in the Contract which is against the principle of Natural Justice

Query :- What is the Principle of Natural Justice ?

The principles of natural justice consist primarily of two main rules, namely,

“nemo judex in cause sua” (“no man shall be a judge in his own cause”) and
“audi alteram partem” (“hear the other side”).
From the above two rules a corollary has been deduced namely that he who shall decide anything without the other side having been heard, although he may have said what is right, will not have done what is right, in other words has it is now expressed, Justice should not only be done but should manifestly be seem to be done.

Some courts have taken a stand as Principle of Natural Justice is overused concept and cannot be used as a straight jacket formula.12

In one of the judgements Court held as under:

“Natural justice is no unruly horse, no lurking land mine, nor a judicial cure all. If fairness is shown by the decision-maker to the man proceeded against, the form, features and the fundamental of such essential procedural propriety being conditioned by the facts and circumstances of each situation, no breach of natural justice can be complained of. Unnatural expansion of natural justice, without reference to the administrative realities and other factors of a given case, can be exasperating (i.e.infurating) . We can neither be finical nor fanatical but should be flexible yet firm in this jurisdiction. No man shall be hit below the belt that is the conscience of the matter”.13

Cost Allocation in Recent Years

The allocation of Cost in recent years are as under :-

“Costs follow the event” pure – The victor takes all, the loser pays all costs of arbitration and all opposing costs of party representation (“Even Attorney fees & Expenses”)
“Costs follow the event” pro rata – The loser pays all costs of arbitration and all opposing attorney’s fees in proportional relationship to the outcome.
“Costs follow the event” modified – The loser pays all costs of arbitration, but not necessarily all or any opposing attorney’s fees.
“Costs to be shared equally” – 50-50 as to either costs of arbitration or attorney’s fees or both, irrespective of any disparity in respective investment in attorney’s fees
The costs of arbitration are to be shared equally, respective attorney’s fees to be borne by each side.
American Rule” – Each party bears its own costs of arbitration and attorney’s fees, irrespective of the outcome or other externalities.
“American Rule” exception – In the presence of manifest fraud, corruption, spuriousness, abusiveness of process, etc., the culpable party bears some or all of the costs of arbitration and/or attorney’s fees of the other party14
Attributes of Arbitration Agreement/Clause

The arbitration agreement must contemplate that the decision of the tribunal will be binding on the parties to the agreement
The jurisdiction of the tribunal to decide the rights of parties must derive either from the consent of the parties or from an order of the court or from a statute, the terms of which make it clear that the process is to be an arbitration.
The agreement must contemplate that substantive rights of parties will be determined by the agreed tribunal
The tribunal will determine the rights of the parties in an impartial and judicial manner with the tribunal owing an equal obligation of fairness towards both sides
The agreement must contemplate that the tribunal will make a decision upon a dispute which is already formulated at the time when a reference is made to the tribunal15
Expert Determination and Arbitration

Example :- Clause 9 of MOU :- “…….Implementati on will be done in consultation with the financial institutions. For all disputes, clarifications etc. in respect of implementation of this agreement, the same shall be referred to the Chairman, IFCI or his nominees whose decisions will be final and binding on both the groups.…..”

The role of an arbitrator and an expert is different. If a person is appointed, owing to his skill and knowledge of a particular subject, to decide any questions, whether of fact or of value, by the use of his skill and knowledge and without taking any evidence or hearing the parties, he is not, prima facie, an arbitrator
A person is appointed with the intention that he should hear the parties and their evidence and decide in a judicial manner, then he is an arbitrator
The most significant distinction between an arbitrator and an expert is that, an expert need not act judicially. This has two effects, namely, an expert can apply his own expertise to decide the question referred and further the expert is not bound to give each party an opportunity to put its case and to deal with other material.16
Russell on Arbitration in 21st Edition describes difference between expert determination or Arbitration in following words :-

Firstly the express words of the disputes clause
If specific words such as ‘arbitrator’, ‘arbitral tribunal’, ‘arbitration’ or the formula ‘as an expert and not as an arbitrator’ are used to describe the manner in which the dispute resolver is to act, they are likely to be persuasive although not always conclusive.
Where there is no express wording, the court will refer to certain guidelines. Of these, the most important used to be, whether there was an ‘issue’ between the parties such as the value of an asset on which they had not taken defined positions, in which case the procedure was held to be expert determination; or a ‘formulated dispute’ between the parties where defined positions had been taken, in which case the procedure was held to be an arbitration

‘Conciliation’, as a specific mechanism for dispute resolution is provided under Part-III of the Arbitration and Conciliation Act, 1996, and under Section 61, applies to disputes arising out of a legal relationship as well as to proceedings relating thereon. Conciliation proceedings are initiated under Section 62 of the Act on a written invitation by one party to conciliate to the other.
It commences when the other party, accepts such invitation, in writing. The appointment of a conciliator is undertaken under Section 64 while Section 66 maintains that the conciliator is “not bound by the Code of Civil Procedure, 1908 or the Indian Evidence Act, 1872”.
A settlement agreement between the parties is finalized in accordance with Section 73 while by virtue of Section 74 of the Act, such settlement agreement shall have the same status and effect as if it is an “arbitral award on agreed terms on the substance of the dispute rendered by an arbitral tribunal under Section 30”. Section 76 prescribes the manner in which the conciliation proceedings are terminated.
. .

1 – Mangayarkarasi Apparels Pvt. Limited vs Sundaram Finance Ltd., Pattullos on 30 April, 2002 (2003 113 CompCas 487 Mad, (2002) 2 MLJ 444)

2 – In M. Dayanand Reddy v. A.P. Industrial Infrastructure Corpn. Ltd., this Court has held that: (SCC p. 142, para 8) ;

3 – Supreme Court of India Jagdish Chander vs Ramesh Chander & Ors on 26 April, 2007

4 – M/S Reva Electric Car Co.P.Ltd vs M/S Green Mobil on 25 November, 2011 , Supreme Court Judegement. ; M/S.Today Homes & Infrastr. … vs Ludhiana Improvement Trust & Anr on 10 May, 2013

5 – Supreme Court of India Konkan Railway Corporation vs M/S. Rani Construction Pvt. Ltd on 30 January, 2002

6 – SBP & Co. v. Patel Engg Ltd (2005) 8 SCC 618

7 – Supreme Court of India Enercon (India) Ltd And Ors vs Enercon Gmbh And Anr on 14 February, 2014

8 – Supreme Court of India in Videocon Industries Ltd vs Union Of India & Anr on 11 May, 2011

9 – Supreme Court of India in Indian Oil Corp.Ltd.& Ors vs M/S Raja Transport(P) Ltd on 24 August, 2009

10 – Delhi Jal Board vs Reliable Diesel Eng. (P) Ltd. on 14 December, 2005 2005 (3) ARBLR 602 Delhi, 127 (2006) DLT 378

11 – Sohan Lal Gupta Thr. L.Rs. & … vs Smt. Asha Devi Gupta & Ors on 1 September, 2003

12 – Union Of India And Another vs Tulsiram Patel And Others on 11 July, 1985 1985 AIR 1416, 1985 SCR Supl. (2) 131

13 – In The Chairman, Board of Mining Examination and Chief Inspector of Mines and Another v. Ramjee (1997) 2 SCC 256)

14 – Best Practices in International Arbitration”, ASA Swiss Arbitration Association, Conference of January 27, 2006 in Zurich, Edited by Markus Wirth

15 – Supreme Court of India K.K. Modi vs K.N. Modi & Ors on 4 February, 1998 (1998) 3 SCC 573

16 – Delhi High Court Joint Investment (P) Ltd. vs Escorts Ltd. on 26 May, 2010

Materiality and Judicial Rulings

Mandar D Rane

In terms of Regulation 30 of SEBI (Listing Obligations and Disclosures Requirements) Regulations, 2015 mandates every listed entity shall frame policy for determination of materiality based on criteria specified and it shall be approved by Board of Directors of the Company and also be disclosed on Company’s website

The question of materiality, it is universally agreed, is an objective one, involving the significance of an omitted or misrepresented fact to a reasonable investor. The General standard of materiality could be summed up as, omitted fact is material, if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding his investment decision or vote.


Judicial Decisions

a.    Zee Telefilms Ltd. vs The Adjudicating & Enquiry (2003) 2 CompLJ 282 SAT

1.    Belated Reporting

Here we analyze a reported judgement of Zee Telefilms Limited (”Appellant”) in 2003, In the said case the Appellant was issued a notice by SEBI stating that it had failed to comply with the requirements of Regulations 6(2), 6(4) and 8(3) of erstwhile Takeover Regulation 1997 and in that context penalty of five lakh rupees was imposed on the Appellant.

The Appellant had contended that it had not intentionally suppressed any material information, which was to be disclosed under the regulations and that, the Appellant on its own had disclosed the belated reporting in the letter of offer which was issued by it in the context of the public offer made by it relating to the acquisition of shares in another Company. The Appellant stated that , material information was submitted is the fact that the Appellant itself had disclosed voluntarily the default, goes to prove the bonafides of the Appellant, that if it had not so disclosed, perhaps SEBI would have never noticed the failure and proceeded against for such default. The Appellant further stated that they had not acted willfully and thus penalty shall not be imposed.


The Respondent refuted all the claims of the Appellant and stated that, no where did the Appellant disputed that reporting has not been belated and delay was substantial.

Comment: – The appellant had made willful disclosure but if they have not done that the offer letter would not have been considered proper. Such a disclosure was made due to compelling requirement and thus they cannot claim that disclosure made by them willful and voluntary.


2.    Mens Rea , Disproportionate gain or unfair advantage

Penalty is not leviable for an omission or commission not done willfully which was upheld in judgement1. Section 15-J provides various factors which are to be taken into consideration while adjudging the question of penalty under Section 15-l namely, the amount of disproportionate gain or unfair advantage whenever quantifiable, loss caused to an investor or group of investors and the repetitive nature of default. Considering said case the Appellant alleged that legislature in its wisdom had not included mens rea or deliberate or willful nature of default as a factor to be considered by the Adjudicating Officer in determining the quantum of liability to be imposed on the defaulter.

The Appellant in the said case contended that there was no mens rea on his part and nor its promoters secured any disproportionate gain or unfair advantage that the belated reporting has not resulted in wrongful loss to any investor, and the delay in reporting was an isolated one and was not of repetitive nature.

The Respondent supplemented its contention through a judgment2 and stated that it is not necessary to establish mens rea for the purpose of imposing penalty is not comparable in the present case.


Comment: – The notion that a penalty or a punishment cannot be cast in the form of an absolute or no-fault liability but must be preceded by mens rea should be rejected.  The classical view that  ‘no mens rea, no crime’ has long ago been eroded and several laws  in India  and abroad, especially regarding economic crimes and departmental penalties, have created severe punishments even where  the offences have been defined to exclude  mens rea3.
b.    SEBI vs Ispat Industries Limited


In the present case, Executive Director of Ispat Industries Limited4 in an interview given to CNBC in 2003 and which was reported on on the same day that, the Company has is targeting a turnover of Rs. 4000 crore , capacity expansion programme of the Company along with cost saving initiatives would result in savings of about Rs.1000 Crores a year , the contribution of long term contracts to sales would move up to 50% from the current 10% , The export target for the current fiscal had been pegged at Rs.1300 Crores.


SEBI issued a notice that aforesaid averments were not been disclosed to the Stock Exchange as required to be disclosed as required under SEBI Insider Trading Regulation 1992.


The Company had replied to notice of SEBI stating that proposed additions to their steel making capacities has been duly notified to the stock exchanges as part of details relating to quarterly financial results of the company and planned capacity expansion has been duly set out in the annual report of the Company and in this regard they have invited reference to the statement contained in the Director’s report on accounts of the company for the year ended 31.3.2003. The cost benefits have been disclosed in Annual Report and targeted exports for the current financial year were in line with capacity enhancement effected during the current financial year.


The Company reiterated that interview was general in nature and not made with a view to influence the market sentiments.


Now following questions arise that,


·         Whether the information relating to projections of turnover, cost savings, export target and capacity expansion constituted price sensitive information?


·         Whether the Company had failed to disclose the information as required by Insider Trading Regulations?


Comment: – The requirement of prompt disclosure of price sensitive information by Corporates

was introduced as a preventive measure to curb insider trading.


If we consider recent Insider Trading Regulation, Unpublished price sensitive information means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities and shall, ordinarily including but not restricted to, information relating to the                   following :-


(i) Financial results; (ii) Dividends ; (iii) Change in capital structure; (iv) Mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and such other transactions;

(v) Changes in key managerial personnel; and (vi) Material events in accordance with the listing agreement


Here there are two aspects, the first being, can general discussions about the company’s visionary plans and the projects being undertaken by the company and such normal conversation about visionary plans should be viewed as Price Sensitive Information and secondly misleading and and premature announcements relating to the company could be done to generate investor interest in the scrip and to shore up its stock price.


Supra of judgment of SAT5, “whether a transaction has been executed with the intention to manipulate the market or defeat its mechanism will depend upon the intention of the parties which could be inferred from the attending circumstances because direct evidence in such cases may not be available”.


In this case, SEBI made an observation that financial statement did not contain the disclosure as stated by the Executive Director, the information is a price sensitive information and thus Company had not complied with the requirement of Disclosure as required by Regulations.


c.    DLF Limited vs Securities & Exchange Board of India & Ors.


In this case, DLF had filed Draft Red Herring Prospectus (DRHP) with the SEBI on May 11, 2006 it was indicated that Sudipti Estates Private Limited (“SEPL”) was one of the joint ventures of DLF. The said DRHP was withdrawn and a fresh DRHP was submitted, in which SEPL was not mentioned as being associated with DLF. A complainant filed with SEBI alleging that SEPL had defrauded him for sum of Rs. 34 crore (approx.) and in order to safeguard the interests of general public, the listing of DLF pursuant to the IPO be disallowed and immediate action be taken in this regard. Aggrieved by inaction of SEBI the Complainant file a writ petition which was been allowed by learned Judge and ordered for investigation.


DLF Ltd. had 3 wholly owned subsidiaries namely DLF Home Developers Ltd. (“DHDL”), DLF Estate Developers Ltd. (“DEDL”) and DLF Retail Developers Ltd. (“DRDL”) which held equity shares in SEPL, Shalika Estate Developers Private Limited (“SDPL”) and Felicite Builders & Construction Pvt. Ltd. (“FBCP”). On November 29, 2006, the entire shareholding in Felicite held by DHDL, DEDL and DRDL was sold to three persons namely, Mrs. Madhulika Basak, Mrs. Niti Saxena and Mrs. Padmaja Sanka. These three persons were wives of Mr. Surojit Basak, Mr. Joy Saxena and Mr. Ramesh Sanka, respectively who were the KMPs of DLF. On November 30, 2006, DHDL, DEDL and DRDL sold their entire shareholding in Shalika to Felicite. On the same date, DHDL and DEDL, sold their entire shareholding in Sudipti to Shalika.


The three shareholders who, pursuant to purchase of shares of Felicite from DHDL, DEDL and DRDL on November 29, 2006, became 100% shareholders of Felicite, which in turn became 100% shareholder in Shalika and which in turn became 100% shareholder in Sudipti, were spouses of KMPs of DLF.  All the three transferees were “Housewives” and they held bank accounts jointly with their respective husbands. On this basis, it was alleged that their purchases of shares in Felicite were funded by their respective husbands’ joint accounts of their respective husbands it was alleged that DLF did not lose control over these three entities.


Charges raised by SEBI against DLF:-


·         Non- Disclosure of financial details relating to subsidiaries.


·         Non- Disclosure of outstanding litigation against subsidiaries


Comment: – 


·         Sudipti, Shalika and Felicite continued to be subsidiaries of DLF consequent to the sale of shareholding by the wholly owned subsidiaries of DLF in them and on the relevant dates there was “holding -subsidiary ” relationship between DLF and those three companies. Therefore disclosure in RHP/Prospectus as per regulatory requirement was mandatory.


·         Since FIR cannot be construed as an outstanding litigation, however a FIR in question do contain material information so as to enable the investors to take an informed investment decision and since the FIR was been lodged against one of Companies subsidiaries it should have been disclosed.


4.         Matrixx Initiatives, Inc. v. Siracusano, No. 09-1156


Here we discuss, a case6 decided by US Supreme Court where the Respondent alleged that the petitioners (“Matrixx”) violated provisions of the Securities Exchange Act of 1934 and Securities and Exchange Commission by failing to disclose material adverse effect reports of a possible link between Matrixx’s leading product, Zicam Cold Remedy, and loss of smell (anosmia), rendering statements made by Matrixx misleading. Petitioner had disclosed product liability litigation generally but did not disclose the lawsuit filed against them for Anosmia which was caused by their product Zicam.


On January 30, 2004, Dow Jones Newswires reported that the Food and Drug Administration (FDA) was “‘looking into complaints that an over-the-counter common-cold medicine manufactured by a unit of Matrixx which may be causing some users to lose their sense of smell’” in light of at least three product liability lawsuits. Matrixx’s stock fell from $13.55 to $11.97 per share after the report. Matrixx issued a press release clarifying their position on this issue after which their stock price leaped to $13.40 per share




·         As all adverse effects shall not necessarily required to be disclosed and reported, the determination of materiality shall be on a case to case basis. In the instance case, Zicam the product of Matrixx was an important product and non-reporting of adverse report would substantially affect investor’s views. Thus adverse information report would be material information for disclosure.


·         Considering the said case, if any lawsuit is pending against product liability claim than the Company shall specifically disclose the same as general disclosure would not be suffice.




The test of materiality is to be determined taking into account facts and the possible impact that the information/event under consideration may have on the investor’s investment decisions.


.                                                                     .

1 – Securities and Exchange Board of India. vs Cabot International Capital 2005 123 CompCas 841 Bom


2 – R.S.Joshi V. Ajit Mills (1977) 4 SCC 98


3 – Supra of Judgement R.S. Joshi, STO v. Ajit Mills Ltd, AIR 1977 SC 2279


4 – Sebi vs Ispat Industries Limited and as decided on 31 March, 2004, Bench – T Nagarajan


5 – Ketan Parekh vs Securities And Exchange Board Of India decided on July 14,2006, Bench – N Sodhi, C Bhattacharya, R Bhardwaj


6 –  Matrixx Initiatives, Inc., ET AL. v. Siracusano No. 09–1156. decided on March 22, 2011


Buyback of Shares – A Judiciary Prospective

Buyback-of-Shares-Mandar D Rane


When a Company has excess cash they may either use it for Investment, Acquisition of another company, repay debt or Buyback of shares. Buyback of shares in common parlance may be described as a procedure followed by a Company wherein it offers to purchase shares from its shareholders. Buyback of share is an indicator that a company believes its shares are undervalued and is very coherent strategy to give money back to its shareholders.

Section 68 Companies Act 2013(“Act”) deals with Buyback of securities. The section commences with a non- obstante clause i.e. “Notwithstanding anything contained in this Act, ….”.This would imply that, it gives an overriding effect to the said provision and is a complete code for buy-back of shares. Therefore the company desiring to buy-back its equity shares must follow procedure as set down in the provision. The section provides a detailed framework for a Company to Buyback its own shares. There is a clear distinction of the fund from which a buy-back can be financed. A buy-back exercise can be carried out only up to an amount up to 25 per cent of the paid-up equity capital in that financial year of the Company and the debt to paid up capital and free reserves ratio should not go beyond 2: 1.The shares to be bought back should be fully paid. There should be authorization in the articles of the company, a declaration of solvency and it shall be authorized by a special resolution of a company at its general meeting so as to ensure shareholder protection.

  1. Objectives of Buyback of Shares


  • Increase promoters stake:- Increase of promoter’s stake shows their confidence in the Company. Promoters holdings is diluted if, allotted ESOPs are exercised by employees .Due to dilution of their holdings the entity is prone to unwelcome takeover bids. Thus Buyback of shares assist in consolidating the stake and averting such bids.


  • Exit opportunity to shareholders:- Buyback of shares would provide an exit opportunity to institutional shareholders/large retail shareholders, which may otherwise not be available whilst at the same time safeguarding the interest of continuing shareholders as provided in Re: Abbott India Limited1 buyback casein 2007 where price at which the buy-back is proposed is Rs. 650/- and is higher than the book value of Rs. 141.65 per share


  • Increase in Earning per share: Buyback of share lead to a reduction in the number of Shares outstanding, which can lead to improvement in earnings per share as earnings is being distributed to few shares and an overall enhancement of value for shareholders continuing with the Company. For instance, if we consider a case of Deepak Industries Limited where the Company had proposed Buyback of 13,24,500 paid up equity shares. They projected EPS would surge from Rs. 34.06 to Rs. 45.42 as on March 31,2015 assuming full acceptance of Buyback offer.


  • Return to shareholders:- If there is no profitable utilization of the reserves, returning back its money to the shareholders out of its surplus funds and if the best possible price is being paid, than it would benefit the shareholders who would opt to divest their shares in the buy back.


  1. Pitfalls in Buyback of shares

  • Lack of Growth:- Buyback of shares is a signal to the Investors that there are no more profitable opportunities of Growth available in Business , rather than using excess cash for reinvesting or acquisition the Company adopts Buyback exercise and diverts it to shareholders.

  • Misleading Buyback Announcement:- Several Buyback of shares announcements are issued to generate investor interest and later disseminate the information regarding rejection of the Buyback of shares. It was held in In Re: Shalibhadra InfoSec Ltd2case in March 2008 where their Key personnel were is charged with having issued misleading and unsubstantiated advertisements regarding buyback of shares even when the company was not performing well. The announcement was issued with a view to create investor interest in the scrip even though the Company did not have sufficient resources to meet the buyback obligations.


  • Procedural Aspect:- The procedure set out in the Act shall be adhered strictly to protect the stakeholders. In case if any provision are not adhered to than it would attract penalty and officer in default are punishable with imprisonment. In Essar Bulk Terminals case3 in 2011 wherein the only observation raised by Regional Director was pertaining to the compliance with the procedure prescribed under Sec. 77 A of the Companies Act, 1956 for the buyback of the shares by the company.


  • Insider trading:- The most important concern is that Buyback of share is presumed as an indirect form of Insider Trading. In Continental Controls Ltd.’s case4wherein Buyback proposal was approved and later the said proposal was deferred. In the said case a close accomplice (i.e. person acting in concert) of the Managing Director of the Company heavily traded using the Buyback information after issuance of advertisement causing spurt in pricing of shares.Favourable conditions were created to operate in the market in the backdrop of such advertisements and sell the shares of the Company to the gullible public thereafter, another aspect that was pointed out was that the whole funding of Buyback was been accrued in future from a proposed technology transfer deal. It was held that such a said method of funding was not acceptable as per provision of Section 77A and such an information being a price sensitive information should have been disclosed to SEBI.

  1. Judicial decisions

Buyback of shares –Evasion of Tax?

Here we analyze a landmark judgement Capgemini India Private Limited’s case5 which was decided by High Court of Bombay in April 2015.

Capgemini India Private Limited (“Company”) decided to buyback 221,231 equity shares in accordance to provision of Section 391 read with Sections 100 to 103 of Companies Act 1956,which constituted 30% of issued , subscribed and paid up capital of the Company.

The Regional Director via an affidavit dated October 1, 2014 had raised objection and opposed sanction of the Scheme. Regional Director raised objection on grounds that buyback of shares can be effected only under Section 77A of Companies Act 1956/Section 68 of the Companies Act 2013.

The Regional Director further stated that, if the company effected buyback of shares via Section 77A/Section 68 of Companies Act 2013 than distributed income of would be chargeable to tax in accordance with Section 115QA of the Income Tax Act, thus the Scheme shall be rejected as it would amount to evasion of income tax and outflow of foreign exchange amounting to Rs. 248 crore.

The Company i.e. Petitioner contented, Regional Director has no locus standi in respect of tax matter particularly when Income Tax authorities have not broached any objections. Further it was argued that it is open for the Company to follow either of the procedure out of two available to effectuate Buy Back of shares and since the Company wants to buyback 30% paid up capital and free reserve it would not be possible under Section 77A/Section 68 as it is only permissible to buyback 25% of paid up capital and reserves of the Company, thus the Company can buyback only by following the procedure under Section 391 read with Sections 100 – 104 of the 1956 Act.

The petitioner placed reliance upon the case of SEBI V/s. Sterilite Industries (India) Limited6wherein it was held that, The legislative intention behind the introduction of section 77A is to provide an alternative method by which a company may buyback upto 25 per cent of its total paid up equity capital in any financial year subject to compliance with Subsections (2), (3) and (4). Section 77A is a facilitating provision which enables companies to Buyback their shares without having to approach the court and Prior to the introduction of section 77A, the only manner in which a company could buyback its shares was by following the procedure set out under sections 100 to 104 and section 391 of Companies Act 1956.

Thus Hon’ble High court sanctioned the Scheme of Arrangement with clarification the issues relating to Income tax that may arise out of the Scheme are left open to be dealt with and decided by the Income tax Authorities in accordance with law.

Noting’s: – Section 115QA was inserted via Finance Act 2013 wherein amount of distributed income (i.e. consideration paid by the company on buy-back of shares as reduced by the amount which was received by the company for issue of such shares) of the company on buy-back of shares was chargeable to tax. Buy Back of shares in accordance to Section 77A of Companies Act 1956.Thus if the Buyback of shares was carried out through Section 391 of Companies Act 1956 the said tax obligation was not triggered. Thus, Finance Act 2016 has amended Section 115QA of Income Tax wherein the provision will be applicable to buy back of unlisted share undertaken by the company in accordance with the provisions of the law relating to the Companies and not necessarily restricted to section 77A of the Companies Act, 1956.

Buyback of shares – Unilateral Purchase of Shares?

Here we analyze Godrej Industries Ltd.’s Case7 adjudicated at National Consumer Disputes Redressal Commission , Godrej Industries Limited (“GIL”) laid down a scheme for buyback of 40% of paid up capital of GIL.After sanction from High Court, GIL sent letter of offer to all its shareholders.

The Complainant held 45 shares, paid up value Rs.6.The Complainant was in receipt of a Cheque amounting Rs.810 (45 shares of Rs. 18) but was returned. The Complainant than sent a letter to GIL stating that she did not receive any buyback offer and nor did she exercise any option of buy back of shares. The Complainant further stated such an act amounted to a unilateral purchase of share and amounted to compulsory acquisition of shares.

The Complainant had stated that option form stated by GIL has not been received thus question of intimation would not arise and there is no evidence of actual delivery of the form. The Complainants counsel further argued that holding shares in Company is similar to possessing a property and the same could not be purchased by GIC in the manner, stated by them. They further stated that after Scheme was sanctioned no public notice was issued and implied consent for Buy-Back.

GIL counsel referring to Scheme of Arrangement stated unless the shareholder expressed its desire in written intimation to Company within 30 days of record date it is presumed that consent is accorded for Buyback of shares. They further stated that meeting of shareholders was convened via publication of notices and still the Complainant did not prefer any objection to the Scheme.GIC further contended that The Company had, therefore, acted in accordance with provisions of the Scheme and the procedure laid down in the Companies Act.

The decision was in favour of GIC wherein it was directed to make the payment along with interest.

Noting’s: – The basic issue in the said case revolved around whether a shareholder can be made to sell shares of a Company without consent and is the scheme unfair and against the interest of the shareholders. For the first instance in given case , as per the scheme if the shareholder did not exercise the option to retain shares within specified time limit , it was assumed that shareholder accorded for buying back the shares and the shareholder did not prefer any objection when scheme was known to shareholders through notices and publication. For second instance, since the scheme has been duly approved by the Court, the Company is well within their rights to proceed with the approved scheme and the Company has taken appropriate steps to apprise shareholders about the Scheme.

Buyback of shares – Reduction of Capital?

In the present case of Goldman Sachs (India) Securities Pvt. Ltd8which was a wholly owned subsidiary of Goldman Sachs (Mauritius) LLC. The Indian entity of Goldman Sachs had remitted certain amount to its parent entity under Buy Back of Shares Scheme which was over and above the face value as approved in General Meeting.

The Tax authorities contented that Buy Back carried out by the Company amounted to reduction of Capital. The tax authorities were of view that, such a remittance of an amount which is above face value represents income by way of Dividend and hence tax at source should be deducted. Following queries were deliberated in the said case:-

Does Buy Back Deal be termed as Colourable Device?

Since the deal entered in by the Entity is in compliance to applicable laws and does not violate any provisions of the Act. Even If the Buy Back transaction in said scenario leads to non-payment or lesser payment of Tax it cannot be held as a Colourable transactions.

Can Assesse be held in default for non-deduction of Tax at source?

Profit arising out of Buy Back is taxed as Capital Gain, the said Capital Gain arised is taxable at hands of parent company in Mauritius however under Indo – Mauritius Treaty capital gain is not taxable to parent Company. Since the Assesse is not liable to deduct tax as per provision of Income Tax Act it cannot be held as Assesse in Default, thus the penal provision of Income Tax would not be applicable.

Can Buy Back of share be equated to reduction of Capital?

Here we have to consider two provisions Section 2(22) (d) and Section 46A of Income Tax Act. As per Section 2(22) dividend is defined inclusively and as per sub-section (d) “dividend is any distribution to its shareholders by a company on the reduction of its capital…”to the extent to which the company possesses accumulated profits. Section 46A on other hand asserts the difference between the cost of acquisition and value of consideration received by the shareholder or the holder of others specified securities, as the case may be, shall be deemed to be the capital gains arising to such shareholder or holder of specified securities. Thus we conclude after considering both sections of the Act that Buyback of shares and reduction of capital are two different concepts and Buyback of shares by Corporate Entity cannot be characterized by deemed dividend but profits arising out of Buyback is taxed under the head Capital Gain.

Noting’s:In the said case two important issues were highlighted, firstly does Buyback of shares be considered as a colourable device, wherein it was stated that Non-payment of taxes by an entity in given circumstances could be a moral or ethical issue, however entities can be penalised only if any provision of law has been violated. Secondly, Is Buyback of share and Reduction of shares one and the same, it is pertinent to note that there is a vast difference between both. In addition to difference mentioned above, in case of Buyback of shares there are limitations on quantum of Buyback, the sources of funding and conditions as specified for Buyback. In Buyback of shares consent of members in suffice, however in case of Reduction of Capital must be approved by the Court, Creditors and Members.


As we have seen objectives and pitfalls of buyback of shares along with few judicial pronouncement pertaining Buyback of shares. Shareholders need to be extra vigilant in Buyback of shares proposal and scrupulous examine the Company’s financial position, even the regulatory authorities are trying their best to protect the interest of investors by issuing clarification on tax and procedural aspects of Buyback of shares.


1 In Re: Abbott India Limited on 24 January, 2007, Securities Appellate Tribunal, Bench – G Anantharaman

2 In Re: Shalibhadra Infosec Limited on3 March, 2008, Securities Appellate Tribunal, Bench – V Chopra

3 High CourtGujarat, EssarBulk Terminal Ltd, CompanyPetition No. 50 of 2011, Coram – HonourableMr. Justice Anant S. Dave

4 SEBI vs Continental Controls Ltd. on 14 February, 2008, Securities Appellate Tribunal, Bench – V Chopra

5 High Court Bombay, Capgemini India Private Limited, CompanyPetition No. 434 of 2014, Coram – S.J. KATHAWALLA, J.

6 High Court Bombay,SEBI vs Sterlite Industries (India) Ltd., 2003 113 CompCas 273 Bom, 2003 45 SCL 475 Bom

7 National Consumer Disputes Redressal , Ritu Bhargava vs Godrej Industries Ltd & Ors on 23 January, 2014

8 Income Tax Appellate Tribunal – Mumbai, Goldman Sachs (India) Securities on 12 February, 2016