Balco arbitration: What does it mean for Sterlite?

Excerpts from What's Hot on CNBC-TV18 Watch the full show » RELATED NEWS Sterlite Ind Q3 cons net profit down at Rs 1101 cr Balco arbitrator says Sterlite cannot buy balance 49% stake ALSO READ See latest News about Sterlite Ind See previous management interviews See what other Experts & Brokerages are saying about Sterlite Ind

Sterlite Industries has been dealt a serious blow in the Balco arbitration matter. The arbitrator says that Sterlite cannot buy the balance 49% stake in Balco. This arbitrator award would impact residual stake sale in Hindustan Zinc as well.

In an interview with CNBC-TV18's Shereen Bhan, Supreme Court Advocate Gopal Jain, speaks about the issue and gives his outlook going forward.

Here is a verbatim transcript of the exclusive interview on CNBC-TV18. Also watch the accompanying video.

Q: They have used Section 111A of the Companies Act to actually reject Sterlite's plea, but was this Section 111A intended as a blanket restriction on such kinds of transfers? What will this really mean for transactions done by corporate India?

A: There are two parts to your question. Obviously when 111A was there, it was meant for free transferability of shares. Usually when you have a contractual document, you have to comply with the legal stipulations, the legal regime at that point in time and the articles of the company. So, to the extent that a shareholders agreement is not in consonance with the article, it is not binding on the company and therefore, Supreme Court judgment in Rangarajan's case to that effect. Ofcourse if it offends the provisions of 111A then also it would obviously not stand legal scrutiny. I have not seen the award, but if this is what they have held then probably in the hierarchy the law comes first and therefore they have said that that particular stipulation goes.

The second part, I think is a very important issue that you have raised because this sends a distress signal across the board and across sectors. I think that Rangarajan's case is pending reconsideration. If not, the government must also now recognise that the way of doing business is to have shareholders agreement and that must therefore be reflected in the law because the law must also change to keep pace with the way business transactions are done and the manner in which two shareholders agree. But till the law changes, the shareholders agreement has to be in consonance with the law.

Q: So what relief can we really expect for Sterlite because we understand that the company will be appealing and this award is likely to impact the residual stake sale in Hindustan Zinc, of course that hasn't gone into arbitration just yet?

A: An arbitral award under the 1996 Arbitration Conciliation Act, there is no appeal. There is a provision to challenge it under what we call section 34 which has very limited grounds because the whole idea was to have finality of awards and not have many legal challenges thereafter. So, if it's a matter of interpretation, the arbitrator's word is virtually final. So, unless there is a violation of natural justice for some serious infirmity, usually the rule is not to interfere with arbitral awards. So, unlike an appellate power, it is only an application to set aside on limited grounds. Also, when the arbitrators happen to be two former Chief Justice of India, the weight which is attached to that award apart from what it holds also will weigh with any judge who looks at a potential challenge.