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TMI Blog2009 (7) TMI 767X X X X Extracts X X X X X X X X Extracts X X X X ..... the assets. Suffice it to note that the grievance made by the Objectors that the basis and methodology of valuation is not spelt out in the valuation report, is devoid of merits. As it was suggested that the Court may consider of specifying the rate of interest to be not less than 1 per cent over and above the Benchmark Primary Lending Rate or not less than 1 per cent over and above the Weighted average cost of debt of the Demerged Company, whichever is lower, thus, it would be just and proper to accept this offer made by the Companies as it is seen that the Average Lending Interest Rate paid by the Company is far less than the Benchmark Primary Lending Rate. The Company cannot be made to pay interest at a higher rate. Accordingly, on accepting this offer of the Companies on the above terms, the Scheme will stand modified to that limited extent. It is not a Scheme of Arrangement to affect the claim of the unsecured Creditors. Scheme allowed. X X X X Extracts X X X X X X X X Extracts X X X X ..... post the balance sheet as on 31-3-2009 has not undergone any change. The objects of the respective companies are set out in their Memorandum of Association. The Demerged Company is presently engaged in the business of providing telecommunication services, whereas, the Resulting Company is engaged in the business of providing telecom infrastructure services. The Board of Directors of the Resulting Company vide Resolution dated 19-1-2009, approved the Scheme of Arrangement between the Demerged Company and the Resulting Company and the respective shareholders and creditors. Similar approval was accorded by the Board of Directors of the Demerged Company vide Resolution dated 31-1-2009. The rationale for the proposed scheme of arrangement is stated as under: "(a )Reduced set-up and operating costs resulting in cost efficiency coupled with a greater financial flexibility; (b )Segregation of the business of providing telecommunication services and the business of providing infrastructure on a consolidated basis, thereby enabling each of the companies to concentrate on its core business activities; (c )Promote high valued standalone business by conversion of cost-centric assets to reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in English language and Maharashtra Times in Marathi language, both having circulation in Mumbai. Accordingly, notice of the meetings were sent individually to all the equity shareholders of all the respective companies under Certificate of Posting as required by order, together with copies of the Scheme, statement required to be sent under section 393 of the Companies Act, prescribed form of proxy and attendance slip therewith. Besides, the notice convening the meetings was also advertised as per the order of the Court in the specified newspapers. 6. As per the said notice, the meeting of equity shareholders of both the Companies was convened and held at the nominated place, time and date which was presided over by Justice M.H. Kania (Retired Chief Justice of India) as Chairman of the meeting of the equity shareholders. The Chairman has submitted two separate reports with regard to the meetings of the equity shareholders of the respective Companies. Insofar as the Demerged Company is concerned, the report records that proxies and representations under section 187 of the Act representing 144,40,36,096 equity shares were submitted. In all, 2218 ballots representing 143,98,25,310 eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... put to vote for approval with or without modification, the arrangement embodied in the Scheme of Arrangement between the Demerged Company and the Resulting Company and their respective shareholders and creditors. The Report records that the Resolution was unanimously approved by the shareholders as no shareholder voted against the Scheme. 8. As aforesaid, both these reports have been submitted before this Court as per the directions given on the earlier occasion. Since the shares of the Demerged Company are listed on Bombay Stock Exchange Limited and National Stock Exchange Ltd., approval of the respective Stock Exchanges has also been obtained. The said Stock Exchanges have favoured the proposed arrangement. According to the respective Companies, the sanctioning of the arrangement embodied in the Scheme will be for the benefit of the Company. It is stated that no winding up Petitions have been admitted against any of these Companies nor any investigation proceedings are pending against the Companies under sections 235 to 251 of the Companies Act or the like. Besides, it is stated that the Scheme does not value or overwrite or circumscribe any of the provisions of Regulation or G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore this Court. Two Company Applications being Company Application Nos. 759/2009 and 762/2009 are filed by one Shri S. Anantharaman on 14-7-2009 supported by affidavit sworn at Coimbatore on 11-7-2009 in respective Company Petitions, praying for the following reliefs : "(a)That this Hon'ble High Court may be pleased to dismiss and set-aside order passed in Company Applications in Company Petition No. 487 filed by Reliance Communications Ltd. i.e., The Petitioner Company and Company Petition No. 488 filed by Reliance Infratel Ltd. i.e. The Resulting Company namely Reliance Infratel Limited under sections 391 and 394 of the Companies Act, 1956 as not maintainable; or (b)In the alternative the Hon'ble High Court may be pleased to order and direct (i) the Petitioner Company to amend the scheme to disclose all material facts that are relevant for the proper appreciation of the scheme by the shareholders; (ii) the Petitioner Company to table the Valuation Report (iii) the office of the Regional Director to ascertain whether the scheme is in the interest of the shareholders and (iv) the National Advisory Committee on Accounting Standards (NACAS) to confirm whether the accounting treatme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd hold passive infrastructure assets in Reliance Communications Infrastructure Limited (RCIL) and its subsidiary RITL, de-merged towers and lit optic fiber owned by the Company to RITL through another scheme of arrangement. (iii)In the year 2007-08, the Company purchased unlit passive optic fiber assets from RCIL worth Rs. 1,930 crores for a token consideration of Rs. 80 crores. (iv)Now, in the year 2008-09, through the subject scheme of arrangement the passive optic fiber assets are being de-merged from the Company to RITL. From the above, it is not clear which parts of the optic fiber is lying with the Company and with RCIL and RITL. 2. The disclosures made in the scheme with respect to the value of the Optic Fiber Undertaking are vague and are not transparent. The Company has not disclosed the book value of the assets which are transferred to RITL through the subject scheme of arrangement. 3. The basis and methodology of valuation for the Optic Fiber Undertaking which is proposed to be de-merged from the Company to RITL through the subject scheme of arrangement is also not known. I had already written to the Company for a copy of the Detailed Valuation Report on 7-7-2009. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther informed that he was in the process of moving an Intervention Application as the Scheme of Arrangement is contrary to public interest and does not meet the statutory requirements of sections 391 to 394 of the Companies Act, 1956. It is the case of this Applicant that after detailed discussion, he was convinced that in the capacity as a shareholder, he should take up the matter before this Court and for which reason, has filed the two Intervention Applications on 11-7-2009 itself. 13. In addition, two other Applications have been filed on 14-7-2009 by M/s. Webduniya.Com (India) Pvt. Ltd. being Company Application Nos. 757/2009 and 758/2009 respectively, praying for the following reliefs: "(a )That this Hon'ble High Court may be pleased to set-aside and dismiss the order passed in Company Petition No. 487 of 2009 and Company Petition No. 488 of 2009; or (b )In the alternative to prayer clause (a ) above, this Hon'ble High Court be pleased to : (i) modify its earlier order passed in company application 438 and company application 439 dated 23-4-2009 in dispensing the meeting of the creditors and (ii) direct the Petitioner Company to hold the meeting of its Creditors and also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 2009; or (d )to order the Petitioner Company to hold meeting of the creditors considering the huge amount of borrowings from Public section Banks and other Banks and Financial Institutions; (d-I)That this Hon'ble Court be pleased to allow to intervene application. (e )pass such other order or orders as deemed fit and proper and thus render justice. (f )That the cost of this Application be provided for. (g )For such further and other relief's as this Hon'ble Court may deem fit and proper in the nature and circumstances of the case." 16. Significantly, this Applicant is neither a shareholder nor a creditor of the Demerged Company or the Resulting Company. But being a public spirited person, has taken up the cause to protect the interest of the Creditors and shareholders of the public in general. 17. As per the order passed on the earlier occasion, Petitions were notified for hearing on 17-7-2009. At the outset, Counsel appearing for Mr. S. Anantharaman raised an issue that unless the valuation report is furnished by the Company, it may not be appropriate to proceed with the hearing of the Petitions. According to him, if the valuation report is furnished, the said Applicant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Rajkot Saher/Jilla Grahak Suraksha Mandal is neither a shareholder nor creditor of any of the two Companies. In fact, the Applicant has not minced words in stating that he was inspired to file objection by Mr. Mavani. Since Mr. S. Ananthraman has filed his intervention Applications and objections to the proposed Scheme at the behest of person who is neither a shareholder or creditor of either Company, it will have to be considered with utmost circumspection. The bona fides of Mr. S. Ananthraman to intervene in the proceedings would become questionable. 18. Be that as it may, the grievance now made before this Court about supplying valuation report as a condition precedent for hearing of the Petitions, clearly overlooks that the notices regarding convening of the meeting of the equity shareholders of the Demerged Company were issued and published in time as directed by the Court. The same clearly mentioned that inspection of documents referred to therein were available at the registered office of the Company upto one day prior to the date of the meeting. One of the document referred to therein is valuation report issued by M/s. R.B. Shah and Associates and certificated by M/s. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nment of hearing of the Petitions, I have already noted that the two Applications filed are clearly at the behest of a person who had no causal connection with the proposed Scheme. More over, this Applicant though a shareholder, did not think it necessary to remain personally present in the meeting of the shareholders which considered the proposed Scheme for approval. On this count alone, the Applications filed by Mr. S. Ananthraman will have to be rejected. However, to reassure myself that the grievance made by the objector is not significant one, I would proceed to consider the issues that have been raised at the time of arguments. 21. In the first place, Counsel appearing for the Objectors took me through the history of earlier Schemes of Arrangement between the Demerged Company, the Resulting Company and another wholly owned subsidiary M/s. Reliance Company Infrastructure Company Limited inter se. In my opinion, however, it may not be necessary to delve upon matters which may be relevant to those Schemes. It may be noticed that as per the earlier Schemes, the transfer of assets were made at book value of Rs. 2,755 crores from the above named Reliance Communication Infrastructu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he subject matter of the scheme of demerger. My attention has not been invited to any such provision". 23. In my opinion, having regard to the fact that the Petitioner Companies have produced the audited Books of Account till 31-3-2008 and unaudited till 31-12-2008, which discloses all the relevant information coupled with the fact that the valuer has also referred to the figures of the value of the assets of the Optic Fiber Undertaking, it is neither a case of vague nor of non-transparent disclosures made by the Companies. 24. The next issue canvassed was that the basis and methodology of valuation of the Optic Fiber Undertaking which is proposed to be transferred from the Demerged Company to the Resulting Company under the Scheme is not known and that in absence of valuation report, the Objectors were at a loss to offer any comment. Insofar as non supply of valuation report is concerned, I have already dealt with that aspect in the earlier part of this Judgment. The valuation report was available for inspection before the meeting was held. If the Applicant failed to avail of the said opportunity. Therefore, the Company cannot be blamed. The fact that the Applicant has demanded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mary of Valuation of OFC Network of RCOM as on 1-4-2008 All Figures in INR Sr. No. Particulars Gross Block Net Block Gross current Replacement Cost Depreciated 1. OFC Network (45%) acquired from RCIL as at 31-3-2006 40396156775 36022483086 56382090446 46559903405 2. OFC Network (49%) BAN Project 2006-07 851115135 777806197 1910666629 1740855692 3. OFC Network (49%) Phase : WIN Project 2007-08 2427703785 2385365983 4954498307 4835771942 4. OFC Network (49%) BAN Project 2007-08 (BAN) 1437973985 1419893142 2934640786 2882143255 5. OFC Network purchased from RCIL as on 31-12-2007 780000000 768218441 Incld. In Sr.No. 1-4 Incld. in Sr.No. 1-4 6. OFC Network transferred from RCIL (*)1826357677 (*)1802738862 Incld. in Sr.No. 3-4 Incld. in Sr.No. 3-4 Grand Total (excluding CWIP) 47719307356 43176505711 66181896168 56018674293 7. Approximate Premium on the Value to account for the time required to replicate the Network; and the fact that any potential acquirer gains on 'time and opportunity' by acquiring such a premium asset in 'one go' (For details please refer the D.V.R.) 6000000000 Grand Total of Market Value (excluding CWIP) 6201867429 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , there is nothing on record to doubt the integrity and honesty of the independent expert appointed by the Company for the purpose of valuation. The argument of the Applicant that the same valuer is regularly appointed by the Company for valuation purpose, cannot be the basis to hold that the subject report submitted by the said Valuer is dishonest or manipulated one. Such inference cannot be lightly drawn in absence of tangible material to substantiate the same. Significantly, it is noticed during the course of argument that the valuation is in excess of the net book value of the assets. Suffice it to note that the grievance made by the Objectors that the basis and methodology of valuation is not spelt out in the valuation report, is devoid of merits. 26. Another issue raised on behalf of the Objectors is that the Scheme does not disclose whether the Company proposes to pay any user charges (lease rentals) for the use of passive optic fiber to the Resulting Company. In absence of such disclosure, the shareholders cannot evaluate the merits and de-merits of the Scheme. In the first place, no such grievance or doubt was expressed by any shareholder who voted in favour of the Scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny and 1.1.6.7. any other asset/liability which is deemed to be pertaining to the Optic Fiber Undertaking by the Board of the Demerged Company. Explanation.--In case of any doubt regarding whether any particular asset or liability forms part of the Optic Fiber Undertaking or otherwise, the same shall be resolved mutually by the Board of the Demerged Company and Resulting Company." The Scheme also mentions the appointed date to mean 1-4-2008 or such other date as may be decided by the High Court. The effective date is defined to mean date on which the certified copy of the Order of the High Court sanctioning the Scheme of Arrangement is filed with the Registrar of Companies, Maharashtra, Mumbai. Clause 1.3 stipulates the date of taking effect and operative date. Clause 2.1 provides for transfer and vesting of Optic Fiber Undertaking of the Demerged Company into Resulting Company. The manner in which the same shall be effected is provided in Clauses 2.1.1 (a), (b), (c ) and (d). It is an arrangement to transfer whole of the Undertaking and properties of Optic Fiber Undertaking to be vested in and/or deemed to be transferred to and vested in the Resulting Company, subject to non-ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and Resulting Company on arm's length basis." 29. The grievance is that, it is not known when the Company will receive the consideration of Rs. 7,206 Crores from the Resulting Company upon demerger of the Optic Fiber Undertaking as per the Scheme of Arrangement. Besides, if the consideration is not received, what is the quantum of interest to be paid by the Company is also not spelt out, even though, the appreciation in value of the assets demerged will accrue to the Resulting Company. In the context of this objection, the Counsel appearing for the Companies were called upon to state whether it was possible to specify the quantum of interest in the Scheme itself. In response thereto, Counsel for the Company have stated on instructions that the Court may consider to specify the interest rate as not less than 1 per cent over and above the prevailing Benchmark Primary Lending Rate (BPLR) from the effective date until the realisation of the amount in question. It was, however, later on argued by the Counsel for the Companies that the Reserve Bank of India has reviewed the Benchmark Primary Lending Rate Structure. In the opinion of the Reserve Bank of India, as can be discerned from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 per cent over and above the Weighted average cost of debt of the Demerged Company, whichever is lower. That may from time to time be mutually decided by the Board of the Demerged Company and Resulting Company on arm's length basis." 31. Insofar as the time within which the said payment has to be made, although the Scheme does not specify any specific time period, since that arrangement is not against any provision of law for the time being in force, the question of disapproving the Scheme on that count does not arise. For, that is the commercial wisdom of the Body of equity shareholders which would bind the stakeholders. As a matter of fact, the Creditors are in no way affected by the said arrangement. Somewhat similar issue was considered by me in the recent decision in the case of Hindalco Industries Ltd. (supra). In that case, the Regional Director had raised issue that the Scheme does not place time limit for implementation of the Scheme and to write off expenses of securities premium accounts in the Books of Account up to a particular day. That objection was negatived on the opinion that the decision was expression of commercial wisdom of the shareholders who have approved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be faulted even if there were to be deviation from the accounting standards, more so, to be made a ground to disapprove the Scheme. 34. To overcome this position, Counsel for the Objectors relied on the recent decision of the Apex Court in the case of CIT v. Woodward Governor India (P.) Ltd. [2009] 179 Taxman 326 (SC), to contend that the Apex Court has disapproved the deviation of accounting standards and has observed that the authorities should ruthlessly proceed against the defaulting companies. The argument clearly overlooks that the said decision is in the context of provisions of taxation law. However, while considering a Scheme of arrangement propounded by the Company, the same will have to be tested on the touchstone of provisions of the Companies Act which, as aforesaid, do not completely prohibit the deviation of accounting standard subject to disclosures in terms of section 211 of the Act. This does not mean that the authorities under the taxation law are precluded from lifting the veil or to prosecute the companies for violation of mandatory accounting standards. Those matters will have to be proceeded on its own merits in accordance with law, uninfluenced by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the courts will not interfere with the decisions of the majority provided prescribed procedure is followed and unless there is grave prejudice being caused to a section of the public or the scheme is generally harmful to the public interest. I am afraid I cannot accede to the submissions made by Mr. Chatterjee that if the scheme is sanctioned, it will cause grate harm to the public interest." 36. Recently, while approving the Scheme of Reliance Communications Infrastructure Ltd. decided on 19-6-2009 in Company Petition No. 375 of 2009, the apprehension that on approval of the Scheme, the Company would claim that it stood extricated from the investigation and proceedings to be resorted to by Income-tax Department, have been dealt with by recording as follows :-- "9. The Income-tax Department will be free to examine the aspect of any tax payable as a result of the Scheme by either of the two entities. The Petitioners undertake that they will not urge before the Income-tax authorities that the issue of taxability cannot be gone in to by reason of the order passed by this Hon'ble Court." 37. Even in the present case, the Petitioners through Counsel undertake that they would not pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting period, from the date this transitional provision comes into force or the first date on which the concerned foreign currency monetary item is acquired, whichever is later, and applied to all such foreign currency monetary items), exchange differences arising on reporting of long-term foreign currency monetary items at rates different from those at which they were initially recorded during period, or reported in previous financial statements, insofar as they relate to the acquisition of a depreciable capital asset, can be added to or deducted from the cost of the asset and shall be depreciated over the balance life of the asset, and in other cases, can be accumulated in a "Foreign Currency Monetary Item Translation Difference Account" in the enterprise's financial statements and amortized over the balance period of such long-term asset/liability but not beyond 31-3-2011, by recognition as income or expense in each of such periods, with the exception of exchange differences dealt with in accordance with paragraph 15. For the purposes of exercise of this option, an asset or liability shall be designated as a long-term foreign currency monetary item, if the asset or liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sible to adjust the increase/ decrease in liability relating to acquisition of capital assets on account of exchange rate fluctuation, in the actual cost of the assets acquired in foreign currency and for, inter alia, depreciation to be allowed with reference to such increased/decreased cost. This position is also made clear by Circular No. 5-P dated 9-10-1967 issued by CBDT. One more point needs to be mentioned. Section 43A (unamended) corresponds to para 10 of AS-11 similarly providing for adjustment in the carrying cost of fixed assets acquired in foreign currency, due to foreign exchange fluctuation at each balance sheet date. The relevant para reads as follows : '10. Exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which carried in terms of historical cost, should be adjusted in the carrying amount of the respective fixed assets. The carrying amount of such fixed assets should, to the extent not already so adjusted or otherwise accounted for, also be adjusted to account for any increase or decrease in the liability of the enterprise, as expressed in the reporting currency by applying the closing rate, for making paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ans/liabilities denominated in foreign currencies taken/incurred which have been or are debited to profit and loss account of any year upto the year ending 31-3-2011 may as determined by the Board of Directors and to the extent the balances are available, be adjusted by a corresponding withdrawal from the General Reserves of the Resulting Company". 43. In response to this objection, the Petitioners, through Counsel, undertake that the Petitioners would not only follow the Accounting Standard-11 but also Accounting Standard-5 in its letter and spirit. Assurance so given by the Petitioners is accepted. The Regional Director has no other objection to any other clause in the Scheme. 44. That takes me to the objection of Webduniya.com (India) Pvt. Ltd., a Creditor of the Demerged Company. The said objector has more or less reiterated the issues put forward by the Counsel for Mr. S. Ananthraman, which have already been answered hitherto. The Counsel appearing for this objector, however, additionally argued that the Company has already substantial secured loan and has huge liability and in furtherance of this Scheme would part with the assets worth Rs. 7,206 crores. That may cause preju ..... X X X X Extracts X X X X X X X X Extracts X X X X
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