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TMI Blog2006 (7) TMI 332X X X X Extracts X X X X X X X X Extracts X X X X ..... gamation to be made between Torrent Power SEC Ltd., (TPSL) (hereinafter referred to as "the petitioner-company" or "the transferor company") and Torrent Power Ltd., (TPL) (hereinafter referred to as "the transferee corn-pan") as well as the reorganisation of the share capital of the transferee company, since the petitioner being a public limited company within the meaning of the Companies Act, 1956. Company Petition No. 69 of 2006 is concerned, it is for the sanction of this court to a scheme of arrangement including the amalgamation to be made between Torrent Power Generation Ltd., (TPGL) (hereinafter referred to as "the petitioner-company" or "the transferor company") and Torrent Power Ltd., (TPL) (hereinafter referred to as "the transferee company") as well as the reorganisation of the share capital of the transferee company since company being a public limited company within the meaning of the Companies Act, 1956. So far as Company Petition No. 70 of 2006 is concerned, it is for the sanction of a scheme of arrangement including the amalgamation of Torrent Power AEC Ltd., (TPAL) Torrent Power SEC Ltd., (TPSL) and Torrent Power Generation Ltd., (TPGL) (hereinafter referred to as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n into a public limited company as a Torrent Power Ltd. A fresh certificate of incorporation was obtained on February 8, 2006, which is also to undertake consolidated operation of the three transferor companies of the Torrent group in the power sector. The reasons narrated for scheme of arrangement is with a view to consolidate the power business of the Torrent group of amalgamating three companies, i.e., TPAL, TPSL and TPGL into TPL and considering the scenario prevailing in the energy sector, it was thought fit that in order to enable the group to be more competitive and for better growth opportunities so as to capitalise on the strength of these three companies in a systematic, integrated and optimised fashion. The board of directors has decided for amalgamation so that twin objectives of sustainability of the existing efficiency parameters and future growth can be achieved. It also narrates strategic, financial, organisational and operational advantage so that proposed amalgamation could enable the group to leverage its existing assets and human resources for enhancing the value of its stakeholders. It has also in its mind certain other commercial advantages and better inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eror companies by the transferee company pursuant to the amalgamation of the transferor companies with the transferee company. A fairness opinion has also been provided by M/s. Ernst and Young P. Ltd., on the valuation done by M/s. N.M. Raiji and Co. 12.2 Upon coming into effect of this scheme and in consideration of the transfer and vesting of the undertaking of the transferor companies in the transferee company, the transferee company shall, subject to the subsequent provisions of the scheme and without any further application or deed, be required to issue and allot to the equity share holders of the transferor companies whose names appear in the register of members of the transferor companies as on the record date, equity shares of the face value of Rs. 10 each in the transferee company, credited as fully paid up (hereinafter referred to as "exchange shares"), in the following manner : ( a )22 (twenty-two) equity shares of Rs. 10 each fully paid up of Torrent Power Ltd., for every 1 (one) equity shares of Rs. 10 each fully paid up held in Torrent Power AEC Ltd. ( b )47 (forty-seven) equity shares of Rs. 10 each fully paid up of Torrent Power Ltd., for every 1 (one) equity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Rs. 10 each fully paid up of Torrent Power Ltd., for every 1 (one) equity share of Rs. 10 each fully paid up held in Torrent Power AEC Ltd. ( b )11.75 (eleven and three-fourth) equity shares of Rs. 10 each fully paid up of Torrent Power Ltd., for every 1 (one) equity shares of Rs. 10 each fully paid up held in Torrent Power SEC Ltd. ( c )0.25 (one-fourth) equity shares of Rs. 10 each fully paid up of Torrent Power Ltd. for every 1 (one) equity share of Rs. 10 each fully paid up held in Torrent Power Generation Ltd.. It is clarified that on the scheme being effective, the shares of TPGL held by TPAL and TPSL shall be cancelled and no shares shall be issued by the transferee company against these shares. 12.5. The scheme makes provision that reduction of capital of transferee company pursuant to the scheme shall be given effect as an integral part of the scheme and the consent given to the scheme by the shareholders and creditors of the transferee company shall be deemed to be their consent under the provisions of section 100 and all other applicable provisions of the Act to such reduction of the capital of the transferee company and the transferee company shall not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have relied on submissions of Shri K.M. Patel, learned advocate appearing on behalf of the second objector. As per the objectors, one of the main objections is that being shareholder, he has challenged the Government resolution dated July 16, 1997, whereby a sale transaction and ownership of 28.89 per cent, of equity shares in the Torrent Power AEC Ltd. is questioned. According to him, the above Special Civil Application No. 8936 of 1998, is admitted by this court and is pending for final hearing. The second objection is with regard to the outcome of the scheme if sanctioned would result into erosion of share capital of the shareholders since reduction in the face value of the shares would effectively result in the issue of new shares and the offer made in the scheme is illusive and amounts an eyewash. The third objection is raised to the effect that the public institution like Government of Gujarat, Gujarat State Investments Ltd., Life Insurance Corporation of India Ltd., Oriental Insurance Co. Ltd., National Insurance Co. Ltd., General Insurance Corporation of India Ltd., have acted contrary to the public interest and failed to protect interest of different class of investors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er cent, in value by members present and voting by overwhelming majority of the shareholders in number and in value of shares. It is also stated that voting of Government of Gujarat and its industrial investment agency and other financial institutions is in accordance with law. It is further stated that special civil application filed by objector is admitted and the issue being subjudice further comments were not offered except denial of certain allegations levelled by the objector. By and large the rejoinder reflects incorrect understanding of the objectors about the exchange ratio, wrong comparison of market and book value of the shares of transferor company and transferee company as wrongly understood by the objector. The provision of general reserve fund, reduction of shares, valuation by the expert in the field are elaborately dealt with in this and another rejoinder filed by the transferor company. Shri S.N. Soparkar, learned senior counsel appearing for the petitioner, has broadly referred to the background of the transferor companies, activities carried out, financial structuring, business transactions, provisions of the newly enacted Electricity Act, 2003, and the Gujara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Regional Director, Western Region, Ministry of Company Affairs, Government of India dated July 3, 2006, is placed along with affidavit which indicates furnishing of latest balance-sheet as on March 31, 2005, for the latest financial position and to increase authorised capital of the transferee company by complying under section 94/97 of the Act. According to Shri Soparkar, learned senior counsel appearing for the company, latest financial position of the company as required is placed on record and about second objection he has submitted that in view of the resolution passed increasing the share capital is integral part of the scheme and the provisions made therein and in view of certain judgments no further procedure is required to be followed. Shri Soparkar, learned senior counsel, has submitted that on the scheme becoming effective, as mentioned in clause 13, the authorised capital clause of the memorandum of association of the transferee company shall be substituted by the paragraph and the approval contained in the said clause and approval by the shareholders to the scheme shall be deemed to be their consent to the alteration of the memorandum of association pursuant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apex court has considered the above aspects in detail. That there are three other decisions, in the line which followed the above decision by the learned single judge of our High Court also. Shri Soparkar, learned senior counsel appearing for the petitioner, has referred to the explanatory statement "12.1,12.2,12.3 and 12.5" and in detail explained why procedure under sections 100, 101 and 102 of the Companies Act, 1956, need not be followed. In support of the above submissions, he has placed reliance on Maneckchowk and Ahmedabad Manufacturing Co. Ltd., In re [1970] 40 Comp. Cas. 819 (Guj.), and other two decisions. He has also drawn attention of the court about valuation of the shares of Torrent Power AEC Ltd, by M/s. N.M. Raiji and Co., chartered accountant and M/s. C.C Choksi and Co., which reveal difference of about Rs. 107 in a short span of 10 days. He has relied on the letters issued by M/s. Raiji and Co., and submitted that both the evaluation was in different context and the evaluation of this scheme is concerned, it was as per the regulation framed by SEBI. So for as the general reserve and the fund to be utilised, he has submitted that the said reserve is created ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to him, even reduction in share capital is not as such an integral part of the scheme and initially even the valuer appointed by transferor company did not recommend any reduction of the face value of equity shares from Rs. 10 each to Rs. 2.50 immediately upon the approval of the scheme of arrangement. According to learned counsel for the objectors, effective actual ratio will result into financial losses to small shareholders of the two public listed companies, i.e., TPAL and TPSL. According to him, even creation of general reserve of Rs. 1,417.35 crores will be in the hands of the directors of the transferee company, which will create irreversible situation. According to learned counsel for the objectors, the State Government has recently on March 10, 2006, offered another 4.74 per cent, of the shareholding to Torrent Power P. Ltd., valued at over Rs. 327 where the valuation was done by another chartered accountant, M/s. C.C. Choksi and Co., while in the present scheme the valuation of the shares M/s. N.M. Raiji and Co., is Rs. 220, within a short span of 10 days only, which grossly undervalues the equity of the transferor company and causes loss to the Government of Gujarat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fallacy of the objection raised by the objector is because the aspect is not considered from the above angle and he is comparing the market value of shares of TPAL against the book value of shares of TPL. Thus, by comparing uncomparable the objection about erosion in the wealth of the shareholder is raised artificially. Mr. Soparkar has, therefore, submitted that the share exchange ratio determined is based on the well considered principles determined by the experts in the field and in consonance with the principles laid down in the case of Hindustan Lever Employees' Union [1995] 83 Comp. Cas. 30; [1995] Supp (1) SCC 499, and for this purpose he referred to the explanatory notes and relevant clauses therein and submitted that the scheme is unless manifestly unjust and unfair the court will refuse to lift the veil of the scheme. Shri Soparkar, learned senior counsel has further submitted that the dispute which is sought to be raised by the objector is between two shareholders and the same cannot be a subject-matter of section 391 of the Companies Act, 1956, and for this purpose he has relied upon National Organic Chemical Industries Ltd. v. Miheer H. Mafatlal [2004] 121 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he notice of meeting and the explanatory statement and relevant clauses and submitted that all relevant and material facts were placed before the shareholders for their consideration. Not only that but documents were kept for inspection at the registered office of the transferor company. Mr. Soparkar, learned senior advocate, has submitted that O.J. Appeal No. 60 of 2006, filed in Company Application No. 219 of 2006, by the objectors challenging the order passed by the learned single judge directing the transferor companies to convene the meeting came to be disposed of as not pressed with certain clarifications. The appellate Bench, however, clarified that disposal of appeal would not affect the rights and contentions of the appellants in Special Civil Application No. 8936 of 1998 and Company Petitions Nos. 67 of 2006 to 70 of 2006. It is also submitted that Civil Application No. 6482 of 2006 filed in Special Civil Application No. 8936 of 1998 is also withdrawn, which indicate, according to learned senior counsel appearing for the company, that the request of the objector to stay the relevant proceedings cannot be exceeded. Shri Soparkar, learned senior counsel, has submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. He has further emphasised that even in a view of the court or according to the opinion of the court, a better scheme could have been framed or can be recommended, is not a ground for not according sanction to the scheme. He has further submitted that court would not like to sit in appeal over the collective and commercial wisdom of the shareholders who approved the scheme with open eyes. Reliance was also placed on the decision in the case of Kiritbhai Hiralal Patel v. Arvind Intex Ltd. [2001] 107 Comp. Cas. 232 (Guj.), and it was submitted that if the shareholders think it proper and think it advantageous to adopt a particular scheme, the court should not sit in appeal over the decision of the shareholders, since normally it is presumed that shareholders know their interest better. Learned counsel Shri Soparkar has further relied upon Hindustan Lever v. State of Maharashtra [2003] 117 Comp. Cas. 758 (SC), and submitted that the principles laid down in Miheer H. Mafatlal's case [1996] 87 Comp. Cas. 792 (SC), were reiterated and followed. So far as pendency of Special Civil Application No. 8936 of 1998 is concerned challenging the Government resolution dated July ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , technical mistakes and the accounting errors. The perspective has to be that of the ordinary shareholder exercising his discretion in a reasonable and businesslike manner. Fundamentally, the point to be emphasised is that the discretion as to whether to sanction the scheme for amalgamation is one which the court has the jurisdiction to exercise. This cannot be concluded on the supposed consideration that the scheme has the support of a large majority of shareholders. Majorities are not necessarily comprised individuals each of whom critiques the provision of the scheme with a measure of expertise. Lethargy is not unknown to collective bodies of shareholders and creditors. In these circumstances, the court has to be alive to the duty which sections 391, 392 and 394 cast upon it, before the court grants the seal of its approval upon the proposed amalgamation." It would be useful to refer to the observations found in the oft-quoted passage in Buckley on the Companies Act, 14th edition. They are as under Miheer H. Mafatlal [1996] 87 Comp. Cas. 792 (SC) (page 815) : "In exercising its power of sanction the court will see, first that the provisions of the statute have been co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining the real purpose underlying the scheme with a view to be satisfied on this aspect, the court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously x-ray the same. 7. that the company court has also to satisfy itself that members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising the same class whom they purported to represent. 8. That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant. 9. Once the aforesaid broad parameters about the requirements of a scheme for getting sanction of the court are found to have been met, the court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the court there could be a better scheme for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction is a thorough going merger, this may be more of a talking- point than a matter of substance, since what is relevant is the relative values of the two undertakings as going concern. 7. The voting strength in the merged enterprise of the shareholders of the two companies. 8. The past history of the prices of the shares of the two companies." It is also advantageous to refer to a decision reported in Hindustan Lever v. State of Maharashtra [2003] 117 Comp. Cas. 758 (SQ, where again the apex court has reiterated the ratio laid down in the case of Miheer H. Mafatlal [1996] 87 Comp. Cas. 792 (SC), and found that two broad principles underlying a scheme of amalgamation are that the order passed by the court amalgamating the company is based on a compromise or arrangement arrived at between the parties, and that the jurisdiction of the company court while sanctioning the scheme is supervisory only, i.e., to observe that the procedure set out in the Act is met and complied with and that the proposed scheme of compromise or arrangement is not violative of any provision of law, unconscionable to contrary to public policy. The court is not to exercise the appellate jur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity or is the controller of the majority." The court has further observed that (page 137) : "As far as the variation of the rights of the equity shareholders and violation of the provisions of sections 106 and 107 of the Act, are concerned, the court is of the view that there is no variation of rights as such and there is no violation of the provisions contained in sections 106 and 107 of the Act. As a matter of fact, these provisions have no application to the facts of the present case. 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 Division Bench of our High Court in the case of Kiritbhai Hiralal Patel v. Arvind Intex Ltd, [2001] 107 Comp. Cas. 232, and particularly at page 239 in placitum B, C and D, has observed as under: "The submission of the learned advocate for the appellants that the profit making transferor companies have been amalgamated into a loss making transferee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which contained relevant and important features of the scheme as required under law and record of the companies was kept open for perusal of the stakeholders. The report of the chairman was received along with affidavit about events that took place in the meetings held as per the order passed by the court and compliance of various provisions of the Act and rules as required. That report of the chartered accountant appointed by the official liquidator is also placed on record, which reveals no objection, if the scheme is sanctioned by this court and also a letter of Regional Director, Western Region, Ministry of Company Affairs, Government of India dated July 3, 2006, with affidavit filed by the Deputy Registrar of Companies, Ahmedabad dated July 4, 2006, with certain points to be urged at the time of hearing. The foremost requirement, before sanctioning the scheme under the provisions of sections 391 to 394 of the Companies Act, 1956, is to comply with the provisions of the above sections and various rules and analogous provisions in this regard. In the above context, if the present scheme at exhibit "C" is scrutinised including amalgamation to be made between the transferor co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forth the terms of compromises or arrangements and explaining its effect and the interest of the directors, managing directors or manager of the companies with the scheme of compromise, if any. It also, inter alia, provides about other requirements which we are at present not concerned with. Section 394 is with regard to the provision for facilitating reconstruction and amalgamation of companies which specifically provide under sub-clause ( iii ) of clause ( b ) of sub-section (1) of section 394 about the continuation by or against the transferee company of any legal proceedings pending by or against any transferor companies and section 394A is about notice to be given to the Central Government for application under sections 391 and 394 of the Act. So for as section 100 of the Act is concerned, it provides for reduction of share capital and special resolution be passed in this regard and sections 101, 102, 103 and 104 are about the procedure further to be followed in this regard. Thus, in the present case, meeting was convened by the petitioner-company as per the direction given by the order dated May 1, 2006, passed in the company application. In all the Company Petitions Nos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed under sub-section (2) of section 101 of the Act was dispensed with by an order dated May 1, 2006, in Company Application No. 222 of 2006, the above objections do not survive and need not to be dealt with. However, even if it is examined in the context of law laid down by this court in the case of Maneckchowk and Ahmedabad Manufacturing Co. Ltd., In re [1970] 40 Comp Cas 819, and later on in the case of Essar Steel Ltd., In re [2006] 130 Comp Cas 123 (Guj.), the objections are not well founded. Since the law laid down by the above decision is already reproduced, the same is not repeated. That, in the present case, no liability is reduced qua share capital unpaid or payment to shareholders of any paid up share capital, as per clause 15 of the explanatory statement and clause 12.5 of the scheme. Thus, even stakeholders were informed as required under section 173 of the Act. Besides, as per principles laid down by Miheer H. Mafatlal's case [1996] 87 Comp. Cas. 792 (SC), the present scheme fulfils all the relevant criteria laid therein and against commercial and collective wisdom of the class, this court would not like to sit in appeal over the same. Even objection with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tan lever Employees' Union v. Hindustan Lever Ltd. [1995] 83 Comp. Cas. 30; [1995] Supp (1) SCC 499, as relied upon again in Miheer H. Mafatlal's case [1996] 87 Comp Cas 792 (SC). I do not find that share exchange ratio in any manner is unfair and detrimental to the shareholders of the transferor companies. So far as the creation of general reserve to the tune of Rs. 1,417.35 crores is concerned, again the creation of such reserve is not contrary to any provisions of the Act and it is to be utilised only after following the provisions of the Act like giving dividends, bogus shares or making good the loss after passing appropriate resolution. Thus, it cannot be said mat it will be advantageous to the directors of the transferee company and will create any monopoly. Therefore, there is no merit in the above objections of the objector. The status of transferee company being not listed and the objections raised in this regard do not detain this court any longer in view of listing agreement by the transferor companies with SEBI and provisions made in this regard in the scheme particularly in clause 12.6( a ), ( b ) and ( c ) which provide for issuance and allotment of the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncerned, the same is admitted and the matter being subjudice has no relevance with the present scheme of sanction which do not require any interference. Even civil application filed later on is withdrawn by the objector in the aforesaid special civil application. Besides, clause 7 of the scheme provides for the continuity of the legal proceedings against and by transferee company even after the scheme is approved. The objection was raised with regard to different valuation by two firms of chartered accountants and within short span of 10 days value of share of TPAL is shown, which indicates difference of Rs. 107. The above objection does not hold good so far as both the valuation of shareholding of the company was for different purpose. It is explained by the petitioner that while it was for the purpose of finding out the price, at which the Government of Gujarat was to sell the shares held by it in TPAL to the Torrent Power group. That two reports are the exercise undertaken by experts for different purposes, i.e., M/s. N.M. Raiji and Co., and M/s. Ernst and Young P. Ltd., have opined on the fairness of exchange of ratio of shares which is always in relative terms while the va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under : ( i )that the provisions of the Act have been complied with ; ( ii )that the scheme is a reasonable and practical one ; ( iii )that the creditors and shareholders had sufficient information with regard to the affairs of the company before approving the scheme and that they acted in good faith ; ( iv )that there are no consideration of interest to the public which should override the decision of the creditors and shareholders. Thus, if the scheme is scrutinised, keeping in mind the decisions of the apex court and this court as reproduced in paragraphs 42 to 48, the scheme as a whole is just, fair, reasonable and bona fide and in the public interest requires sanctioned in accordance with law, and therefore, the scheme at annexure "C" along with the schedule is sanctioned and shall be binding on all the equity shareholders, unsecured creditors and the secured creditors of the petitioner-company and on the petitioner-company. All these petitions are allowed with the reliefs mentioned therein. So far as prayer made in Company Petition No. 70 of 2006 is concerned, minutes under section 103 for reduction of capital as mentioned therein is also sanctioned and petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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