2025 (3) TMI 690 - AT - Companies Law

Challenge to scheme of arrangement - right to reverse book building - unfair valuation and swap ratio - validity of relaxation granted by SEBI - undue influence caused by the company over its shareholders - non-disclosure of the relaxation granted by SEBI - participation of employees and mutual funds of ICICI group in the voting as public shareholders. Unfair valuation - reverse book building process (RBB) may have yielded a better price or not - HELD THAT - Regulation 37 was introduced after detailed deliberations as an alternate mode of delisting by way of an amendment. As part of the process SEBI had issued a board memorandum dated 29 September 2020 which specifically deliberated upon the merits of providing an alternative mode of delisting and the safeguards to be built in when opting for this route. The Board memorandum specifically discussed three key safeguards for protecting the interest of public shareholders. viz a) regarding the valuation of shares being not less than 60-days volume weighted average price (VWAP) of the companies; b) the voting threshold being 66% of the public shareholders of the listed subsidiary in addition to the usual requirement of 75% amongst all shareholders of the listed subsidiary in terms of Section 230 of the Act; c) the shares of the holding company (in this case ICICI Bank) are frequently traded which ensures the shareholders have the ability to freely exit the holding company at any time by selling the shares in the stock market - The Appellants claim reverse book building RBB would have guaranteed a better price is mere speculative as is held valuation is not an exact science and is subject to professional judgment and can vary from one valuer to another and as long as recognized methods are adhered to valuation cannot be faulted as held in Indiabulls Real Estate Limited v. Department of Income Tax 2025 (1) TMI 555 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL PRINCIPAL BENCH NEW DELHI . Whether RBB mechanism requires 90% of public shareholders to tender their shares is completely baseless as the said regulation only says the total shareholding of the acquirer should become more than 90% for the delisting to take place? - HELD THAT - SEBI has after thoughtful consideration introduced the alternate mechanism of delisting through a scheme of arrangement under Reg. 37. More so the Ld. NCLT also noted the argument on RBB is entirely speculative since stock exchange trading platform is considered to be the best price discovery mechanism. Further the Ld. NCLT per order dated 21.08.2024 observed the shareholders of ICICI Securities would also benefit indirectly by receiving shares of ICICI Bank and merger will lead to an increase in the intrinsic value of ICICI Bank which would reflect in the traded price consequent upon implementation of Scheme. Thus it is entirely baseless to argue that any prejudice is being caused to the public shareholders. Joint valuation report has been prepared by 2 (two) independent and registered valuers - HELD THAT - The valuation of ICICI Securities is in accordance with the minimum requirement prescribed under Reg. 37(2)(j) of the Delisting Regulations i.e. the per share valuation of the listed subsidiary shall be at least equal to 60-day VWAP. It is settled law the courts should not enquire into the issue of valuation of shares as the same is a question of fact which is based on technical and complex considerations and should be left to the experts in the field of accountancy as is held in G.L. Sultania Anr. v. Securities and Exchange Board of India 2007 (5) TMI 334 - SUPREME COURT and Miheer H. Mafatlal v. Mafatlal Industries Ltd. 1996 (9) TMI 488 - SUPREME COURT . Relaxation granted by SEBI in exercise of its regulatory powers - HELD THAT - Regulation 42 of the Delisting Regulations specifically empowers SEBI to grant relaxation from strict compliance of the Delisting Regulations. The fact of such relaxation being granted is undisputed. It is beyond the scope of the present proceedings to sit in appeal over the relaxation granted by SEBI which is an expert regulatory body. The Ld. NCLT has rightly noted this aspect and held that with the relaxation in place the Companies were entitled to propose the Scheme in terms of Reg. 37. In Sahara India Real Estate Corporation Limited Ors. v. Securities and Exchange Board of India 2012 (9) TMI 559 - SUPREME COURT the Hon ble Supreme Court has held that on the subject of protecting the interests of investors the SEBI Act 1992 is a standalone legislation and SEBI s powers thereunder are not fettered by any other law including the Companies Act. Breach of legal provisions by ICICI Bank in the course of the outreach initiative - HELD THAT - The Administrative Warning Letter dated 6 June 2024 does not in any manner suggest ICICI Bank has resorted to any illegal methods or has interfered with or attempted to influence the voting process or the free will of the shareholders of ICICI Securities. There is nothing in the administrative warning which can be said to be connected to the voting process or the outcome of the voting. Further SEBI has nowhere stated the voting would stand invalidated on account of the outreach initiative nor has SEBI referred to any circumstance that would invalidate the votes cast by the shareholders of ICICI Securities. At best the SEBI may have taken exception to the mode of carrying out a outreach and not the outreach per se nor even the objective of such outreach. Failure to disclose the relaxation granted by SEBI - HELD THAT - The disclosure made in the Explanatory Statement informs the shareholder the Scheme in the present case will be in terms of the requirements stipulated in Reg. 37(2) of the Delisting Regulations. In fact the Explanatory Statement provides a detailed chart of provisions of Reg. 37(2) showing how each of the provisions thereof are met. Thus the shareholders had all information necessary for voting on the Scheme. All requisite details required for the shareholders to make an informed decision in respect of the Scheme were available in the explanatory statement the Scheme itself and the joint valuation report each of which were accessible to the public shareholders at the time of voting. Whether the participation of ICICI group employees and mutual funds in voting as public shareholders was appropriate? - HELD THAT - Only those funds of ICICI Prudential which held 21, 675 shares as on the record date have cast their votes. This constitutes 0.0067% of the paid-up capital of ICICI Securities and therefore their participation had negligible impact on the overall voting. The definition of public shareholding under Rule 2(e) of the Securities Contract (Regulation) Rules 1957 does not exclude employees holding ESOP shares nor does Rule 2(d) classify them as promoters or part of the promoter group. Since no such exclusion exists the argument that employee shareholders should not be considered public shareholders does not hold good. Whether the appellant is entitled to object to the scheme under Section 230(4) of the Companies Act 2013? - HELD THAT - Not only is the Appellant not entitled in terms of the proviso to Section 230(4) to object to the Scheme but the Appellant has also failed to demonstrate any illegality in either the process followed for sanctioning of the Scheme or in the terms of the Scheme itself. The Impugned Order is a detailed well-reasoned order which has effectively dealt with all the contentions raised by the Appellant whilst noting that the Appellant is not entitled to object to the Scheme. Conclusion - i) The scheme s safeguards under Regulation 37 of the Delisting Regulations adequately protect public shareholders and the removal of RBB does not prejudice them. ii) The valuation is a complex issue best left to experts and the joint valuation report met regulatory requirements. iii) The relaxation granted by SEBI was within its regulatory powers and the Court cannot sit in appeal over SEBI s decisions. iv) No evidence of undue influence found from ICICI Bank s outreach initiative and SEBI s administrative warning did not suggest any legal breach. v) The disclosure of SEBI s relaxation was deemed sufficient and the shareholders had all necessary information for informed voting. vi) The participation of ICICI group employees and mutual funds in voting was appropriate and had a negligible impact on the outcome. vii) The appellant s lack of entitlement to object under Section 230(4) was upheld and the scheme s approval by the majority of shareholders was emphasized. Appeal dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the scheme of arrangement prejudices public shareholders by removing the right to reverse book building (RBB).
• Whether the valuation and swap ratio under the scheme are unfair.
• Whether the relaxation granted by SEBI is valid.
• Whether the outreach exercise by ICICI Bank and SEBI's administrative warning indicates undue influence over shareholders.
• Whether there was a failure to disclose the relaxation granted by SEBI.
• Whether the participation of ICICI group employees and mutual funds in voting as public shareholders was appropriate.
• Whether the appellant is entitled to object to the scheme under Section 230(4) of the Companies Act, 2013.

ISSUE-WISE DETAILED ANALYSIS

1. Prejudice to Public Shareholders and Reverse Book Building (RBB)

The appellant argued that the scheme prejudices public shareholders by removing the RBB process, potentially yielding a better price. The Court noted that Regulation 37 of the SEBI (Delisting of Equity Shares) Regulations 2021 provides an alternative delisting mechanism with safeguards such as valuation not less than the 60-day volume-weighted average price (VWAP), a voting threshold of 66% of public shareholders, and the frequent trading of holding company shares. These safeguards ensure shareholder protection, and the claim that RBB would guarantee a better price is speculative. The Court emphasized that valuation is a matter of professional judgment and cannot be faulted if recognized methods are followed.

2. Valuation and Swap Ratio

The appellant contended that the valuation and swap ratio were unfair. The Court highlighted that the joint valuation report was prepared by independent valuers using recognized methods and supported by fairness opinions from SEBI-registered merchant bankers. The valuation adhered to the minimum requirement under Regulation 37(2)(j) of the Delisting Regulations. Citing precedents, the Court reiterated that valuation is a complex fact-based issue best left to experts and should not be scrutinized by the courts.

3. Validity of SEBI's Relaxation

The appellant questioned the validity of SEBI's relaxation. The Court noted that Regulation 42 of the Delisting Regulations empowers SEBI to grant such relaxations. The NCLT correctly concluded that the relaxation was within SEBI's regulatory powers and that the companies were entitled to propose the scheme under Regulation 37. The Court referenced a Supreme Court decision affirming SEBI's broad powers to protect investor interests.

4. Outreach Exercise and Undue Influence

The appellant alleged undue influence from ICICI Bank's outreach initiative. The Court found no evidence of legal breaches or undue influence in SEBI's administrative warning. Citing precedents, the Court stated that influence through suggestions or appeals does not constitute undue influence unless free agency is impaired. SEBI found no evidence of undue influence, and the appellant's voting against the scheme further disproved any coercion claims.

5. Disclosure of SEBI's Relaxation

The appellant argued that the relaxation granted by SEBI was not disclosed. The Court noted that the Explanatory Statement provided to shareholders included the grounds, justification, and details of the relaxation. SEBI's appellate authority upheld this disclosure as sufficient, and the relaxation letter was deemed confidential. The Court concluded that all necessary information for informed voting was available to shareholders.

6. Participation of Employees and Mutual Funds in Voting

The appellant challenged the participation of ICICI group employees and mutual funds in voting. The Court observed that the participation of ICICI Prudential funds was negligible and did not impact the overall voting. The definition of "public shareholding" does not exclude employees holding ESOP shares, and the argument against their inclusion as public shareholders was rejected.

7. Entitlement to Object under Section 230(4)

The appellant's entitlement to object to the scheme was questioned due to not meeting the 10% threshold under Section 230(4) of the Companies Act, 2013. The Court noted that the appellant held only 0.002% of ICICI Securities' shares, failing to meet the threshold. The provision aims to prevent frivolous objections by shareholders with minimal holdings. The Court emphasized the principle of shareholder democracy and the overwhelming approval of the scheme by the majority of shareholders.

SIGNIFICANT HOLDINGS

• The Court held that the scheme's safeguards under Regulation 37 of the Delisting Regulations adequately protect public shareholders, and the removal of RBB does not prejudice them.
• The Court affirmed that valuation is a complex issue best left to experts, and the joint valuation report met regulatory requirements.
• The relaxation granted by SEBI was within its regulatory powers, and the Court cannot sit in appeal over SEBI's decisions.
• The Court found no evidence of undue influence from ICICI Bank's outreach initiative, and SEBI's administrative warning did not suggest any legal breach.
• The disclosure of SEBI's relaxation was deemed sufficient, and the shareholders had all necessary information for informed voting.
• The participation of ICICI group employees and mutual funds in voting was appropriate and had a negligible impact on the outcome.
• The appellant's lack of entitlement to object under Section 230(4) was upheld, and the scheme's approval by the majority of shareholders was emphasized.

In conclusion, the Court dismissed all appeals, finding no illegality in the process or terms of the scheme. The appellant's contentions were rejected as speculative and unfounded, and the majority shareholders' approval of the scheme was upheld. The Court emphasized the principle of shareholder democracy and the need to prevent frivolous objections by shareholders with minimal holdings.