2020 (1) TMI 765 - AT - Companies Law

Approval of scheme of amalgamation - valuation report - HELD THAT - Valuer has to be an independent person assigned the important duty that his report is equitable to all stakeholders for which his report is to be relied upon. As regards the arguments of the learned counsel for the appellant that the valuation report has been got prepared from an unregistered valuer is concerned, we note that earlier there was no such section in Companies Act - Section 247 of the Companies Act, 2013 was notified w.e.f. 8.10.2017. The compliance of Section 247 would arise only after this date. There has been no regulation of valuers under the Companies Act, 1956 though the practice has been well established that this valuation was being done by the Chartered Accountants or valuers. The valuation report was submitted by the Valuer in March, 2017 - But the duties of the valuer as all along is necessitated that as a professional he will do his work i.e. Make an impartial, true and fair valuation of any assets which may be required to be valued; Exercise due diligence while performing the functions as valuer; Make the valuation in accordance with such rules as may be prescribed. In view of the serious compromises in the process of the valuation of shares the creditability of the exchange ratio recommended could at best be termed as guess work by the valuer. The scheme based on such a valuation report losses its creditability and will impact the entitlement of the shareholders of the transferor companies. The valuer made a valuation disregarding the methodology, methods or share entitlement ratio even as stated by him in his valuation report. No valuation of each share of every company has been done to arrive at the exchange ratio and we are convinced that only the guess work has been done to arrive at share exchange ratio. We are unable to convince ourselves that on the basis of this valuation report and for other reasons recorded above the amalgamation can be termed as fair to all stakeholders. Such Scheme could not have been approved. Impugned order is quashed and set aside - Appeal allowed.

Summary

Issues Involved:
1. Locus Standi of the Appellant
2. Service of Notice for the Extraordinary General Meeting (EGM)
3. Valuation of Shares and Swap Ratio
4. Compliance with Section 66 of the Companies Act, 2013
5. Objections by the Regional Director, Southern Region, Ministry of Corporate Affairs
6. Allegations of Scheme Being Promoter Oriented and Anti-Minority/Public Shareholders
7. Intervenors' Objections

Issue-Wise Detailed Analysis:

1. Locus Standi of the Appellant:
The 9th Respondent argued that the appellant lacked locus standi to file the appeal, asserting that the appellant was neither a shareholder nor a Power of Attorney holder of any shareholder in the respondent companies. However, the appellant contended that he held a Special Power of Attorney on behalf of Mr. Laxman Das, a shareholder in the 1st and 2nd Respondent companies. The tribunal found that the appellant had the right to oppose the scheme as the Power of Attorney holder of Mr. Laxman Das and that the issue of locus standi was not raised before the NCLT, thus could not be entertained for the first time in appeal.

2. Service of Notice for the Extraordinary General Meeting (EGM):
The appellant argued that there was no proof of service of the Court Convened Meeting notice to shareholders, which violated the NCLT's directions. The 9th Respondent countered that notices were published in newspapers and sent by speed post, with postal receipts provided as evidence. The tribunal was convinced that the directions given by the NCLT were duly complied with, both in terms of publication and notice to shareholders.

3. Valuation of Shares and Swap Ratio:
The appellant and intervenors contended that the valuation report was unreasoned, prepared by an unregistered valuer, and did not consider the market value of shares. The tribunal noted that the valuation report lacked details on the valuation of each share in the respondent companies and that the share exchange ratio seemed to be based on guesswork. The tribunal found that the valuation report did not provide a fair basis for the scheme and that the scheme's foundation was seriously compromised.

4. Compliance with Section 66 of the Companies Act, 2013:
The appellant argued that the scheme contemplated a reduction of capital in violation of Section 66 of the Companies Act, 2013. The 9th Respondent contended that the scheme did not violate Section 66 and that a company could reduce its share capital in different manners. The tribunal found that the scheme's approach to capital reduction was flawed and would require re-working of the exchange share ratio for all companies, which would necessitate initiating the approval process de novo.

5. Objections by the Regional Director, Southern Region, Ministry of Corporate Affairs:
The Regional Director raised several objections, including that the scheme involved a transfer of shares rather than a business undertaking, did not compensate minority shareholders adequately, and resulted in deemed profit for the transferee company. The tribunal noted that the objections were material and that the NCLT had not provided good reasons to ignore them.

6. Allegations of Scheme Being Promoter Oriented and Anti-Minority/Public Shareholders:
The appellant and intervenors argued that the scheme was promoter-oriented and prejudiced minority shareholders. The tribunal found that the scheme's valuation and share exchange ratio were unfair and unjust, leading to substantial losses for public shareholders while benefiting the promoters. The tribunal concluded that the scheme could not be termed fair to all stakeholders.

7. Intervenors' Objections:
The intervenors, including Maya Devi and Prem Prakash Pareek, raised similar concerns about the scheme's fairness, valuation, and lack of notice for the EGM. They argued that the scheme defrauded public shareholders and did not provide adequate compensation. The tribunal acknowledged these objections and found that the scheme was flawed and prejudicial to public shareholders.

Conclusion:
The tribunal allowed the appeal, quashed the impugned order dated 12th April 2018, and rejected the scheme of amalgamation. The tribunal imposed a cost of ?10,00,000 on the 9th Respondent, to be deposited with the National Defence Fund within 15 days from the date of the order, with proof of deposit to be submitted to the Registrar of the Appellate Tribunal.