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TMI Blog2007 (5) TMI 334X X X X Extracts X X X X X X X X Extracts X X X X ..... et Kumar, Amar Gupta, Somashekhar Sundaresan, Karan Vhariyog, Mayank Mishra, Ms. Inklee Barrooah, Ms. Rohini Musa, Ms. Bina Gupta, Ms. Pallavi Roy Chowdhary, Bhargava V. Desai, Rahul Gupta, Ms. Rakhi Ray and S.S. Ray for the Respondent. JUDGMENT B.P. Singh, J. - This batch of appeals has been preferred by the appellants under section 15Z of the Securities and Exchange Board of India Act, 1992 ('the Act') impugning the common judgment and order of the Securities Appellate Tribunal, Mumbai dated 8-12-2005 disposing of eleven appeals before it. While Civil Appeal No. 1672/2006 arises out of Appeal Nos. 134 and 138 of 2005; Civil Appeal No. 1704/2006 has been filed against Appeal Nos. 137, 159, 160, 161 and 164 of 2005 and Civil Appeal No. 1740 of 2006 has been filed against Appeal Nos. 158, 162, 163 and 139 of 2005. The Appellate Tribunal by its impugned judgment and order dismissed all the appeals. 2. The grievance of the appellants before the Securities Appellate Tribunal was that the Securities and Exchange Board (hereinafter referred to as the 'Board') as well as the Merchant Banker had not properly valued the shares of the target company in accordance with the parameters laid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... becomes necessary to recapitulate the essential facts which provide the background in which the dispute has arisen. These facts are more or less admitted by the parties. 5. The acquirers are Respondent Nos. 2 and 3 herein namely, ACE Glass Containers Ltd., and Shri C.K. Somany respectively. Respondent No. 4 is the target company Hindustan National Glass and Industries Ltd. 6. It is not in dispute that the Somany family comprising of four brothers managed several companies including the target company. All the brothers held equal shares in the target company and the public shareholding in the target company was negligible, that is less than 0.30 per cent. The shares of the target company are infrequently traded. In the year 1994 about 40 per cent of the equity capital of the target company was transferred to Shri C.K. Somany pursuant to a family settlement arrived at between the brothers. According to the appellants on 5-8-1994 there was an agreement between Shri C.K. Somany, Respondent No. 3 and his brothers for the sale of the entire balance shareholding in the target company held by his brothers to Respondent No. 3, Shri C.K. Somany at the price of Rs. 267 per share. This, howe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... others. 8. The public announcement was made by respondent Nos. 2 and 3 herein to acquire the balance 19.19 per cent share of the target company held by the minority shareholders on 30-11-2003. The offer price proposed to be mentioned in the public announcement was Rs. 40 per share as determined by the Merchant Banker namely, M/s. UTI Bank on the basis of the MOU dated 7-10-2002 between Respondent No. 3 Shri C.K. Somany and his brother Shri S.K. Somany for sale of the shares of the target company @ Rs. 40 per share. 9. The appellants complained to the Board that the price offered for the shares in the public announcement was very low and had not been determined in accordance with the parameters laid down in Regulation 20(5) of the Takeover Code. Since the price offered by the acquirers respondents 2 and 3 as determined by the Merchant Banker was not acceptable to the appellants, respondents 2 and 3 in consultation with the Merchant Banker namely, M/s. UTI Bank appointed M/s. Deloitte Haskin and Sells, a firm of Chartered Accountants, to value the shares of the target company. The aforesaid firm of valuers determined the price of each share of the target company as Rs. 43.02. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The offer was opened on 31-8-2005 and closed on 19-9-2005. The appellants tendered the shares without prejudice to their rights and contentions but challenged the order of the Board before the Appellate Tribunal. 15. The Appellate Tribunal by its order of 8-12-2005 dismissed the appeals preferred before it. Having noticed the background facts in which the controversy arose, the appellate Tribunal observed that the valuation of shares could be impeached on the ground of fraud, mistake or miscarriage of justice. It could also be interfered with if there was an apparent or arithmetical error or the valuers took into account something, which ought not to have been taken into account or interpreted the regulations wrongly, or proceeded on some erroneous principles. The interest of the shareholders had to be protected. The appellate Tribunal could also be asked to interfere if it was found that the offer price arrived at was so extravagantly high or so inadequately low that one could infer that the valuer must have committed an error in working out the offer price for the public offer. The appellate Tribunal, however, noticed that there was no allegation of mala fide either against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 200 each. 17. The appellate Tribunal noticed the fact that the Board had exercised its discretion under the proviso to sub-regulation (5) of Regulation 20 by requiring the shares to be valued by an independent merchant banker or an independent Chartered Accountant of minimum 10 years' standing or a public financial institution. Since the appellants objected to the valuation report of M/s. Deloitte the Board exercised its discretion and appointed M/s. Patni & Co. to go into the matter and submit a valuation report. 18. The appellate Tribunal held that M/s. Ace Glass Containers Ltd. was a sick company under the BIFR. The valuers had taken into account the net value of its shares. The submission that the entire assets of its subsidiary should have been taken into account in working out the value of the shares of the target company was untenable. It further held that the said M/s. Ace Glass Containers Ltd. was not a subsidiary of the Target Company within the meaning of that term in section 4(1) of the Companies Act since the target company did not own more than ½ in nominal value of the equity share capital of M/s. Ace Glass Containers Ltd. It also held that the Target C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellants which valued the shares at abnormally high rates of Rs. 408 and Rs. 590 per share. Apart from other reasons, the very fact that there was such a wide disparity in valuation in the aforesaid two reports, was itself a sufficient ground to reject them. 22. In view of these findings the appellate Tribunal held that the Board had acted strictly in terms of the Takeover Code and approved the public offer. There was no ground, therefore, to assail the approval to the public offer. The valuation of shares by M/s. Patni & Co. was arrived at after following the norms laid down in Regulation 20(5) of the Takeover Code and, therefore, it could not be characterized as either erroneous, arbitrary or unreasonable. 23. Aggrieved by the order of the appellate Tribunal the appellants have filed the instant appeals under section 15(Z) of the Securities and Exchange Board of India Act, 1992. The appeal to this Court against the decision or the order of the Securities Appellate Tribunal may be entertained on any question of law arising out of such order. 24. Counsel for the appellants submitted that questions of law do arise for consideration of this Court. He referred to several decisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with in response to the statutory public offer. 26. We may notice some of the decisions cited at the Bar by counsel for the parties on the question of scope of interference by this Court in such appeals. 27. In S.C. Cambata & Co. (P.) Ltd. v. Commissioner of Excess Profits Tax AIR 1961 SC 1010, a question arose in connection with the valuation of the goodwill. This Court observed that the goodwill of the business depends on a variety of circumstances or a combination of them. The location, the service, the standing of the business, the honesty of those who run it, and the lack of competition and many other factors go individually or together to make up the goodwill, though locality always plays a considerable part. At the same time, locality is not everything. In the case of a theatre or restaurant, what is catered, how the service is run and what the competition is, contribute also to the goodwill. In that case a question arose whether the goodwill of the company in question was calculated in accordance with law. This, the Court observed was a question of law. It was found that the Tribunal had taken into account only the value of the lease hold of the site to the subsidiary co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he recognized methods, must be adopted. This was a case of determination of market value of unquoted equity shares. 30. Reliance is placed on the decision of this Court in Dr. Renuka Datla v. Solvay Pharmaceuticals B.V. [2004] 1 SCC 149 for the proposition that even where finality attaches to the decision of the valuer, the Court could still intervene if the valuation was made on a fundamentally erroneous basis, or a patent mistake had been committed by the valuer, or that the valuation was vitiated by a demonstrably wrong approach or a fundamental error going to the root of the valuation. The same decision also lays down that if the valuer applied the standard methods of valuation, considered the matter from all appropriate angles without taking into account any irrelevant material or eschewing from consideration any relevant material, his valuation could not be challenged on the ground of its being vitiated by fundamental error. 31. In Duncans Industries Ltd. v. State of UP [2000] 1 SCC 633 this Court held that the question of valuation is basically a question of fact and this Court is normally reluctant to interfere with the finding on such a question of fact if it is based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tiple vis-a-vis the industry average : Provided that where considered necessary, the Board may require valuation of such infrequently traded shares by an independent merchant banker (other than the manager to the offer) or an independent chartered accountant of minimum ten years' standing or a public financial institution. Explanation : (i) For the purpose of sub-regulation (5), shares shall be deemed to be infrequently traded if on the stock exchange, the annualized trading turnover in that share during the preceding six calendar months prior to the month in which the public announcement is made is less than five per cent (by number of shares) of the listed shares. For this purpose, the weighted average number of shares listed during the said six months period may be taken. (ii) In case of disinvestment of a Public Sector Undertaking, the shares of such an undertaking shall be deemed to be infrequently traded, if on the stock exchange, the annualized trading turnover in the shares during the preceding six calendar months prior to the month, in which the Central Government or the State Government as the case may be opens the financial bid, is less than five per cent (by the numb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assigned to different enumerated parameters. As noticed earlier, many imponderables enter the exercise of share valuation. It must therefore follow that the weightage to be given to the different factors that go into the process of valuation, must be left to the wisdom, experience and knowledge of the experts in the field of share valuation. Such being the method of share valuation which involves subjective and objective considerations, there is considerable scope for difference of opinion even amongst experts. Even if the correct principles are applied, different valuers may arrive at different valuations. Each one of them may be right, yet the valuations may differ. Mathematical precision and exactitude are not the attributes of share valuation, for at best the valuation arrived at by an expert is only his opinion as to what the value of the share should be. No doubt the variation may not be very wide between two valuations prepared honestly by two valuers applying the correct approach and the correct principles, but some variation is unavoidable. 38. There is one other factor which cannot be ignored. The Regulation seeks to protect the interest of an investor by ensuring that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffered has not been determined fairly taking into account the enumerated factors. In case of doubt, it may require valuation of the shares by an independent merchant banker or chartered accountant. If the valuation determined by the acquirer or his merchant banker agrees with the valuation of the Board's valuer, more or less, then the Board has no option but to accept the offer price of the acquirer. It may suggest changes in the draft letter of offer, but it is doubtful if it can compel the acquirer to improve his offer even if the offer price is found to be fairly arrived at after due consideration of the matters enumerated in the Regulation. We do not wish to express any considered opinion in this regard, because that question does not arise in the facts of this case. The acquirer in the instant case did not challenge, rather accepted the suggestion of the Board to incorporate in his offer document the offer price based on the valuation report of M/s. Patni and Company which was the highest. 42. Learned counsel for the appellants submitted that the Board in approving the letter of offer of the acquirers failed in performance of its duty as required under the Act and Regulations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by it from the appellants and others. Since there was a serious dispute as to the correct valuation of shares, it appointed M/s. Patni and Company to value the shares independently. After receiving the valuation report of M/s. Patni and Company, it also considered the grievance of the acquirers against the said report and permitted them to get a valuation report from another expert valuer. That is how the acquirers got a report from M/s. T.R. Chadha and Company. Having considered the letter of offer, the three valuation reports before it in the light of the provisions of the Regulations, the Board was satisfied that the valuation of shares done by M/s. Patni and Company represented the fair value of the shares. It was also the highest and therefore favourable to the interest of shareholders. There is nothing in the scheme of Regulation 20 which requires the Board to pass a reasoned order while approving the offer price declared in such public offer document. 45. We are of the considered view that the submission urged by the appellants is not tenable. There is nothing in the Regulations which requires the Board to pass a reasoned order for all it does as a regulator. Being a re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the valuer, it took the precaution to seek the opinion of another expert valuer in view of complaints made by some shareholders. The appellants cannot therefore make a grievance that their objections were not given due weight. Thereafter, it also gave an opportunity to the acquirers to get the opinion of another expert valuer. Ultimately the Board reached the conclusion that the share price fixed by the expert valuer appointed by it represented the true and fair value of the shares in question and being the highest was also in the interest of the shareholders. The suggestion of the Board to the acquirers to incorporate in the public offer, the offer price on the basis of the valuation report of M/s. Patni and Company was accepted by the acquirers and the offer price earlier suggested by them was enhanced. We are, therefore, satisfied that the Board acted in a reasonable manner and in consonance with the Regulations. Only after considering all relevant matters it approved the offer price to be incorporated in the public offer document. 46. We shall deal with the valuation reports of M/s. Anand K. Associates and M/s. Sanjay Bajoria and Associates later. 47. It was next contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable companies in the industry. The report also refers to the approval of this Court in Hindustan Lever Employees' Union's case (supra ) of the method adopting a combination of all three methods of valuation after giving appropriate weightage to them. 51. Applying the Profit Earning Capacity Method, it has calculated the "yield value" by taking the average of 9 years, from 1993-94 to 2001-02. The year 2002-03 was excluded for the reasons recorded in the report which show that on account of abnormal situations the profits of the Company had decreased. In Hindustan Lever, the principle that for working out the average profit, profit of only those years which were normal and not affected by abnormal situations should be considered, was approved. Taking the capitalization rate as 15 per cent as suggested for manufacturing Companies in erstwhile Controller of Capital Issues guidelines, the value of shares has been worked out to Rs. 55.06 per share. 52. By adopting the Net Asset Value Method the value of Rs. 77 per share has been worked out by dividing the Share Capital of the Company plus Reserves and Surplus (excluding Revaluation Reserve and Contingent Liabilities) by the number o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... weightage for market value was reduced from 2 to 1 because in the case of infrequently traded shares, the market price has less relevance. 61. We have carefully examined the report submitted by Patni and Company. It is quite apparent to us that the report cannot be assailed on the ground that it does not take notice of various factors mentioned in Regulation 20(5)(c) of the Takeover Code. The valuer has in fact referred to the said Regulations and enumerated the factors to be taken into account. It has thereafter proceeded to make the necessary calculations after giving due weightage to various factors. In doing so the valuer has relied upon the principles approved by this Court in Hindustan Lever Employees' Union's case (supra). Learned counsel for the appellants submitted that the principles approved in Hindustan Lever Employees' Union's case (supra) were not relevant and should not have been applied by the valuer. This was because that was a case of amalgamation of two companies and it was in that context that the valuation of the shares had to be determined. It is true that Hindustan Lever Employees' Union's case (supra) related to a case of amalgamation but for determining t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal Market relevant to the period, 1-11-2003, and not March 1-14, 2004. According to him in both the periods there were only three profit making companies and therefore there was no reason why the valuer should have taken the industry P/E ratio as represented during the period March 1-14, 2004. 67. On the other hand the respondents contended that the Capital Market which is a fortnightly magazine gives the necessary data in regard to each industry. The data pertaining to every industry category reflect the "full year", the "latest quarter" and the "trailing twelve months" figures. The Capital Market source itself says that the companies with an earning per share (EPS) of less than (1) are not considered. According to him the "trailing twelve months" reflects the most current computation of the price earnings multiple and that period includes more companies with an EPS of more than (1) and was, therefore, more representative of the market. 68. The valuer in its report has observed that the Industry P/E of 20.9 is not the correct indicator of the industry. As the industry (glass and glass products) covers 12 companies out of which 6 companies are loss making hence having a negative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dends from the company. The value of the assets of the target company cannot be included to the value of the assets of the holding company, more so in the case of an associate company. 71. The valuer has also recorded reasons to the effect that it is not mandatory to derive the valuation of shares on the basis of consolidated Financial Statement. As per normal accounting practices, for determining the value of shares as a going concern only individual financial statements are considered because parent company is entitled to dividend only and has no right whatsoever in the assets of subsidiary and associate companies. 72. The appellants made a grievance that the capitalization ratio of 15 per cent was taken by Patni & Company whereas the capitalization ratio should have been 8 per cent. It was submitted that the guidelines issued by the CCI had been repealed and, therefore, reliance could not be placed on the aforesaid guidelines. 73. To this the respondents have replied by saying that the CCI guidelines have always been and continued to be a material and significant indicator for purpose of valuation in India. The mere fact that the CCI as a statutory authority has since been ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dopting the very same method but while valuing the shares in terms of Regulation 20(5)(c). 79. To this the reply of the respondents is that the valuer has correctly applied the HLL/TOMCO principles for computation of the "Yield Value". Adopting those principles audited financial statements of 9 years between 1993-94 and 2001-02 were considered. The financial statement for the year 2002-03 was excluded since the profits for that year had fallen by nearly 50 per cent. Adopting these principles and taking into account the discounting rate of 15 per cent applicable in terms of the CCI guidelines a value of Rs. 55.06 per share was computed by the valuer. The valuer also independently applying the yield value and without applying HLL principles computed the value of the shares as Rs. 34.39. After having arrived at two distinct values as aforesaid, the valuer adopted the higher of the two values. 80. We have only referred to some of the objections raised by the appellants and we must observe that several other similar objections were raised by them. We have also noticed the reply of the respondents and in most cases the observations of the valuer. It appears to us that the appellant exp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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