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TMI Blog2005 (2) TMI 546X X X X Extracts X X X X X X X X Extracts X X X X ..... with, on such terms as the Hon ble Court may deem fit; ( d )That the petitioner be dispensed with the use of the words "and reduced"; 2. The capital of the petitioner-company as per the latest audited balance-sheet as on 31-3-2003, when the present petition was filed, are as follows: SHARE CAPITAL AS ON 31-3-2003 Authorised : Rs. 150,00,00,000 Equity Shares of Rs. 10 each1500,00,00,000 1,00,00,000 Redeemable Cumulative Preference shares of Rs. 100 each 100,00,00,000 1600,00,00,000 Issued Subscribed 33,42,12,890 Equity shares of Rs. 10 each334,21,28,900 Paid up : 33,42,12,890 Equity Shares of Rs. 10 each330,34,99,589 3. In Annual General Meeting held on 19-7-2003, the authorised capital was raised from Rs. 1,600 crores to Rs. 5,000 crores. The Company has consequently allotted 17,76,19,893 Equity Shares of Rs. 10 each fully paid up to Essar Investments Limited and as such status of Authorised, Issued and Paid capital as on 1-8-2003 was as follows: Authorised : Rs. 460,00,00,000 Equity Shares of Rs. 10 each4600,00,00,000 30,00,00,000 0.01% Redeemable Cumulative Preference shares of Rs. 10 each300,00,00,000 10,00,00,000 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after 1997-98 due to South East Asian Meltdown, dumping of steel by the CIS countries, an oversupply position and other adverse factors. The steel prices dipped to levels as low as USD 170 per ton, a price level at which most steel mills worldwide incurred substantial losses. Several mills, particularly in the US, filed for bankruptcy protection. 5.5 Reflecting this global trend, in India too the prices fell steeply. The Government of India brought down the customs duty on import of HR Coils from 50% in 1994 to 25% in 2001. Also, new capacities were created with Jindal Vijaynagar Steel Ltd. and Ispat Industries Ltd. setting up their steel plants, whereas there was no commensurate increase in demand. This created an oversupply position and steep fall in prices in the domestic market as well. Consequently, the Indian steel industry s performance has been very poor. 5.6 The petitioner Company s profitability and cash flows, therefore, were much lower than the appraised levels, despite the fact that the petitioner Company implemented a series of cost reduction measures, to maintain the cost of production at competitive levels. The financial difficulties of the petitioner Compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Financial Institutions and Banks are the members of the CDR Forum. 5.11 Upon reference in October 2002, a CDR meeting was held and the CDR members appointed a Core Committee. The Core Committee comprised of IDBI, ICICI Bank, State Bank of India and Bank of India to evolve a Restructuring Package. A Restructuring Package as formulated by the Core Committee was approved in the CDR Forum Meeting held on January 21, 2003. 6. The salient features of restructuring package, as regards the Secured Term Lenders are as under: PART A - WITH REGARD TO THE SECURED TERM LENDERS AND WORKING CAPITAL LENDERS ( i )Waiver of Penal Interest and liquidated damages; ( ii )Conversion of Compound Interest into Zero Coupon Bonds; ( iii )Simple Interest Charged in excess of 14% p.a. in respect of Rupee Term Loans and Non Convertible Debentures with effect from 1-4-2001 till the Cutt-off Date would be converted into 10% Cumulative Redeemable Preference Shares (CRPS) and Compound Interest charged, for the above period, in excess of document rate shall be waived; ( iv )Conversion of Rupee term debt into Equity Share Capital ( v )Conversion of 40% Rupee Term Debt into Foreign Currency Loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce shares in lieu thereof and conversion of a portion of the IFIs debt into equity share capital. Any change in the aforesaid assumption would result in consequent change in the capital structure and the means of finance. 10. It is further stated that on annulment of forfeiture of any equity shares made due to non-payment of call moneys, the said equity shares would also be cancelled in the ratio of four equity shares of Rs. 10 each out of every 10 equity shares of Rs. 10 each held and in lieu of such cancellation, the petitioner will issue and allot preference shares as provided in the resolution passed on July 19, 2003 at the 27th Annual General Meeting and the remaining 6 equity shares shall be held by the shareholders as equity shares of Rs. 10 each without any alterations. 11. It is only technically that the capital of the petitioner will stand reduced. The implementation of the proposed resolution will not practically result in a reduction of capital inasmuch as on the cancellation of the equity shares, preference share capital of an amount equal to the equity share capital cancelled will be simultaneously created. Preference shares can be redeemed only out of profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid-up share capital or in any other case if the Court directs. Since the interest of the secured creditors are not affected in any manner, the creditors meeting was also required to be dispensed with as prayed for by the petitioner. 13. This entire restructuring package would assist the petitioner in meeting the difficult situation and to make operations profitable. The proposed restructuring of the petitioner including the proposed reduction of equity shares capital will strengthen the petitioner and is in the best interest of the petitioner, as also its shareholders and creditors. The petitioner has, therefore, prayed that the proposed cancellation of part of equity share capital and fresh issue of preference shares, in lieu thereof, as resolved by the shareholders of the petitioner at its 27th Annual General Meeting held on July 19, 2003 be confirmed by this Court. 14. This Court has passed an order on 10-9-2003 directing the petitioner to supply one copy of the present petition to learned advocate Mr. Sandeep Singhi appearing on behalf of Unit Trust of India (UTI), which is one of the Secured Creditors of the petitioner Company. 15. This Court has passed further o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Power Generation (Essar Power), Shipping (Essar Shipping), Telecommunication (Cellular Services), Oil Exploration, etc. Thus, this kind of over diversification resulted into financial problems by the petitioner Company. As on 30-9-2002, against shareholders fund of Rs. 2080.88 crores, the carried forward loss was Rs. 2249.09 crores i.e., higher than the shareholders fund. Mr. Joshi has, therefore, submitted that GIIC strongly objects to sanction of the Scheme and granting of any relief to the petitioner for the following reasons: ( a )GIIC is holding 30,26,200 equity shares of Rs. 10 each of the petitioner Company with an average cost of Rs. 63.77 per share (investment made in July 1995). If the proposal is sanctioned by this Court, 12,10,480 equity shares of Rs. 10 each would stand cancelled. Therefore, GIIC will have to write off its 40% investment, i.e., Rs. 7.72 crores in Books of Account out of Rs. 19.30 crores. GIIC will be left with 18,15,720 Equity Shares after the cancellation. Looking to the market price of the petitioner, GIIC will have to suffer huge financial loss. Till this date, GIIC has not received any return by way of dividend from the petitioner Company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otherwise would be available to them as redemption of preference share in the year 2017. This would also give undue advantage to promoters in increasing their present shareholding percentage in the Company. ( f )Mr. Joshi has further submitted that the proposed reduction results into variation of shareholders rights and it is in violation of the provisions contained in sections 106 107 of the Act. He has further submitted that provisions prescribed in section 192A of the Act has not been followed. It relates to passing of resolution by postal ballot. The Central Government, vide Notification No. GSR 337(F) dated 10-5-2001 has framed Rules for postal ballot, in exercise of its powers conferred by section 192A read with clauses ( a ) and ( b ) of sub- section (1) of section 642 of the Companies Act, 1956. Rule 4 deals with list of businesses in which the resolutions may be passed through postal ballot. Clause ( j ) of Rule 4 deals with variation in the rights attached with Class of shares or debentures or other securities as specified under section 106. 19. Mr. S.N. Soparkar, learned Senior Counsel appearing with Mrs. Swati Soparkar, learned advocate for the petitioner Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Company and for the same reason, the objection raised to the debt restructuring package, by the objector is not relevant for the purpose of passing special resolution for reduction of capital. The details of the entire restructuring scheme were provided in the explanatory statement sent to all the shareholders along with the notice for 27th AGM. The special resolutions were passed at the meeting after due deliberation and discussion by the shareholders present at the meeting. No material fact was concealed from the shareholders of the petitioner Company. 22. Mr. Soparkar has further submitted that the present petition is filed for consideration of the limited issue of sanction of the proposed reduction of capital only and not for consideration of the entire scheme which was the subject-matter of Company Petition No. 176 of 2003 and it was ultimately withdrawn by the petitioner. The contentions raised by the Objector are absolutely irrelevant for the purpose of considering the proposed reduction of capital. The unsecured loan of Rs. 200 crores has been converted into equity and shares were allotted at a premium of Rs. 1.26 per share in accordance with the formula under SE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppearing for the respective parties and after having considered their submissions, the Court is of the view that despite the objections raised by GIIC, the Scheme of reduction of the share capital of the petitioner, by cancellation of part of equity share capital deserves to be confirmed. It is an admitted position that the special resolution was passed by the requisite majority of the shareholders at the 27th AG Meeting held on 19-7-2003. The Objector GIIC did not attend the said meeting. Initially, UTI Asset Management Company Private Limited has raised the objections. However, the said objections were subsequently withdrawn. As far as the objections raised by the GIIC is concerned, the Court does not find much substance in these objections. By virtue of such reduction of equity share capital, the objector GIIC or any other shareholder in this regard, will suffer heavy loss as contended before this Court. Part B of the Scheme specifically deals with the shareholders and it is clearly stated that for every ten equity shares of Rs. 10 each held by the equity shareholders, the petitioner shall cancel four (4) equity shares and in lieu of such cancellation create, issue and allot fou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The variation referred to in section 106 is variation to the prejudice of any class of shareholders, and not any variation adding to or enhancing rights of any class. It is only where a variation involves the curtailment of the rights of any class or classes of shareholders, the consent or sanction of such class or classes will be necessary. The section relates to variation and abrogation of rights attached to shares and has no application to cancellation of shares or a reduction of capital. Similarly, increasing the capital of a company does not amount to varying class rights. The question arose before the Bombay High Court in the case of Spindel Fabrik Suessen v. Suessen Textile Bearing Ltd. [1989] 2 CLA 202 (Bom.) wherein the promise of a company to its foreign collaborator that he would be entitled to 26% of the Company s equity was held to be not breached when the Company resolved in accordance with its articles and in compliance with section 81(1A) to capitalise the interest due to the Financial Institutions in respect of their loans and to issue them in lieu thereof equity shares in the Company. The Bombay High Court refused to stay the implementation of the issue. Twe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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