Supreme Court Establishes Balanced Approach to Interest in Long-Running Share Valuation Disputes

1. Introduction

In I.K. Merchants Pvt. Ltd. v. The State of Rajasthan (2025 INSC 418), the Supreme Court of India addressed a five-decade-old litigation relating to the valuation of shares and the rate of interest payable for the delay in payment of the enhanced share value. This case involved a dispute wherein I.K. Merchants Pvt. Ltd. and others (“the appellants”) sold shares of a company (now known as Rajasthan State Mines and Mineral Ltd.) to the State of Rajasthan. Following prolonged litigation over the “fair value” of these shares and payment of the difference in valuation, the single remaining issue was the rate of interest the appellants were entitled to receive for the delayed payment.

Given the absence of an express agreement on how interest should be calculated, the Court thoroughly examined Section 34 of the Code of Civil Procedure, 1908 (CPC). Ultimately, it recognized the transaction as commercial and established a balanced formula for awarding interest: simple interest at 6% per annum from July 8, 1975, to the date of the decree, and 9% simple interest from the date of the decree until realization of the payment.

2. Summary of the Judgment

The Supreme Court first clarified that the dispute over share valuation is now final. An independent valuer, appointed pursuant to judicial directions, fixed the share price at Rs.640 per share. That valuation was affirmed by the High Court and had even passed scrutiny before the Supreme Court in a previous appeal.

However, the crux of the remaining disagreement between the parties was the appropriate rate of interest that should apply to compensate the appellants for the decades-long delay in receiving the fair share value. The following points encapsulate the Court’s final rulings:

The claim for monthly or quarterly compound interest was rejected as being excessive and beyond the scope of Section 34 CPC.
The Court held that the High Court’s award of 5% simple interest per annum was inadequate, considering the transaction was commercial in nature and had spanned fifty years of delay.
Balancing fairness to the claimants with the burden on the public exchequer, the Supreme Court modified the High Court’s decision and awarded:
- Simple interest at 6% per annum from July 8, 1975, to the date of the decree.
- Simple interest at 9% per annum from the date of the decree until realization.
All other conclusions regarding the share transfer and valuation remain as previously decided, leaving only this interest modification as the final determination by the Court.

3. Analysis

3.1 Precedents Cited

Several judgments guided the Supreme Court’s approach to awarding interest:

Union of India v. Tata Chemicals Ltd. (2014) 6 SCC 335: Reiterated the principle that an obligation to refund or pay a due amount naturally carries an entitlement to interest for the “time value of money.”
Fertilizer Corporation of India Ltd. & Ors. v. Coromandal Sacks Private Ltd. (2024) 8 SCC 172: Clarified that interest is neither a penalty nor punishment, but rather compensation for continuous deprivation of a lawful entitlement.
Bernard Francis Joseph Vaz & Ors. v. Government of Karnataka & Ors. (Civil Appeal No. 17 of 2025): Emphasized that long delays (in that case, over 22 years) in paying amounts due deprive parties of legitimate value and purchasing power, underscoring the need for interest to offset inflationary losses.
Alok Shanker Pandey v. Union of India (2007) 3 SCC 545: While there is no “one-size-fits-all” rate of interest, the Court may use a discretionary yardstick to award a rate that balances equity, reasonableness, and time value of money.
Central Inland Water Transport Corporation Ltd. & Anr. v. Brojo Nath Ganguly & Anr. (1986) 3 SCC 156: Although dealing with unconscionable contracts, it illustrated the broader principle that the State may not hide behind the notion of public interest if the result is oppressive or unfair for the other party.

3.2 Legal Reasoning

The Court’s reasoning pivoted on Section 34 of the Code of Civil Procedure, under which the court may award interest in phases: pre-suit, pendente lite (during the suit), and post-decree interest. The Court found that:

There was no contractual or statutory provision fixing interest between the parties, so Section 34 CPC would govern.
The “commercial transaction” explanation appended to Section 34(1) CPC applied. Despite the State’s public character, the actual purchase of shares for capital infusion was deemed commercial, thus opening the possibility of awarding interest in excess of 6% post-decree.
The High Court’s earlier 5% simple interest was insufficient, given the extraordinary duration (five decades). Relying on the principle of equitable compensation for the time value of money, the Court adjusted the rate to 6% from 1975 to the date of decree, and 9% thereafter until realization.

3.3 Impact

This Judgment contains vital takeaways for both litigants and governmental bodies involved in commercial transactions:

Clear Guidance on Interest Rates: Courts may grant differing interest rates before and after a decree, tailoring them to the transaction’s commercial nature and to the length of the prolonged litigation.
State’s Role in Commercial Transactions: The mere fact that one party is a State government does not shield it from paying adequate interest reflecting commercial realities. Once the government enters the commercial domain—buying shares or property—it may be required to pay interest at market-based (or higher) rates.
Equitable Approach to Delayed Dues: The Supreme Court underscored the importance of compensating a party who has been deprived of legitimate dues for a long period, to account for inflation and lost opportunities.
Guidance for Future Disputes: Litigants can expect courts to evaluate interest rates for fairness and equity, ensuring neither side gains an unjust advantage through delayed litigation.

4. Complex Concepts Simplified

Time Value of Money: This represents the idea that money available now is worth more than the same sum in the future, due to its potential earning capacity and inflation’s erosion of value.
Commercial Transaction under Section 34 CPC: A transaction is considered commercial when it relates to trade, industry, or business. This classification permits courts to award an interest rate higher than 6% post-decree under Indian law.
Pendente Lite Interest: This term refers to interest accruing while a lawsuit is ongoing. Courts can award this to compensate for the loss of use of money during the litigation period.
Post-Decree Interest: Once a final amount is determined by judgment, the successful party is normally entitled to further interest until actual payment. The usual upper limit under Section 34 CPC is 6%, unless the transaction is commercial, in which case a higher rate is permissible.

5. Conclusion

The Supreme Court’s decision in I.K. Merchants Pvt. Ltd. v. The State of Rajasthan offers a pivotal precedent on awarding interest in commercial disputes that drag on for decades. Highlighting that the State’s public character does not exempt it from equitable principles, this Judgment clarifies that a fundamentally commercial share transfer warrants competitively realistic interest rates.

By granting a two-tiered interest rate—6% from 1975 to the decree date, and 9% thereafter until payment—the Court balanced the appellants’ prolonged deprivation against the public burden on the State’s exchequer. This approach ensures the claimant is fairly compensated for inflation and lost investment opportunities while preventing the rate from becoming punitive. In turn, it serves as authoritative guidance for Indian courts in similarly protracted financial disputes, reaffirming that equity, fairness, and the commercial nature of a transaction inform a just interest award.