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2019 (8) TMI 974 - HC - SEBIBuyback of shares at a grossly understated valuation - breach of the minimum public share holding requirement as specified in Rule 19(2) and Rule 19 (A) of the Securities Contracts (Regulations) Rule 1957 - grievance of the petitioners that the process of buyback is being undertaken when investigation in respect of the promoters of respondent No.2 is pending - Whether the Circular dated July 25, 2017 issued by the SEBI is non-est in law? - HELD THAT - Vide the said circular SEBI permitted a Company to buy-back the shares so as to provide an exit to the public shareholders. At the outset, it must be stated that the circular has been challenged after two years of its coming into existence. Within these two years, it has been made operational / implemented. It is quite late in the day for the petitioners to challenge the circular on the ground that the company cannot be allowed to buy back shares. Even otherwise, the impugned circular has to be read in conjunction with Section 68 of the Companies Act as it stipulates buyback of shares in a particular manner. Any reading of the circulars in the manner stated by the petitioners shall be in violation of the Companies Act creating an anomalous situation whereby the buy-back of shares while the Company is on the Dissemination Board shall be contrary to the Companies Act which allows buy-back as a legitimate and legal corporate action. Having said that, this court proceeds to deal with the submissions of the counsel for the parties on the premise that the company can buy back shares. The exit circulars nowhere expressly state that all the public shareholders need to be given complete exit. The reliance was placed on the words number of outstanding public shareholders in clause (VII) of Annexure A of 2016 circular. The words have to be read in the context when exit offer is given an escrow account shall be opened in favour of the valuer / designated stock exchange wherein, deposit of the amount on the basis of exit price and number of outstanding public shareholders shall be made. This is keeping in view, all the public shareholders shall be given option to sell their share but it is not necessary all the public shareholders shall opt to sell their shares. It was rightly pointed out by Mr. Sethi that shareholder is also free to reject the buy-back offer and continues to be a shareholder. So, it follows the circulars do not contemplate the exit of all public shareholders. The plea of Mr. Vashisht that the impugned circular does not give timelines and road map is concerned, the same is also without merit. Also the plea that the impugned circular does not protect the interest of the investors is concerned, as stated above there is no compulsion for the investors to sell or not to sell his share. So, it cannot be said that the petitioners interest has been put in jeopardy. The issue of identifying the promoters has no effect on a company giving an exit to its public shareholders, as the option to buy back the shares of the public shareholders is available through a promoter or through the company itself. It is the case of the respondent no.2 BNL that it has no promoters and it has decided to buy-back the shares itself. Assuming promoter / promoter groups are identified, then also the discretion / right of the company to buy-back shares cannot be interdicted / curtailed as is clear from the impugned circular which provides for such an option to a Company. This conclusion also answer the plea of Mr. Vashisht that failure on the part of the promoters to give full and fair exit to public shareholders shall entail penalties as being without merit inasmuch as, when there is no obligation, there is no question of penalties. Circular of 2016 stipulates action against a company, its director on their failure to provide exit to the shareholders, which includes the action stated therein. It is not the case of the petitioner that respondent no.2 company has failed to provide exit to its shareholders. So, it follows, the postal ballot dated July 13, 2019 is in that direction, which cannot be faulted. One of the pleas of Mr. Vashisht was that the price offered for share is not the fair value, and amongst other factors, market value of investments made by the respondent No.2 have not been considered and even the valuation report dated June 6, 2019 issued by Corporate Professionals Capital Private Limited does not reveal the fair value of the shares of the Respondent No.2 and in fact admits lack of information and documents, is concerned, if the petitioners are not satisfied with the valuation, they are within their right not to accept the offer of buy-back at that rate. I note, respondent no.2 has justified share value by stating that under Section 68 (2)(c) of the Companies Act, 2013, a company can buy-back 25% of the Company s full paid up equity share capital and free reserves and as per the last unaudited stand alone financial statements for the year ending March, 2019, the aggregate paid up share capital and free reserves of the company amounted to ₹ 97,87,99,681/- and 25% of the amount would be ₹ 24.46 Crores and with each share valued at ₹ 11,229/-, the total number of shares that would be offered is 21,791/- equity shares. If that be so, there is some justification of the respondent no.2 to value the share @ ₹ 11,229/-. In any case, this court does not have necessary wherewithal to determine the share value and surely the determination shall be beyond the scope of judicial review. We agree with the submission made by Mr. Sethi that Prayer (2) of the writ petition challenging the Postal Ballot and Notice and PA of the respondent no.2, shall not be maintainable as their issuance is purely an action of the company incorporated under the Companies Act. It is not the case of the petitioners that the same have been issued contrary to the circulars issued by SEBI or provisions of the Companies Act. That apart through this writ petition, the petitioners who are two shareholders holding a miniscule number of shares cannot interdict the process of buy back. Viability of buy-back needs to be decided through the special resolution, passed at the general meeting of the company through the postal ballot, wherein it is clearly mentioned that a shareholder can vote for or against the resolution. This court is of the view that the impugned circular dated July 25, 2017 is in accordance with the law and the prayer made at serial no.2 of the writ petition cannot be granted as being not maintainable. In so far as the prayer no.3 is concerned, there is no dispute that the SEBI is investigating the issue of breach of MPS norms by respondent no.4, which has no connection with the issue of buy back of shares by the Company.
Issues Involved:
1. Validity of SEBI Circular dated July 25, 2017. 2. Compliance with Minimum Public Shareholding (MPS) norms. 3. Fair valuation of shares for the buyback. 4. Maintainability of the writ petition against a private company. 5. SEBI's obligation to protect investors' interests. Detailed Analysis: 1. Validity of SEBI Circular dated July 25, 2017: The petitioners challenged the SEBI Circular dated July 25, 2017, which allowed companies to buy back shares to provide an exit to public shareholders. The court noted that the circular had been operational for two years and had been implemented in other cases, such as T. Stanes and Company Limited. The court held that the circular must be read in conjunction with Section 68 of the Companies Act, which governs buyback procedures. The court found no illegality in the circular, stating that it does not mandate a complete exit for all public shareholders but allows shareholders the option to remain if they choose. 2. Compliance with Minimum Public Shareholding (MPS) norms: The petitioners argued that the respondent company, Bharat Nidhi Limited (BNL), breached MPS norms by including promoters and promoter groups as part of public shareholders. The court noted that SEBI is investigating the breach of MPS norms. The court held that the identification of promoters has no effect on the company's ability to buy back shares, as the option to buy back can be exercised by the company itself or through promoters. The court found no merit in the argument that SEBI failed to act against BNL, as the petitioners had not made any formal complaint to SEBI. 3. Fair valuation of shares for the buyback: The petitioners contended that the valuation of shares offered for the buyback was not fair and did not consider the true value of BNL's investments. The court stated that if the petitioners were not satisfied with the valuation, they were free not to accept the buyback offer. The court noted that BNL justified the share value based on Section 68 (2)(c) of the Companies Act, which allows a company to buy back up to 25% of its paid-up equity share capital and free reserves. The court held that it lacked the expertise to determine the fair value of shares and that such determination was beyond the scope of judicial review. 4. Maintainability of the writ petition against a private company: The court held that the writ petition challenging the postal ballot notice and public announcement by BNL was not maintainable, as BNL is a private company incorporated under the Companies Act. The court emphasized that the process of buyback needs to be decided through a special resolution passed at the general meeting of the company. The court also noted that the petitioners, holding a minuscule number of shares, could not stall the buyback process. 5. SEBI's obligation to protect investors' interests: The petitioners argued that SEBI failed to protect the interests of public shareholders by allowing the buyback under the impugned circular. The court held that SEBI's circular does not compel shareholders to sell their shares and allows those who wish to remain shareholders to do so. The court found no violation of investors' interests, as the circular provides an option rather than a mandate for exit. Conclusion: The court dismissed the petition, holding that the SEBI Circular dated July 25, 2017, is in accordance with the law and does not mandate a complete exit for all public shareholders. The court found no merit in the arguments regarding the breach of MPS norms and the unfair valuation of shares. The writ petition against the private company BNL was deemed not maintainable, and the court emphasized that the buyback process should be decided through corporate democracy.
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