BALCO was perhaps one of the first instances of privatisation by the NDA Government a fewyears ago. Sterilite Industries Ltd made a successful bid for a 51 per cent stake at around Rs 551 crore. In its aftermath, there was a heated debate on the correctness of its valuation. The then Disinvestments Minister, Mr Arun Shourie, faced flak for what was termed as selling the family silver cheap. The Left parties argued that the prime assets of the company were worth around Rs 2,500 crore and at least half of this must have been extracted from the buyer. To this, Mr Shourie's counter was that a going concern could not be valued on the assumption of liquidation.

Be that as it may, the second round of controversy that erupted recently, centres around whether the Government is bound to sell the remaining 49 per cent stake to Sterilite, as contemplated by the shareholders' agreement.

Rangaraj vs Gopalkrishnan

The Supreme Court's ruling in V. B. Rangaraj vs V. B. Gopalakrishnan (1991 6 CLA 211) is the authority for the proposition that a clause in a shareholders' agreement that is not repugnant to the Companies Act or to the company's Memorandum would stand legal scrutiny only when it is incorporated in the company's Articles.

On this touchstone, it would be futile for companies operating in India to enter into such agreements because by the very nature of things it would be impossible to incorporate everything contemplated as private affair between two promoters in the Articles of Association (AoA).

At any rate, if everything were to be made a part of the Articles, a separate shareholders' agreement would become redundant. Therefore, the Supreme Court's decision should be read in the context in which it was made any restriction on transfer of shares found in the AoA of a private company can be enforced only if the same restriction is also incorporated in the company's Articles.

The apex court's anxiety was no shareholder qua shareholder should be stumped by a document, which the law does not look upon as the basic charter of a company the basic charter of a company are three: The company law, its own Memorandum and its Articles.

Pact not to stump shareholders

The shareholders' agreement, therefore, should not be used to stump a member or scupper his/her rights because, as per Section 36 of the Companies Act, 1956, the Articles bind the shareholders and the company as well as the shareholders inter se as if each shareholder had individually entered into a covenant with the company as well as amongst themselves. This supremacy of the Articles, therefore, cannot be vested on any other document, including the shareholders' agreement.

But it is respectfully submitted that when the shareholders' agreement between the two promoters does not impinge upon the rights of the company or its other shareholders as guaranteed by its charter and such agreement is strictly a private contract between them without involving the company or the other shareholders, then there is no reason why it cannot be enforced.

Thus, when the Government and Sterilite Industries Ltd agreed that the former would sell to the latter the residual 49per cent shares that it owns in BALCO within the specified period at the price fixed in the manner agreed upon, such a clause becomes very much enforceable. The Attorney-General is reported to have opined that such a sale would be repugnant to the Companies Act and, hence, should not be gone through.

Consistency with Companies Act

It is true that the shareholders' agreement, in order to be enforceable, should not be inconsistent with the Companies Act, as pointed out by the apex court in the V. B. Rangaraj case. But giving Sterilite the first right of refusal to buy the residual stake does not in any way violate any provision of the law express or implied. Section 81 contemplates rights issue to all the shareholders in proportion to their existing holdings only when the company itself expands or increases its capital, whereas what the Government wants to do is sell the shares it already holds in BALCO.

In fact, the hallmark of a public company is free exit a shareholder can exit by disposing of his holdings to anyone of his choice, and the Government chose Sterilite for this purpose. It should not be allowed to renege on this legal commitment, especially when Sterilite has issued a cheque for Rs 1,098 crore apparently in a manner agreed upon by the two sides for the residual stake.

The Left wants the Government to dispose of its residual holding by making a public issue. In all fairness to the Left parties, they could not have forced the government of the day to toe their line simply because at that time the BJP was in power. But good governance requires the honouring of commitments made by predecessors so long as there is no mala fide involved in the shareholders' agreement. Prejudices and proclivities of coalition partners cannot hold contracts to ransom. While litigation in India is tediously tortuous, the matter would go to the Supreme Court if Sterilite pursues its remedies to their logical conclusion. This would incidentally give the apex court the occasion to clear the air on the implications of its judgment in the V. B. Rangaraj case.

S. Murlidharan
(The author is a Delhi-based chartered accountant.)