2022 (11) TMI 807 - AT - Companies Law

Reduction of share capital - buy back of shares - Special Resolution passed under sections 100-104 of the erstwhile Companies Act, 1956 read with section 52 of the Companies Act, 2013 is in the nature of buy-back shares of non-promoters shareholders or not - requirement to follow the various circulars issued by SEBI for providing exit to its non-promoters shareholders upon de-recognition of a stock exchange where the Company was earlier listed - correct valuation of shares, protecting the interest of its public shareholders who wanted to voluntarily exit the company, or not - guidelines given by SEBI in its Exit Circular dated 10.10.2016, followed or not. HELD THAT - It is noted that sub-section (3) of section 419 of the Companies Act, 2013 provides that if a Single Member Bench comprising of a Single Judicial Member is constituted by President of NCLT in respect of such class of cases or such matters pertaining to such class of cases, then such a Bench would be considered competent to hear such cases. We also note that the Single Member (Judicial) Bench constituted at NCLT, Chennai by the order of the Hon ble President, NCLT on 27.11.2017 in exercise of powers under section 419 of the Companies Act, 2013, whose copy is attached with the report of the Learned Amicus Curiae, the Single Judicial Member, Bench was entrusted with powers to dispose of cases relating to Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016 - the Single Judicial Member Bench that heard the Company Petition bearing No. CA/212/66(1)/CB/2017 and passed order dated 18.9.2019 was a validly constituted bench to hear cases under the Companies Act, 2013 by Hon ble President, NCLT and was fully empowered and competent to hear and dispose of the said company petition. Whether the Special Resolution passed under section 100-104 of the erstwhile Companies Act, 1956, the buy-back of non-promoters shares is a valid modality for providing exit to the shareholders? - HELD THAT - A perusal of section 100 provides for the Special Resolution for reduction of shares capital in three cases viz. clauses (a), (b) and (c) of sub-section (1) of section 100. Since the share capital of the non-promoters who were to be provided option by the company, sub-sections (a) and (b) are not applicable and sub section (c) makes it clear that any paid-up share capital, which in excess of the wants of the company, can be paid off. Insofar as the present case of providing exit to the shareholders of the company, it is clear that the payoff of any paid up share capital is not in excess of the wants of the company, but due to the reason that this exclusively listed company Reed Relays on Madras Stock Exchange has got delisted because Madras Stock Exchange has been de-recognized - the buy-back of shares of exiting shareholders cannot be done by using the Securities Premium Account reserve of the company, though in the present case, the Securities Premium Account of the company has been used for buy-back of the shares. Whether the company Reed Relays was obligated to follow various Exit Circulars issued by SEBI for providing exit to its non-promoters shareholders consequent to the de-recognition of a stock exchange where the company was exclusively listed? - HELD THAT - The various Exit Circulars issued by SEBI are mentioned in the application but curiously the application fails to mention Exit Circular dated 10.10.2016, which provides clarity about the procedure for providing exit to public shareholders. Moreover, while this application is made on 9.2.2017, the manner in which the public shareholders have been provided exit option, is through reduction of share capital and not in accordance with the stipulations in the various Exit Circulars of SEBI - It is clear that while the circular dated 10.10.2016 of SEBI had already been issued, which the company should have known, the Company s Board did not take note of this circular in its Board meeting on 13.10.2016 and followed a procedure that had not been stipulated by SEBI through its Exit Circulars, and which actually meant compulsory buy-back of shares rather than the opportunity of voluntary exit option. Whether the company's funds could have been used for buy-back of shares of the exiting non-promoter shareholders in view of the guidelines issued by SEBI for providing exit to public shareholders after de-recognition of the Regional Stock Exchange (Madras Stock Exchange in the present case)? - HELD THAT - It is clear from the procedure outlined to provide exit to investors in Annexure A of the Exit Circular dated 10.10.2016 that the promoters of the company shall acquire shares of such companies from public shareholders by paying them such value determined by the valuer - two facts are clear from these Exit Circulars. viz (i) that the Exit Circulars have been issued in exercise of powers conferred under the Securities and Exchange Board of India Act, 1992 by SEBI to provide exit option to public shareholders of ELCs of a de-recognised Regional Stock Exchange, and (ii) the promoters of the ELCs shall be responsible for making payment of consideration to the exiting public shareholders. In the present case, where the company has used its Securities Premium Account to make payment to the exiting public shareholders, the procedure adopted is not in accordance with the procedure stipulated for providing exit to public shareholders by SEBI consequent to de-recognition of an exclusively listed company after de-recognition of a Madras Stock Exchange. The Respondent No. 1 company has not provided voluntary exit option to its public shareholders but resorted to compulsory buy-back of shares under section 100 104 of the Companies Act, 1956, when SEBI through its Exit Circulars, particularly the Circular dated 10.10.2016, had provided a very clear and unambiguous modality/ procedure for providing an exit to non-promoter, public shareholders - In view of the infirmities in the procedure employed by Respondent No. 1 company in providing purported exit to its public shareholders through compulsory buyback of their shares, we find that the interests of the public shareholders have not been duly protected and preserved, as was required to be done by complying with the various Exit Circulars issued by SEBI in this regard. The Impugned Order has erred grossly by not considering these factors when passing the Impugned Order. The impugned order is set aside - Respondent No.1 company shall provide voluntary exit to its non-promoter, public shareholders in the manner outlined in the Exit Circular of SEBI dated 10.10. 2016 - Since it appears that a number of non-promoter shareholders have already availed of the buy-back of shares and accepted demand drafts/warrants in payment, the company shall now engage an independent valuer from amongst the SEBI approved panel and cause a valuation exercise to be undertaken based on financials as they existed on 10.10.2016. Those non-promoter shareholders shall be paid the difference amount if the valuation comes to be more than Rs. 107/- per share. The non-promoter shareholders who have not accepted any payment till now shall be entitled to receive the full value of their shareholding as per the accepted valuation. Further, the non-promoter shareholders shall be given interest @ 9% p.a. on the amount due to them for the period 10.10.2016 till the date of this order. This entire exercise shall be completed within 75 days from the date of this order. Appeal disposed off.

Summary

Issues Involved:
1. Competence of Single Member Bench to hear the matter after remand.
2. Validity of Special Resolution under sections 100-104 of the Companies Act, 1956 and section 52 of the Companies Act, 2013.
3. Obligation of the company to follow SEBI Exit Circulars for providing exit to non-promoter shareholders.
4. Adequacy of share valuation protecting public shareholders' interests.
5. Legality of using company funds for buy-back of shares instead of promoters' funds.

Detailed Analysis:

1. Competence of Single Member Bench:
The Tribunal determined that the Single Member Bench was legally competent to hear the matter post-remand. The bench was constituted by the President of NCLT under section 419(3) of the Companies Act, 2013. The appellant did not raise any objection during the hearing, validating the bench's authority.

2. Validity of Special Resolution:
The Special Resolution for reduction of share capital under sections 100-104 of the Companies Act, 1956, was scrutinized. The Tribunal noted that the reduction of share capital was not in excess of the company's wants but was due to the delisting of the company from the Madras Stock Exchange. The company should have followed SEBI's Exit Circulars, particularly the one dated 10.10.2016, which outlined the procedure for providing exit to non-promoter shareholders. The application under section 66 of the Companies Act, 2013, was found inappropriate as it was used for buy-back, which should have been done under SEBI regulations.

3. Obligation to Follow SEBI Exit Circulars:
The Tribunal emphasized that the company was obligated to follow SEBI Exit Circulars issued for providing exit to non-promoter shareholders. The procedure outlined in these circulars, particularly the one dated 10.10.2016, was not followed by the company. Instead, the company used its Securities Premium Account for buy-back, which was against SEBI guidelines that mandated promoters to use their funds.

4. Adequacy of Share Valuation:
The valuation of shares at Rs. 107 per share was found to be flawed due to significant assumptions and limitations in the valuer's report. The valuer's report indicated that if cash reserves and bank balances were considered, the valuation would be Rs. 351 per share. The company's Board did not address these discrepancies, adversely affecting the interests of the exiting shareholders.

5. Legality of Using Company Funds:
The Tribunal found that using the company's Securities Premium Account for buy-back was not in accordance with SEBI guidelines. The procedure mandated that promoters should use their funds for buy-back. The company's action resulted in promoters becoming 100% shareholders, which was not the intention of SEBI's voluntary exit guidelines.

Conclusion:
The Tribunal set aside the impugned order and directed the company to provide voluntary exit to its non-promoter shareholders as per SEBI's Exit Circular dated 10.10.2016. An independent valuer from the SEBI-approved panel should be engaged to revalue the shares based on financials as of 10.10.2016. Non-promoter shareholders who have already accepted payment should receive the difference if the new valuation exceeds Rs. 107 per share. Those who have not accepted payment should receive the full revalued amount plus interest at 9% p.a. from 10.10.2016 until the date of the order. The entire process must be completed within 75 days from the date of the order. No order as to costs was made.