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MTNL Vs CanFina: PSE Asked To Deposit Rs 442 Crore Related With An Arbitral Award

“The Order is extremely significant because of the direction to deposit the entire awarded amount and by a Public Sector Enterprise. Courts were always reluctant in granting such orders against PSEs. This Order is a great step towards providing a level playing field in the domestic commercial arbitrations, said Senior Advocate Chinmoy Sharma appearing for CanFina.

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The Delhi High Court recently stayed an arbitration award and asked the Public Sector Enterprise, MTNL, to refund an amount of 160 Crore along with interest amounting to Rs 282.69 crore.

In the instant case, MTNL had approached the Delhi High Court challenging the enforcement of an arbitration award.

Factual matrix of a 3-decade-old dispute

The transactions between the parties relate back to the period 1991-92. Pursuant to guidelines issued by the Government of India regarding flotation of bonds issued by Public Sector Undertakings [hereinafter, “PSUs”] in the telecommunications and power sectors, MTNL was granted permission for issuance of bonds on 17.12.1991.

MTNL and CanBank Financial Services Ltd. [respondent No. 2,“CanFina”] entered into a Memorandum of Understanding dated 10.02.1992, under which Letters of Allotment [“LoAs”] were to be issued and CanFina was to subscribe to bonds issued by MTNL. It was provided that the consideration would not be paid by CanFina to MTNL immediately, but be invested with CanFina. 

Nature of investments led to dispute between MTNL and CanFina

The dispute between the parties revolves around the nature of the investment. LoAs were accordingly issued by MTNL to CanFina for bonds to the tune of ₹200 crores. MTNL thereafter took a separate loan of ₹200 crores from the Industrial Development Bank of India which it assigned to CanFina, to be paid directly to IDBI from the proceeds of the amounts payable to it. The first instalment was paid by CanFina to IDBI on 11.05.1992. According to MTNL, the transactions were thereafter affected by a wide-ranging securities scam in the Indian stock market, which came to light in April-May 1992. Canara Bank Ltd. [respondent No. 1, hereinafter “the Bank”], which was the holding company of CanFina, took a transfer of the LoAs from CanFina and sought registration of the bonds and payment of interest by MTNL. 

By a communication dated 14.10.1992, MTNL disputed the transaction and thereafter asserted that CanFina was liable to pay in terms of the arrangement between the parties, to IDBI and the balance amount to MTNL. By a communication dated 09.02.1993, CanFina expressed its inability to do so. Therefore, MTNL cancelled the LoAs on 20.10.1993, which led to considerable correspondence between the parties, including administrative efforts to resolve the matter. Writ proceedings were instituted by the Bank in this Court [W.P.(C) 560/1995], wherein this Court ultimately referred the parties to arbitration by an order dated 21.10.2011.  The impugned award dated 03.03.2022 is the culmination of those proceedings. 

Whether MTNL entitled to an unconditional stay 

The arbitrator had allowed the claims of the Bank and granted a declaration that the cancellation of the bonds by MTNL was illegal. MTNL was consequently directed to refund a sum of ₹160  Order dated 21.10.2011 in W.P.(C) 560/1995  crores to the Bank with interest @ 6% per annum from 20.10.1993 until realisation. Costs were also assessed against MTNL. 

While the validity of the impugned award remains to be examined in the proceedings filed by MTNL under Section 34 of the Arbitration and Conciliation Act, 1996, the question for determination at this stage is whether MTNL is entitled to an unconditional stay on enforcement of the impugned award.

ASG Balbir Singh appearing on behalf of MTNL disputed the assertions of the respondents that CanFina had, in fact, transferred the amount for the subscription of the bonds to MTNL on the issuance of the LoAs, and had retained the amount at the instance of MTNL for investment in the stock market, which then collapsed in the wake of the 1992 scam. He submitted that this transaction was fraudulent and no request for CanFina to invest in market securities on behalf of MTNL was made at any stage. 

Relying on JPC report, Singh asserted that CanFina had been violating RBI guidelines with regard to Portfolio Management Services and that its management was well aware that the affairs were being conducted irregularly.

Singh relied upon reports of the Janakiraman Committee and the R. Nanjappa Committee, as well as the Joint Parliamentary Committee all of which inquired into the circumstances of the aforesaid securities scam. 

Singh invoked the second proviso to Section 36(3) of the Arbitration and Concilliation Act to state that MTNL has made out a prima facie case to the effect that the contract which is the basis of the award was induced or affected by fraud or corruption, and is thus entitled to an unconditional stay.

No prima facie case of fraud says CanFina

In response to MTNL's submissions, Senior Advocate Chinmoy Sharma and Senior Advocate Santosh Paul appeared for the respondents and submitted that no prima facie case of fraud or corruption has been made out. They referred to the bank statement of CanFina from 01.02.1992 to 29.02.1992, placed on record before the arbitrator, to submit that there were indeed cross-transactions of ₹200 crores each on the same day recorded in the books, which supports the conclusion that the subscription to the bonds and investment through Portfolio Management Services were two separate transactions. 

The respondents relied on the correspondence placed on record to show that the intention of the parties was for securities to be held by CanFina on behalf of MTNL, and suggested that MTNL’s case was an afterthought. 

MTNL not prima facie entitled to unconditional stay: Delhi HC

After hearing both parties, the question before Delhi High Court's Bench of Justice Prateek Jalan was of the view that MTNL is not entitled to an unconditional stay of the award. 

"MTNL has not been able to demonstrate prima facie that the contract which is the basis of the award, was induced by fraud or corruption", Justice Jalan, said in his order.

Certain observations have undoubtedly been made in the committee reports relied upon by MTNL, which support the allegation of irregularities in CanFina’s transaction at the relevant time. However, the contemporaneous correspondence does not establish a case of fraud or that MTNL was not aware of the nature of the transactions, he added.

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