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TMI Blog2010 (11) TMI 834X X X X Extracts X X X X X X X X Extracts X X X X ..... eld by 6 Promoter Shareholders and the balance of 1.12 per cent of the Paid-up Equity Share Capital of WIL is held by 1463 shareholders. There has been no change in the shareholding from 31st December, 2008 till the date of filing the present Petition. 4. WIL is engaged in the business of manufacture and sale of diesel engines and diesel generating sets and providing solutions to the Power and Shipping Industry. The equity shares of WIL were listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Subsequently, an open offer was made by the Promoters under SEBI (Delisting of Securities) Guidelines, 2003 for acquisition of Equity Shares at Rs. 622 per equity share. Since the public shareholding of the Petitioner Company fell below the 10 per cent limit as provided under the Stock Exchange norms, the shares of WIL were delisted from the NSE and the BSE in June 2007. 5. According to WIL, subsequent to the delisting of its equity shares, there was no market to buy and sell the equity shares held by the holders of the equity shares (other than the promoters). The investments made by the public shareholders were locked-up and they found it difficult to dispose o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pproval of the Members at the General Meeting, consent of the Board be and is hereby accorded to reduce the Issued, Subscribed and Paid-up Equity Share Capital of the Company from Rs. 12,03,40,000 (Rupees Twelve Crores Three Lakhs and Forty Thousand only) divided into 1,20,34,000 (One Crore Twenty Lakhs Thirty-four Thousand) equity shares of Rs.10 each to Rs. 11,89,92,310 (Rupees Eleven Crores Eighty-nine Lakhs Ninety Two Thousand and Three Hundred Ten only) divided into 1,18,99,231 (One Crore Eighteen Lakhs Ninety-nine Thousand Two Hundred and Thirty-one) equity shares of Rs. 10 each by cancellation of 1,34,769 (One Lakh Thirty Four Thousand Seven Hundred and Sixty-nine) equity shares of Rs. 10 each and held by the holders of the equity shares other than the promoters." "RESOLVED FURTHER THAT the aforesaid reduction shall be made by paying off /returning to the holders of the Equity Shares other than the promoters a price of Rs. 532 per share (including a premium of Rs. 522 per Equity Share), thereby extinguishing all such shares." 9. Thus WIL sought to extinguish 1,34,769 equity shares and reduce its paid-up share capital to Rs. 11,89,92,310. Though, the fair value of a fully p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt that a copy of the Memorandum of Association and Articles of Association of the Company as amended from time to time and a copy of the valuation of the independent valuer i.e., KPMG, was available for their inspection and perusal at the registered office of WIL between 11.00 a.m. and 1.00 p.m. on any working day till the date of the meeting. 13. Accordingly, the EGM of the shareholders of WIL was held on 10th November, 2009. At the said meeting 76 equity shareholders of WIL holding 11,903,307 equity shares of Rs. 10 each were present either in person or through proxy or through authorized representative under section 187 of the Act. Out of the 76 equity shareholders, 2 equity shareholders holding 30 equity shares of Rs. 10 each abstained from voting at the meeting. Out of the 74 equity shareholders who exercised their voting rights, ballot papers of 2 equity shareholders holding 125 equity shares of Rs. 10 each were found to be invalid. The ballot papers of the other 72 equity shareholders holding 11,903,152 equity shares were found to be valid. Out of these 72 equity shareholders who cast valid votes, 68 members holding 11,902,602 fully paid-up equity shares of Rs. 10 each, co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elying. He enquired about the total number of shareholders of the Company. He wanted to know whether Members other than Promoters had given proxies. He requested for inspection of the Proxy Register and corporate authorization, copy of valuation report, Memorandum & Articles and Annual Reports for last 3-4 years. He also requested the Chairman to record his objection to the resolution and provide a copy of the minutes of the meeting when recorded." 15. It is pointed out on behalf of WIL that as on 31st October, 2009, WIL has five secured creditors and WIL has obtained written consent from all the five secured creditors agreeing to the reduction of capital. It is further pointed out that WIL has 405 unsecured creditors. The unsecured creditors, comprise of statutory dues, trade creditors and advances received from customers. As on 31st October, 2009, the aggregate amount due to them is Rs. 3,27,202,083. It is submitted that the unsecured creditors shall be paid as and when their dues become payable in the normal/ordinary course of business. Attention of this court is drawn to the Minutes of the Order dated 18th December, 2009, admitting the above Company Petition and passing of di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmined and that value is also discounted back to the valuation date to give an overall value for the business. A Discounted cash flow methodology typically requires the forecash period to be of such a length to enable the business to achieve a stabilized level of earnings, or to be reflective of an entire operation cycle for more cyclical industries. We have used the DCF approach in the valuation of the Company. (b)Comparable Companies ("COCO ") An earnings based approach estimates a sustainable level of future earnings for a business ("Maintainable Earnings") and applies an appropriate multiple to those earnings, capitalizing them into a value for the business. The earnings bases to which a multiple is commonly applied include Revenue, EBITDA and PAT (P/E). The appropriate multiple is generally based on the performance of listed companies with similar business models and size. We have used the COCOs multiple (EBITDA and P/E) in our valuation analysis." KPMG has given its working based on DCF Analysis and COCO Analysis at Pages 29 and 30 of its Report and has after considering an average of the methodology used, at Page 33 valued the share price of common equity of WIL at ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome" Approach. Mr. Haribhakti has pointed out that the Valuer has relied upon only one Company i.e., Cummins India Limited (CIL) for deriving the different multiples. The right approach would be to consider the comparable companies engaged in similar businesses. The comparable companies should be selected based on the size of the business, nature of business, products manufactured by the Company, stage in the business life cycle, etc. Considering only one company to derive at the multiples would mean comparing the company with another company's management style for managing the business and company affairs, which can give skewed results. Also suitable discounts/premiums should be considered to adjust the size of the company, technology used, etc. of the comparable companies. Although CIL can be considered as a remotely comparable company, it cannot be considered as a close comparable company for the following reasons:- (1)Size of the Company : Last two years average revenues of WIL are around 1/15 times that of CIL and the asset base of WIL is 1/6 times that of CIL. (2)Capital Structure : WIL is not levered company, whereas CIL is levered nominally. (3)Earning Before Interest, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of any valuation report. 18. Mr. Sethi, the learned Advocate appearing for WIL, has submitted that although the reduction of share capital of WIL by payment to the holders of equity shares (other than promoters) as embodied in the Special Resolution involves return of paid-up capital and payment of premium out of reserves and surplus, it will not in any manner adversely affect or prejudice the interests of the shareholders, creditors or the public at large. Mr. Sethi has further submitted that during the previous financial years i.e., 2007 and 2008 open offers were made by the promoters of WIL in accordance with SEBI Delisting Regulations. The said price of Rs. 622 was paid by the promoters/acquirers having regard to the discovered price as per Reverse Book Building Method under the then applicable regulations of the SEBI and the same was not on the basis of Valuation of Shares which is normally followed for reduction of capital. The offer by the Promoters is on a different basis and under the regulations which govern the delisting process. The reduction of capital under section 100 of the Act cannot be equated with the promoters offer. As there were many requests received by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Valuation Report of SSPA & Co. was obtained by the Promoters and the Valuation done by SSPA & Co. was on the basis of CCI Guidelines. The valuation report obtained by the promoters of WIL from SSPA & Co. was to comply with the requirements laid down by the Reserve Bank of India. SSPA & Co. has valued the shares of WIL based on the pricing guidelines prescribed by RBI for acquisition of shares by non-residents from resident shareholders in accordance with the 'Guidelines for Valuation of Equity Shares of Company and the Business and the Net Assets of the Branches' issued by the Ministry of Finance, Department of Economic Affairs, vide File No. S.11(21)CCI(11)/90, dated 13th July, 1990, popularly known as the "CCI Guidelines". The price of Rs. 162 per share was the price arrived at by SSPA & Co. based on the said pricing guidelines prescribed by RBI for acquisition of shares by a non-resident from resident shareholders. It is submitted that the defects in the report submitted by A. Maheshwari and Company, are clearly brought out in the report of Mr. Shailesh Haribhakti, Chairman of BDO. It is submitted that though M/s. Raiji and Company have used the Net Asset Value and the Earning C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of WIL is against the principles of natural justice corporate democracy and corporate governance, he is presently not pressing the said contention, in view of the decision of the Hon'ble Division Bench of this court in Sandvik Asia Ltd. v. Bharat Kumar Padamsee [2009] 92 SCL 272 from which an SLP was preferred to the Hon'ble Supreme Court and was dismissed. However, he seeks to keep the said issue open, to enable the Intervenors to raise the same before the Hon'ble Division Bench of this Court or before the Hon'ble Apex Court if so advised. 22. Mr. Dwarkadas has further submitted that though the Intervenors have raised several issues in their Affidavits, he will be restricting his submissions to only two issues. The first main submission advanced by Mr. Dwarkadas is that WIL had earlier made open offers to acquire the shares held by individual shareholders at the rate of Rs. 622 per share. Such open offers issued by WIL were obviously based on WIL's assumption of the then fair value. The profit before tax of WIL has doubled from the year 2007 to the year 2009. WIL has declared dividends of 25 per cent and 30 per cent for the years 2007 and 2008, respectively, and it is therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered in the year 2007. The said offer was valid from 15th May, 2009 up to 31st July, 2009. It was mentioned in the said offer that for the period 1st July, 2009 to 15th August, 2009 the offer price would be revised downwards to Rs. 162 and would remain valid till 15th August, 2009. In my view, the offer of the foreign promoters of WIL of Rs. 622 per share, despite the valuation of SSPA and Co. at Rs. 162 per share, for the period of 10 weeks i.e., from 15th May, 2009 to 31st July, 2009 is a business/commercial call of the foreign promoters of WIL at that point of time. What business/commercial plans the promoters of WIL had in mind at that point of time are known only to them and in my view, the Court cannot and should not attempt to speculate or read into the mind of the promoters. The court also cannot embark upon an exercise of speculating as to why the promoters later offered to pay only Rs. 162 per share from 1st August, 2009 to 15th August, 2009. The said offer at Rs. 622 per share was only for a period of ten weeks and it was for the non-promoter shareholders of WIL to accept or reject the same. The action of the promoter shareholders in choosing to value the shares first at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... limited company and set out its conclusion in Paragraph 12 of the Judgment. However, the Hon'ble Court is also quick in immediately recording the following in the subsequent paragraph of its Judgment (also numbered Paragraph 12): "In setting out the above principles we have not tried to lay down any hard and fast rule because ultimately the facts and circumstances of each case, the nature of the business, the prospects of profitability and such other considerations will have to be taken into account as will be applicable to the facts of each case..." 26. In my view KPMG has used the widely accepted methodologies i.e., the Discounted Cash Flows Methodology and the Comparable Companies Methodology which inter alia includes the P/E multiple analysis for valuation of WIL's shares. One of the valuation methodologies, which was adopted by M/s. Raiji and Co., is the one suggested by the Intervenors, but even in this valuation, the valuation of each equity share of WIL would be Rs. 444. Mr. Shailesh Haribhakti, Chairman of BDO, has given cogent reasons explaining the defects in the valuation of WIL shares by A. Maheshwari and Co. As held in several decisions of the Hon'ble Apex Court and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d do not overstep the limits. But, subject to that, how best the game is to be played is left to the players and not the umpire" 29. In Hindustan Lever Employees Union v. Hindustan Lever Ltd. AIR 1995 SC 4701, the Hon'ble Apex Court rejected the argument of the Petitioner therein, that if some other method was adopted, probably the determination of valuation would have been more in favour of the shareholders. Merely because some other method of valuation could be resorted to, which would possibly be more favourable, that alone cannot militate against granting approval to the scheme propounded by the Company. The Court's obligation is to be satisfied that the valuation was in accordance with the law and it was carried out by an independent body. 30. In the case of Tata Oil Mills Co. Ltd., In re [1994] 81 Comp. Cas. 754 this Court observed thus: "... the exchange ratio arrived at by Mr. Malegam has received the approval of shareholders holding more than 99 per cent (in number and value) shares at the meetings. No one except the shareholders holding the minimum percentage of shares has complained before me. The valuation has been confirmed by two eminent firms of auditors. It would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir shares at a value of Rs. 622 per share. No questions were put by the two intervenors to the representative of KPMG who was present at the EGM by invitation, even after a copy of the valuation report was provided to them at the meeting. The Report of KPMG sets out the basis for arriving at the final opinion. The Report clearly mentions that valuation is done by following the much accepted Income Approach, the Discounted Cash Flow Method and the Company Comparable Method. Though M/s. N.M. Raiji & Co. have followed the Net Asset Value method and the Earnings method, their valuation of each share of WIL also does not exceed the price actually being offered by WIL for purchase of its shares. Moreover, the drawbacks of the report submitted by the Intervenors have been clearly set out in the Report of Mr. Shailesh Haribhakti, Chairman of BDO. The intervenors have not attributed any motives to KPMG, nor commented on its independent professional status or competency, nor have they been able to point out that the method adopted by them in valuing the shares was impermissible or absurd. 33. Keeping in view the observations of the Hon'ble Apex Court as well as the other High Courts inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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