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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 ..... e four intervenors, no other person has come forward to oppose the Petition. Among these intervenors, two of the four did not even attend the EGM. As regards their position - where a shareholder did not attend the meeting and vote against the scheme, it is too late in the day for him to contend that the scheme was unfair to him. 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. Company Petition allowed. - COMPANY PETITION NO. 1037 OF 2009 COMPANY APPLICATION NO. 1303 OF 2009 - - - Dated:- 15-11-2010 - S.J. KATHAWALLA, J. Hemant Sethi, Ms. Kamlesh Rajwani and Bhavin Shah for the Petitioner. Janak Dwarkadas and Ashish Kamat for the Intervenor. JUDGMENT 1. By this Company Petition, Wartsila India Limited ("WIL") seeks approval and confirmation by this Court in terms of the Special Resolution passed by the shareholders of WIL in its "Extraordinary General Meeting" ("EGM") held on 10th November, 2009 for the reduction of its equity share capital. 2. The au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... According to WIL, the holders of the equity shares (other than promoters) continued to face a lot of hardship and inconvenience in the absence of no liquidity/tradability to their shareholding. WIL was receiving requests from time to time from certain non-promoter shareholders to provide them with an exit opportunity. As an investor friendly gesture WIL decided to provide a one-time exit opportunity to the holders of the equity shares (other than the promoters) being the shareholders holding 1,34,769 shares representing 1.12 per cent of the total issued, subscribed and paid-up equity share capital of the company by reducing the entire issued and paid-up equity share capital held by all the shareholders other than the promoters, in accordance with Article 62 of the Articles of Association of WIL and the provisions of sections 100 to 104 of the Companies Act, 1956 ("the Act"). 7. The Petitioner Company obtained Valuation Report from KPMG India Private Limited (KPMG), an independent Valuer for determining the fair value of the Equity Shares of WIL. As per the Report dated 30th Septem- ber, 2009 of KPMG, the fair value of every one fully paid-up equity share of WIL is Rs. 377 (Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut in Paragraph 8 above. 11. In the said explanatory statement, the reason for reduction of share capital was explained as under:- "Subsequent to the delisting of the Equity Shares of the Company, there is no market to buy and sell the Equity Shares held by the Equity shareholders other than the Promoters. The investments made by these shareholders are locked up and they find it difficult to dispose off their shareholding. This has put the holders of the Equity Shares (other than the Promoters) in a lot of hardship and inconvenience as there is no liquidity/tradability to their shareholding. Further, the Company has been receiving requests from certain non-promoter shareholders to provide them with an exit opportunity. As an Investor friendly gesture, the Company wants to provide an exit opportunity to the holders of the Equity Shares (other than the Promoters), being the shareholders holding 1,34,769 equity shares representing 1.12 per cent of the total issued, subscribed and paid-up equity capital of the Company. As a result of reduction of share capital as mentioned in the Resolution, the entire shareholding in the Company will be held by the Promoters." It is further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Petition. Their views are as follows:- "Mr. Arun Kejriwal expressed his comments on valuation based on book value and fair value. He requested for a copy of the valuation report and expressed his dissatisfaction on account of insufficiency of time for evaluating the valuation report and expressed his opposition for the proposed resolution. He stated that the same was not in the interest of non-promoter shareholders of the Company. He also referred to the earlier open offers made by the Promoters of the Company. Mr. Janak Mathuradas referred to the contents of the explanatory statement to the Notice reasoning the exit opportunity being offered to the minority shareholders. He stated that the resolution was not in the interest of the minority shareholders and the Company should buy the shares only from such shareholders who are willing to surrender their shares. In his opinion it did not necessitate to have a special resolution which would result in exit of all the non-promoter shareholders. He also expressed the view that a separate meeting of the minority shareholders should have been held to consider this resolution. He also referred to the price of Rs.622 per equity share b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the said Petition was being opposed by the intervenors. At that time, this Court was informed that the opposition mainly pertains to the valuation of the shares of WIL and the price offered by WIL to its shareholders (other than promoter shareholders) for their shares, which WIL proposed to reduce. At that point of time without going into the merits of the matter or any further details, this court had, in order to enable the parties to arrive at an amicable figure for each equity share of WIL, suggested that the parties approach one more independent valuer and obtain a second opinion in the matter. WIL has therefore, subsequently obtained a valuation report also from M/s. R.M. Raiji and Company, Chartered Accountants. 17. The details of the valuation reports placed before this Court are as under: ( i )Report of KPMG, independent valuer, dated 30th September, 2009 relied upon by WIL : The valuation methodology used by KPMG to arrive at a fair valuation of each equity share of WIL is the Discounted Cash Flow Methodology ( DCF ) and Comparable Company s Method ( COCO ). It is a known fact that the Valuer for the purpose of valuation of equity shares uses different approaches ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be Rs. 444 as on 30th June, 2009. M/s. N.M. Raiji and Company have also clarified that for an unquoted Company generally illiquidity discount of 10-20 per cent is considered. However, they have not applied illiquidity discount for calculating fair value in view of the offer of reduction of capital of WIL. ( iii )Report of A. Maheshwari and Company, Chartered Accountants, dated 1st February, 2010 relied upon by the intervenors: The intervenors have relied on the Report of A. Maheshwari Company, Chartered Accountants dated 1st February, 2010. The said Report follows 3 Methods namely, Price/Earning per Share (P/E) Method; Enterprise Value/EBITDA (EV/EBITDA) Method and Price/Book Value (P/BV) Method. According to the said Report of A. Maheshwari Company, the average price of each equity share of WIL would be Rs. 1,033 per share. ( iv )Report of Shailesh Haribhakti, Chairman, BDO Consulting Private Limited (BDO), dated 17th March, 2010, relied upon by WIL for analyzing the report of A. Maheshwari and Company, relied upon by the intervenors: WIL has relied upon a report of BDO dated 17th March, 2010 setting out the observations/comments of Shri Shailesh Haribhakti, Chairm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i A. Maheshewari and Company are reproduced hereunder: "Observations on Multiple Used Valuation as per P/E The valuer has not mentioned in the report the basis considered for deriving the Price and P/E ratio of CIL. Also, the basis for considering the forward P/E multiple by valuer is not clear. Earning Per Share (EPS): EPS should ideally be considered for Trailing Twelve Months (TTM) period to reflect the normalized EPS (EV). As the above parameters were ignored while arriving the P/E multiple, in our view, P/E multiple derived by the valuer is higher than the ideal calculation of P/E. Valuation as per Enterprise Value (EBITDA (EV/EBITDA) The valuer has not mentioned in the report the basis considered for deriving the Enterprise Value (EV) and EBITDA of CIL. In deriving the EV of a Company, an average market capitalization of the company should be considered and thereafter add net debt (debt less cash and surplus investments) as per the last audited financial statements of the company. TTM EBITDA should be considered to reflect the normalized EBITDA. In our view, EV/EBITDA derived by the valuer is higher than the ideal calculation of EV/EBITDA as the market cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Registered Office of WIL. However, none of the intervenors bothered to inspect the said Valuation Report prior to the EGM. In fact, they have at no place stated when the notice of the meeting was received by them, since that would show that they did have enough time to inspect the valuation report prior to the EGM. Moreover, Mr. Raichura and Mr. Zaveri have not even attended the meeting. The submissions made by the intervenors that the Report of KPMG is purely based on WIL s version and is not an independent analysis by KPMG or that the said report is unreliable and cannot form the basis of any valuation of shares of WIL are false and incorrect. It is submitted that the price being offered by WIL is fair and has been approved by a significant majority of the shareholders. It is further submitted that the KPMG Report has also considered the Capitalized Earning Method, which as admitted by the intervenors themselves, is akin to the Earnings per Share Method. Mr. Sethi has also drawn the attention of this Court to a communication of the Reserve Bank of India, dated 4th May, 2010, forwarding the revised provisions applicable to transfer of shares of an Indian Company in all sector ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esented; that the statutory majority was acting bona fide; and that the arrangement or the scheme was such which an intelligent and honest man, acting in respect of his interest might reasonably approve. It is submitted that the Court is not required to differ from the decision of the majority arrived at the meeting unless any of the above factors are found to be wanting. It is further submitted that it is a settled legal position that the court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the scheme by the requisite majority. The Learned Advocate has in support of his above submission relied on the decision of this Court in ALSTOM Power Boilers Ltd. v. State Bank of India [2002] 112 Comp. Cas. 674 1 , and the decision of the Gujarat High Court in Reliance Petroleum, In re [2004] 119 Comp. Cas. 566 2 . The Learned Advocate has also strongly relied on the following observation of the Division Bench of the Andhra Pradesh High Court in V. Ramarao v. Asian Coffee Ltd. [2002] 109 Comp. Cas. 337 : "In the absence of inherent defects or other vitiating factors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the valuation by any valuer. Despite WIL having offered Rs. 622 per share prior to the company s profits being doubled, WIL is now offering a paltry sum of Rs. 532 per share which is an unfair value and/or an undervalue of the said shares. Mr. Dwarkadas therefore, submits that irrespective of any valuation report produced by WIL or by the Intervenors, this court should reject the Petition on the sole ground that the offer of WIL to reduce its share capital at a value of Rs. 532 per share is totally unjust, unfair and not bona fide. 23. It would be appropriate to deal with this submission of Mr. Dwarkadas at this stage itself. As can be seen from the Affidavit filed by the Intervenors, the foreign promoters of WIL made its first open offer in or about October 2001 at a price of Rs. 120 per share. They received roughly 33.7 per cent shares in the open offer and the promoter shareholding went up to approximately 84.7 per cent. The foreign promoters made a second open offer in or about April 2002 to acquire the balance 15.24 per cent shares at Rs. 120 per share. In or about June 2007 the foreign promoters made a public offer and as per the reverse book building prescribed under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a valuation report, there are numerous instances where no purchaser comes forward to buy a property even at the reserved price but a lone buyer comes forward with an offer which is much higher than the reserved price fixed by the Court. This is because a business/commercial offer solely depends on particular factors taken into consideration by an offeror at the time he makes his offer, which in the long run may turn out to be profitable or otherwise for him. Therefore, such offer of an offeror cannot be held to be binding on him for all times to come and cannot be used as a yardstick for the subsequent offer made by him or by any other offeror. In the instant case, WIL has moved a Special Resolution for reducing its share capital by compensating its equity shareholders (other than promoters) by paying them Rs. 532 per share after following the correct mode of obtaining the valuation report from an independent valuer. This submission of Mr. Dwarkadas, which though on the face of it may sound attractive, must therefore, be rejected. 25. Mr. Dwarkadas, without prejudice to his earlier submission, has further submitted that in factual circumstances such as that of the present cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Kiritbhai Hiralal Patel v. Arvind Intex Ltd. [2001] 107 Comp. Cas. 232 1 , has aptly recorded as follows: " .In the book Study on Share Valuation, which has been published by the Institute of Chartered Accountants of India, and on which reliance has been placed by the Learned Advocate for the Appellants, the following observations has been made in its foreword to the first edition... The subject of valuation of shares has always been controversial in the accounting profession. No two accountants have ever agreed in the past or will ever agree in the future on the valuation of shares of a company, as inevitably they involve the use of the personal judgment on which professional men will necessarily differ ..." 27. In the case of Sidhpur Mills Co. Ltd., In re AIR 1962 Guj. 305, the learned Single Judge observed thus : "... it is not for the court to scrutinise the scheme in the manner of a carping critic, a hair-splitting expert, a meticulous accountant or a fastidious counsel for the effort is not to emhasise the loopholes, technical mistakes and the accounting errors. The perspective to be that of the ordinary shareholder exercising his discreti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s possible." 32. In the present case, even if only the non-promoter shareholders voting is taken into account, the resolution proposing reduction of the share capital of WIL is approved by an overwhelming majority of 93.94 per cent of non-promoter shareholders in number and 85.97 per cent in value in the said EGM. All the secured creditors of WIL have given their consent to the proposed scheme of reduction of capital. Not a single unsecured creditor has raised any objection qua the said proposed scheme of reduction of capital. The hearing of the Petition was advertised by WIL as directed by this Court in two local newspapers. However, except for the four intervenors, no other person has come forward to oppose the Petition. Among these intervenors, two of the four did not even attend the EGM. As regards their position, the observations of the Hon ble Apex Court in Miheer H. Mafatlal s case ( supra ), where a shareholder did not attend the meeting and vote against the scheme, are most relevant: "If he was feeling that the scheme was unfair to him or was not going to protect his interest as a shareholder in the respondent-company, nothing prevented him from remaining presen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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