2016 (4) TMI 965 - HC - Companies Law

Scheme of amalgamation - only opposition to the Scheme is by Securities and Exchange Board of India ( SEBI ) - Held that - there is no merit in SEBI s contention that the Scheme violates the provisions of ICDR or the public policy behind ICDR or the related regulatory machinery. There is, as noted above, no bad faith vis-a-vis any stakeholder. On the whole, the scheme is not such as a prudent man of business would not accept as just, fair or reasonable. And lastly, there is no market abuse, wrongful artificiality or fraud, deceit or unfair trade practice, injuring public interest. If that is so, the Court cannot scrutinize the Scheme with the focus of a man of commerce to see if the consideration provided for therein is truly correct. That is for the businessman in the shareholder to decide. The Court merely preserves the sanctity of the laws, the commercial morality and public interest. And on these, the Scheme does pass muster. Company amalgamtion allowed. The Petitioner Companies to file a copy of this order and the Scheme duly authenticated by the Company Registrar, High Court (O.S.), Bombay, with the concerned Superintendent of Stamps, for the purpose of adjudication of stamp duty payable, if any, on the same within 60 days from the date of the Order. The Petitioners are directed to file a certified copy of the order along with a copy of the Scheme of Amalgamation with the concerned Registrar of Companies, electronically, along with E Form INC-28 in addition to physical copy as per the relevant provisions of the Companies Act, 1956/2013 whichever is applicable.

Issues Involved:
1. Sanctioning of the Scheme of Amalgamation under Sections 391 to 394 of the Companies Act, 1956.
2. Objections raised by SEBI regarding evasion of SEBI Regulations and ICDR.
3. Alleged manipulation of financials and unfair share swap ratio.
4. Compliance with ICDR requirements.
5. Merits of the Scheme, including valuation and fairness of the share swap ratio.
6. SEBI's role in ensuring market integrity and investor protection.

Detailed Analysis:

1. Sanctioning of the Scheme of Amalgamation:
The petition seeks the court's sanction for a Scheme of Amalgamation between Arss Engineering Ltd. (transferor company) and Trio Mercantile & Trading Ltd. (transferee company). The Scheme involves the transfer of the entire undertaking, including all assets and liabilities, from the transferor to the transferee company as a going concern. The Scheme has received the requisite consents from equity shareholders, and meetings of secured and unsecured creditors were dispensed with by court orders. No creditor opposed the Scheme, and neither the Regional Director nor the Registrar of Companies had significant objections.

2. SEBI's Objections:
SEBI raised two primary objections:
- The Scheme aims to evade the SEBI Regulations and ICDR by converting shareholding in an unlisted company into shareholding in a listed company without mandatory disclosures and compliance.
- The consideration under the Scheme is manipulated, and the share swap ratio is skewed in favor of the transferor company's shareholders, leading to unjust gains at the cost of the transferee company's shareholders.

3. Alleged Manipulation of Financials and Unfair Share Swap Ratio:
SEBI argued that the transferor company, despite being incorporated in 2008, did negligible business until 2012-13. The preferential allotment of shares in March 2013 was allegedly to enable the allottees to obtain shares in the listed transferee company through the Scheme. The share swap ratio of three equity shares of the transferee company for every five equity shares of the transferor company was claimed to result in a 75% profit for the transferor company's shareholders.

4. Compliance with ICDR Requirements:
The court examined whether the Scheme breached any ICDR requirements. The ICDR sets conditions for preferential issue of shares, including a special resolution of shareholders, dematerialized shares, compliance with continuous listing conditions, and disclosure requirements. The court noted that a Scheme of Arrangement undergoes regulatory scrutiny, including compliance with SEBI circulars and stock exchange requirements. The court found that the regulatory scrutiny for the Scheme was equivalent to that required under ICDR, and no intentional breach was shown by SEBI.

5. Merits of the Scheme:
The court analyzed the Chartered Accountant's valuation report used to determine the share swap ratio. The valuation considered Net Asset Value (NAV), Profit Earning Capacity Method (PECV), and Market Price Method (MV). The court found the valuation methods and the chosen relevant date for determining MV to be appropriate. The court emphasized that valuation is not an exact science and that the exercise was bona fide and legitimate. The share swap ratio was approved by the shareholders in two duly convened meetings, and no complaints were raised.

6. SEBI's Role in Ensuring Market Integrity and Investor Protection:
SEBI argued that its role is to prevent market abuse and ensure investor protection. SEBI cited Supreme Court cases emphasizing its duty to preserve market integrity and prevent fraudulent practices. However, the court found no evidence of market abuse, fraud, or unfair trade practices in the Scheme. The court noted that the Scheme's rationale, including efficient utilization of resources and better management, was legitimate.

Conclusion:
The court concluded that the Scheme did not violate any provisions of law, display bad faith, or prejudice public interest. The Scheme was found to be just, fair, and reasonable. The court sanctioned the Scheme of Amalgamation and directed the petitioner companies to comply with necessary formalities, including filing copies of the order with the Registrar of Companies and paying costs to the Regional Director and Official Liquidator. The order was stayed until 10 November 2015 on SEBI's application.

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