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2015 (9) TMI 1194 - HC - Companies LawApplication for recall of the Scheme of Arrangement and Amalgamation - scheme was approved / sanctioned by the court vide order dated 17-6-2011 - SEBI has alleged that the Petitioners have suppressed from this Court inter alia the facts to achieve their objective of increasing their shareholding - SEBI also received a complaint that the consideration offered is detrimental for the interest of the equity shareholders. - whether the parties have as alleged by SEBI not disclosed the relevant facts but have suppressed the same from their shareholders or from the BSE/NSE or from the Regional Director or the Official Liquidator or this Court thereby committing a fraud as alleged. Held that - It is clear that there was no suppression of any relevant and/or material fact whilst obtaining orders on either the 2010 Scheme or the 2011 Scheme. The question therefore of any fraud committed by the Companies which have approached the Court seeking orders on the said Schemes by suppression of facts as alleged does not arise and in fact the Regional Director has with the exception of certain objections which have been complied with informed the Court that the Scheme is in the interest of the shareholders of the Company. The question therefore of setting aside the orders sanctioning the Scheme of Arrangement and Amalgamation or sanctioning amendments to the Scheme on the ground of alleged suppression thereby perpetrating a fraud on this Court does not arise. This Court has hereinabove already recorded its finding that SEBI has failed to establish any fraud played by NFCL/KFL by way of suppression of facts and is therefore not entitled to the reliefs as prayed for in the above Applications. However SEBI has in support of its case also alleged that NFCL/KFL has perpetrated a fraud on the shareholders of NFCL in view of several other grounds. The contention raised by SEBI to the effect that the valuation is unrealistic perverse and incredibly high on account of the fact that GT had used arbitrary growth rates to project the revenue for the year beyond 2012 and has not provided any rationale for arriving at the growth rates also cannot be accepted in view of what is stated hereinabove as well as the fact that the GT Report and the letter of GT dated 22nd July 2013 make it clear that GT had reviewed the data provided by the Management for reasonableness and consistency and that GT did not accept the projections at face value. SEBI has failed to make out any case of fraud in GT arriving at the above exchange ratio. The Composite Scheme of 2011 as stated hereinabove has already been made effective and shares have been allotted to the respective shareholders. Subsequent to the Composite Scheme dividends have been declared and paid. The shares of the demerged entity viz. NORL have been listed on 23rd March 2012 and are being traded on the Bombay Stock Exchange ( BSE ) and National Stock Exchange ( NSE ). In fact as regards the Resultant Company No. 1 (Originally KFL and now renamed NFCL) BSE and NSE granted in principle approval for listing on 8th December 2011 and 13th January 2012 respectively. In the circumstances the question of granting any reliefs as prayed for or otherwise to SEBI does not arise and the above Applications are dismissed with costs.
Issues Involved:
1. Locus of SEBI in scheme petitions under Sections 391-394 of the Companies Act, 1956. 2. Alleged suppression of material facts by the petitioner. 3. Alleged violation of Accounting Standards in valuation. 4. Alleged fraud on shareholders by overvaluation of assets. 5. Justification of the swap ratio in the 2011 Composite Scheme. 6. Validity of the valuation method adopted by Grant Thornton. 7. Disclosure of financial projections and data provided to the valuer. 8. Infusion of additional share capital in Ikisan by promoters. 9. Alleged unjustified valuation of assets by DCF method. Detailed Analysis: 1. Locus of SEBI in Scheme Petitions: The court examined whether SEBI has the locus to intervene in scheme petitions under Sections 391-394 of the Companies Act, 1956. It was held that SEBI does not have locus to intervene in such matters, as established by the Division Bench in the Sterlite case. The court noted that SEBI's powers under the SEBI Act do not override the provisions of the Companies Act regarding scheme petitions. The court also emphasized that SEBI did not act on a shareholder's complaint before the scheme was sanctioned, which further undermines its locus. 2. Alleged Suppression of Material Facts: SEBI alleged that the petitioner suppressed material facts, including the valuation report and financial projections. The court found that all necessary disclosures were made to the shareholders, stock exchanges, Regional Director, and Official Liquidator. The valuation report was available for inspection, and the shareholders approved the scheme with a significant majority. The court concluded that there was no suppression of material facts. 3. Alleged Violation of Accounting Standards: SEBI contended that the valuation of intangible assets in Ikisan's balance sheet violated Accounting Standards 14 and 26. The court held that the valuation was consistent with AS-14, which allows for assets to be recorded at fair value. The court also noted that even if there were deviations from accounting standards, it would not justify setting aside the scheme, as accounting takes place after the transaction and does not change its character. 4. Alleged Fraud on Shareholders: SEBI argued that the valuation of Ikisan's assets was inflated, constituting a fraud on the shareholders. The court found no evidence of fictitious assets or overvaluation. It was noted that the valuation was based on future projections and the potential of the business, which is a recognized method. The court emphasized that valuation is not an exact science and differences in expert opinions do not constitute fraud. 5. Justification of the Swap Ratio: SEBI challenged the swap ratio, arguing that it was unjustified given the financial condition of Ikisan. The court upheld the swap ratio, noting that it was based on the DCF method, which is appropriate for valuing businesses with future growth potential. The court also highlighted that the shareholders approved the scheme, indicating their acceptance of the swap ratio. 6. Validity of the Valuation Method: SEBI contended that the valuation method adopted by Grant Thornton was flawed. The court found that the DCF method is a widely accepted and appropriate method for valuing businesses with future potential. The court noted that Grant Thornton reviewed the data for consistency and reasonableness and did not accept the projections at face value. 7. Disclosure of Financial Projections: SEBI alleged that the petitioner refused to disclose financial projections provided to the valuer. The court held that companies are not required to disclose such projections in scheme matters, as they are considered confidential and price-sensitive. The court noted that the valuation report was available for inspection by shareholders, who approved the scheme. 8. Infusion of Additional Share Capital: SEBI argued that the promoters infused additional share capital in Ikisan to gain more shares in NFCL. The court found that the infusion was for setting up a micro-irrigation plant and was not intended to manipulate share allotment. The court noted that the swap ratio was based on projected cash flows and not the additional capital. 9. Alleged Unjustified Valuation by DCF Method: SEBI contended that the DCF method used for valuation was unjustified. The court upheld the use of the DCF method, noting that it appropriately considers future cash flows and growth potential. The court emphasized that the method is recognized and accepted in valuation exercises. Conclusion: The court dismissed SEBI's applications, holding that SEBI failed to establish any fraud or suppression of material facts. The court found that the valuation and swap ratio were justified and that all necessary disclosures were made. The court emphasized the importance of respecting the commercial wisdom of shareholders who approved the scheme. The applications were dismissed with costs.
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