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TMI Blog2015 (9) TMI 1194X X X X Extracts X X X X X X X X Extracts X X X X ..... either the 2010 Scheme or the 2011 Scheme. The question therefore of any fraud committed by the Companies which have approached the Court seeking orders on the said Schemes by suppression of facts as alleged does not arise and in fact the Regional Director has, with the exception of certain objections which have been complied with, informed the Court that the Scheme is in the interest of the shareholders of the Company. The question therefore of setting aside the orders sanctioning the Scheme of Arrangement and Amalgamation or sanctioning amendments to the Scheme on the ground of alleged suppression thereby perpetrating a fraud on this Court does not arise. This Court has hereinabove already recorded its finding that SEBI has failed to establish any fraud played by NFCL/KFL by way of suppression of facts and is therefore not entitled to the reliefs as prayed for in the above Applications. However, SEBI has in support of its case also alleged that NFCL/KFL has perpetrated a fraud on the shareholders of NFCL in view of several other grounds. The contention raised by SEBI to the effect that the valuation is “unrealistic, perverse and incredibly high” on account of the fact that GT had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty Pulse Properties Limited (Unlisted Transferee Company). The Scheme was made effective on and from 8th September, 2010. Pursuant to the Scheme, City Pulse Properties Limited was renamed as Ikisan Limited. 3. However, the orders sought to be recalled/reviewed by SEBI are the orders passed by this Court in Company Scheme Petition Nos. 234 of 2011 and 235 of 2011, by which this Court was pleased to sanction a composite scheme between Kakinada Fertilizers Limited [ (KFL) Transferee Company - Original Petitioner ], erstwhile Nagarjuna Fertilizers and Chemicals Limited [ (erstwhile NFCL) Transferor Company No. 1 - Demerged Company], Ikisan Limited [ (Ikisan) Transferor Company No.2); and Nagarjuna Oil Refinery Limited [ (NORL) Transferee Company No. 2/Resulting Company], under which composite scheme, the oil business of the erstwhile NFCL was demerged into NORL and the erstwhile NFCL together with its residual business and Ikisan were merged into the Petitioner. After the merger, KFL was renamed as NFCL. A schematic diagram of the Ikisan Merger 2010 and a schematic diagram of the composite scheme 2011 are reproduced hereunder: SCHEMATIC DIAGRAM OF THE IKISAN MERGER (2010) Merger Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red that the Promoters of KFL stood to benefit significantly from the scheme of arrangement. SEBI therefore thought it fit that further examination ought to be conducted before granting permission for the listing of shares. Accordingly SEBI appointed M/s. Bansi S. Mehta & Co., as an independent Valuer to examine the matter, seek relevant documents from the Company and independently value the assets of Ikisan Ltd. Bansi S. Mehta & Co. have thereafter submitted their Valuation Report dated 27th September, 2012. The Report submitted by Bansi S. Mehta & Co. shows: (i) that the accounting methods adopted for incorporating the assets and liabilities of Ikisan Limited are not consistent with the mandatory Accounting Standards ("AS") and the accounts prepared consequently are not in accordance with law; (ii) that though accounting standard 14 requires that excess consideration over the net assets should be debited to Goodwill, which in normal cases is required to be amortized over a period of 5 years, in the case of Ikisan Ltd., such excess value over the net assets has not been ascribed to 'Goodwill' but to 'Trademarks' and 'Customer Contract Valuation'; (iii) that though accounting s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above, SEBI has submitted that even if it is assumed that the Valuation Report submitted by Grant Thornton (Chartered Accountants) relied upon by the Company is true and fair, the Promoters of Ikisan Ltd. have been allotted approximately 3 times more equity shares than the worth of the assets brought in by them through Ikisan Ltd. in KFL. According to SEBI, by the said scheme, the shareholding of the Promoters in NFCL or KFL (which subsequent to the merger was renamed back as NFCL) has increased from 38.25 per cent to 51.37 per cent. This is an approximate increase of 13 per cent in the stake of the Promoters in NFCL. According to SEBI, the value of a 13 per cent shareholding according to the market price, prevailing on the Bombay Stock Exchange, of NFCL during the relevant period was to the tune of approx. 175 crores. 8. SEBI has in paragraph 23 of the Application alleged that the Petitioners have suppressed from this Court, inter alia, the following facts to achieve their objective of increasing their shareholding: (a) KFL which is a 100% subsidiary of NFCL was incorporated on 7th June 2006 with an issued, paid up and subscribed share capital of 50,000 equity shares of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bed share capital of 10,000 equity shares of ₹ 10/- each. (g ) Similarly, by a Certificate of Incorporation dated 21st March 2000, a distinct and separate Company by the name of 'Ikisan Limited' was incorporated. (h) By an Order dated 27th August, 2010, passed by this Court in Company Petition No. 392 of 2010 connected with Company Summons for Directions No. 464 of 2010, the said Ikisan Ltd. was merged into City Pulse Properties Limited. Upon such merger, the name of the said City Pulse Properties Limited was changed back to Ikisan Ltd. (the name of the Transferor Company). (i) The said Ikisan Ltd. originally had an issued, paid up and subscribed share capital of 10,000 equity shares of ₹ 10/- each as on 31st March 2009. The same was thereafter increased to 50,000 shares of ₹ 10/- each aggregating to a sum of ₹ 5,00,000/- towards share capital as on 31st March 2010. Between 31st March 2010 and the date on which the composite scheme of arrangement and amalgamation was filed before this Court, the issued, subscribed and paid up share capital of Ikisan Ltd. was increased from ₹ 5 lakhs to ₹ 29.55 crores by adopting various tactics such as convers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uity shareholders of NFCL. Since the company is reported to have earned net profits for the next three quarters after March 2010, amounting to ₹ 88.87 crores (33.37 + 28.36 + 27.14) the erosion in net worth of the equity shareholders is ₹ 950.53 crores (862.66 + 88.87). To this amount, the profit to be earned for the last quarter of the current year-March 2011 also will have to be added. (An extract of the Company's quarterly results is enclosed for your kind reference). In view of the above mentioned facts submitted in the letters furnished to the Bombay Stock Exchange, it is very much evident that the consideration offered is detrimental for the interest of the equity shareholders. I shall be very much obliged if an appropriate remedial action could be taken from your side, by your intervention in this regard safeguarding the interest of the small public investors." 10. According to SEBI, it is in these circumstances that SEBI filed the above Company Application seeking review of the Orders dated 17th June 2011 (sanctioning the Scheme of Arrangement and Amalgamation) and Order dated 22nd July 2011 (sanctioning amendments to the scheme), passed by this Court in Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n new NFCL, which have been attributed to the residual NFCL business (merged into the new NFCL) will remain. D. The result of the above will be that the effect of the fraud on this Hon'ble Court and on the body of investors of the old NFCL and the new NFCL (other than the Promoters) will be nullified. E. Since Ikisan Ltd. was merged into the new NFCL (Kakinada Fertilizers Ltd.) at completely inflated values, the demerger of its business will have no adverse impact on the non-promoter investors of the new NFCL. On the other hand, the disproportionately high number of shares allotted to the Promoters (Nagarjuna Corporation Ltd.) for the Ikisan Ltd. business shall stand cancelled. F. Sanctioned scheme to be modified by directions under Section 392 of the Companies Act,1956. SOLUTION-2 A. Valuation of Ikisan Ltd. as on March 31, 2010 and March 31, 2011 to be done by an independent Chartered Accountant appointed by the Court ("C.A."). B. Share Exchange ratio of shares to be allotted to the Promoters in lieu of the Ikisan Ltd. business to be reworked by such C.A., and the number of shares to be allotted to shareholders of Ikisan Ltd. (i.e. to Nagarjuna Corporation Ltd.) computed ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The allegation of SEBI that Grant Thornton has accepted the projections provided by the management at face value is unfounded and contrary to the GT Report as well as GT's letter dated 22nd July 2013; 14.7 The valuation exercise was conducted in accordance with well known principles of valuation. Tested against the touchstone of the law laid down by the Supreme Court in the case of G.L.Sultania & Anr. Vs SEBI (2007) 5 Supreme Court Cases 133, the Valuation reports are not liable to be set aside or ignored; 14.8 There has been no suppression of material facts as alleged by SEBI. All necessary disclosures in relation to the 2010 Scheme were made to the concerned authorities / court. All necessary disclosures in relation to the 2011 Composite Scheme were made to the shareholders, Stock Exchanges, Official Liquidator, Regional Director and the concerned authorities / court; 14.9 The issues relating to valuation and the alleged unfair advantage / gain made by the Promoters, cannot be gone into by this Court at the instance of SEBI, particularly when the shareholders have after due consideration approved the valuation and the swap ratio; 14.10 There has been no violation of the Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16. I have considered the pleadings filed by the parties, the oral and written submissions made by them and the case law relied upon by them in support of their submissions. 17. The first submission which needs to be dealt with is the submission advanced on behalf of the Petitioner that SEBI does not have locus to intervene in a scheme petition under Sections 391 and 394 of the Companies Act, 1956 ("the Act"). In support of this submission, the Petitioner has relied on the decision of the Division Bench of this court in Sterlite. In this case, SEBI as well as the Central Government had challenged the Order of the Learned Single Judge on the ground that the Court had no power to sanction the scheme under Section 391 of the Act and that the Company was required to follow the procedure prescribed by Section 77A of the Act. The scheme was also challenged on the ground that it was unconscionable and unfair to the shareholders and violated the provisions of various laws including the Companies Act. The Division Bench held that SEBI had no right to notice or the right to appear in proceedings under Sections 391 and 394 of the Act and therefore held that the Appeal filed by SEBI was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rely because the SEBI has been empowered to administer the provisions of Section 77 and 77A, it does not give SEBI any locus in a petition under Section 391 or Section 394. The right to notice under Section 391 proceedings remains with the Central Government under Section 394A The SEBI has not right of notice nor does it have any right to appear in the proceedings under Section 391 and 394A of the Act. 11. In so far as the appeal filed by the Central Government is concerned, we feel that the case of the Central Government stands on a different footing. Section 394A was inserted in the Companies Act with the object to enable the Central Government to study the proposal and raise such objections as it thinks fit in the light of the facts and information available with it and also place the court in possession of certain facts which might not have been disclosed by those who appear before it so that the interest of the investing public at large may be fully taken into account by the court before passing its order. A more liberal approach is required to be adopted in the background of objective of the legislature in enacting Section 394A. The Central Government has the statutory duty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, SEBI has, prior to the present Review Application, not raised the submissions with regard to which liberty was granted by the Hon'ble Supreme Court to SEBI to so raise. Instead, immediately after the Sterlite Judgment, SEBI, vide its Circular dated 8th May, 2003 bearing No. SEBI/SMD/Policy/List/Cir- 17/2003, introduced Clause 24 (f ) in the Listing Agreement thereby authorizing the relevant Stock Exchanges with whom the shares of the Company are listed i.e. the BSE and NSE in the present case, to grant approval, by issuing no objection certificates to schemes under Sections 391-394 of the Companies Act,1956. In fact, as recorded in paragraph 34 (xvii) of the judgment of the Division Bench of this Court in MCX Stock Exchange Ltd. (supra) dated 14th March, 2012, SEBI made a submission that a scheme under Section 391 binds the creditors and shareholders and cannot bind SEBI which does not in any event have locus in a Section 391 Petition. By Circular dated 4th February, 2013 bearing No. CIR/CFD/DIL/5/2013 SEBI issued revised requirements for the Stock Exchanges and listed Companies under the said revised terms. Under the said revised terms, listed Companies desirous of undertaking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3th December, 2011, though SEBI had received the same much prior to this Court granting sanction to the Composite Scheme of 2011. 20. To overcome the above difficulties, SEBI has relied on paragraphs 66, 67, 78, 141, 296 and 303 of the decision of the Hon'ble Supreme Court in the case of Sahara (supra) wherein the Hon'ble Supreme Court has inter alia observed that SEBI has very wide powers to take any actions/steps necessary for investor protection and for the development and regulation of the securities market and that SEBI's powers are not fettered by any other law including the Companies Act. SEBI has submitted that since the Division Bench in Sterlite (supra) did not consider the powers conferred under the SEBI Act, particularly Sections 11, 11A and 11B and was concerned only with the provisions of Section 55A of the Act, Sterlite is no longer good law after the decision in Sahara India (supra). SEBI has submitted that even if the Division Bench judgment were to be still treated as good law, it is restricted to a scenario de hors the SEBI Act, 1992. Sterlite involved a case where SEBI sought to file an appeal in a pending proceeding, and it did not concern a case of SEBI (as r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l bargain on the shareholders and other stakeholders which has not been consented to by them and do not fall within the scope of S.392 of the Companies Act. 23. It is further contended by SEBI that by virtue of Rule 6 of the Companies (Court) Rules, 1959, the provisions of the Code of Civil Procedure, 1908 apply to proceedings under the Companies Act, 1956. It is therefore submitted that pursuant to the provisions of Sections 114 and 151 of the Code of Civil Procedure, 1908 and order 47 of the CPC, this Court has the power to review/recall its orders. As correctly submitted on behalf of the original Petitioner, assuming that the provisions of the Code of Civil Procedure, 1908 with regard to the filing of Review Petitions do apply, it is only a 'person aggrieved' by an order who can file a review petition. SEBI cannot claim to be a person aggrieved. If SEBI has no locus to appear in a Scheme Petition, SEBI can hardly be a "person aggrieved" who would be entitled to file a Petition seeking a review/recall of the order sanctioning the scheme. Again as set out hereinabove, SEBI having failed to look into the complaint of the Shareholder, which was received prior to this Court having s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors of erstwhile Ikisan respectively passed a resolution approving the 2010 Scheme. 27.2 On 25th June,2010, City Pulse filed Company Summons for Direction No. 465 of 2010 before this Court. In compliance with Rules 67 to 87 of the Companies (Court) Rules, 1959, and in compliance with the specific requirements prescribed in a checklist of the Company Registrar of this Court, along with the said Company Summons for Direction, the following documents were submitted: (i) Memorandum of Association and Articles of Association of City Pulse and erstwhile Ikisan; (ii) Audited accounts as on 31 March 2009 of City Pulse and erstwhile Ikisan; (iii) Unaudited accounts as on 31 March 2010 of City Pulse; (iv) Unaudited (provisional) accounts as on 31 March 2010 of erstwhile Ikisan; (v) 2010 Scheme of Amalgamation; (vi) Board resolution dated 23 February 2010; and (vii) Consent letters of the equity shareholders (according their approval to the 2010 Scheme). 27.3 The 2010 Scheme had, inter alia, the following provisions: The provisional unaudited accounts of Ikisan clearly reflected that whereas in 2009 the value of the trademarks and customer contracts of erstwhile Ikisan (pre 2010 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... audited accounts of Ikisan for the year ended 31 March 2010, trademarks and customer contracts were shown at their fair value at ₹ 36.4 crores and ₹ 18.2 crores, respectively. 27.8 On 2nd July, 2010, the erstwhile Ikisan also filed Company Scheme Petition No. 392 of 2010 before this Court. Along with the said Company Scheme Petition, the following documents were submitted: (i) 2010 Scheme; (ii) Board Resolution dated 24 February 2010; and (iii) Order dated 02 July 2010. 27.9 On 9th July, 2010, this Court in Company Scheme Petition No. 393 of 2010 (filed by Citypulse) passed an order admitting the Petition and fixing 13th August, 2010 as the date for final hearing of the petition, and inter alia directing that notice for hearing of Company Scheme Petition No. 393 of 2010 be: (i) served on the Regional Director, Western Region, Ministry of Corporate Affairs Mumbai, Maharashtra pursuant to Section 394A of the Companies Act, 1956; (ii) served on the concerned Registrar of Companies; (iii) served by R.P.A.D. upon all its Unsecured Creditors; and (iv) published in the Free Press Journal in English and the Maharashtra Times in Marathi, both circulated in Mumbai. 27.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctioned the 2010 Scheme. The 2010 Scheme was sanctioned after taking into account the clearance/no objection given by the Regional Director and the Official Liquidator. The clearance/no-objection given by the Regional Director and the Official Liquidator is recorded in the order dated 27 August 2010 of this Court sanctioning the 2010 Scheme which states as follows: "5. Save and except as stated in para 6(a) & 6(b) it appears that the scheme is not prejudicial to the interest of the shareholders and public. 7. The Official Liquidator has filed a report in Company Scheme Petition No. 392 of 2010 stating therein that the affairs of the Transferor Company has been conducted in a proper manner and that the Transferor Company may be ordered to be dissolved." 27.13 On 8th September, 2010, the Scheme was made effective. City Pulse and erstwhile Ikisan filed e-form 21 with the Registrar of Companies. 28. From the aforestated facts it is established that City Pulse and/or erstwhile Ikisan has not suppressed any document containing any relevant fact from its shareholders, the Registrar of Companies, the Regional Director i.e. the Ministry of Law and Justice, the Official Liquidator, and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Scheme. As per BSE and NSE requirements, inter alia the following details/documents (as specified in the checklist available on the BSE and NSE websites at the relevant time) were provided along with the clause 24(f ) application: (i) Board Resolution dated 10 January 2011; (ii) Draft 2011 Composite Scheme approved by the Board; (iii) Rationale of the 2011 Composite Scheme; (iv) Brief details of Ikisan, erstwhile NFCL, KFL and NORL (in the format prescribed by BSE and NSE); (v) Grant Thornton's Valuation Report setting out the share exchange ratio dated 06 January 2011; (vi) Keynote's fairness opinion setting out the share exchange ratio dated 07 January 2011; (vii) Auditor's Certificate under Clause 24(i) of the Listing Agreement certifying the accounting treatment; (viii) Shareholding pattern of KFL and NORL pre and post the 2011 Composite Scheme as required under clause 35 of the Listing Agreement; (ix) Shareholding pattern of erstwhile NFCL and Ikisan pre the 2011 Composite Scheme as required under clause 35 of the Listing Agreement; (x) Capital evolution details of Ikisan, erstwhile NFCL, KFL and NORL; (xi) 3 years financials (i.e. year ended 2010, 2009 and 2008) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roxies; (vii) Value of each member shall be in accordance with the books of erstwhile NFCL and where the entries are disputed the Chairman shall determine the value for the purpose of the meeting; (viii) The Chairman's report to be filed on or before 20 April 2011 as per Rule 78 of the Company (Court) Rules, 1959; (ix) Dispensation from holding meeting of the secured creditors of the company; (x) Dispensation from holding meeting of the unsecured creditors. 29.7 In compliance with the order dated 04 March 2011: (i) Notice (of the Court convened meeting of the members of the erstwhile NFCL) along with explanatory statement under Section 393 of the Companies Act, 1956 was issued to all shareholders which disclosed/ provided the following: (a) background of erstwhile NFCL, KFL, NORL and Ikisan; (b) the reasons which necessitated the 2011 Composite Scheme and the benefits of the arrangement as proposed in the 2011 Composite Scheme; (c) the effect of the 2011 Composite Scheme vis-à-vis the financial position and the rights and interests of the creditors and the shareholders; (d) salient features of the 2011 Composite Scheme; (e) the pre-2011 Composite Scheme shareholdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Scheme with 99.83% in number and 89.45% in value. Quorum was 583 (338 in person and 245 by proxy), i.e. more than the quorum of 25 prescribed by the Court. (v) Erstwhile NFCL informed BSE and NSE that the 2011 Composite Scheme was approved by requisite majority of the members at the Court convened meeting. (vi) Chairman prepared his Report (Ex P12 @ pg. 479 of Company Petition No. 72 of 2011) and filed the same with the Andhra Pradesh High Court. 29.8 On 19th April, 2011, erstwhile NFCL filed Company Petition No. 72 of 2011 before the Andhra Pradesh High Court enclosing therewith the following documents : (i) 2011 Composite Scheme duly approved by the Board, NSE and BSE; (ii) Memorandum of Association and Articles of Association of KFL, Ikisan , erstwhile NFCL and NORL; (iii) Annual Report for 2009-2010 of KFL, Ikisan and erstwhile NFCL; (iv) Unaudited balance sheet of NORL as on 31 December 2010; (v) Board resolution dated 10 January 2011; (vi) Order dated 04 March 2011; (vii) Chairman's Report (without annexures); (viii) List of secured creditors; (ix) Clause 24(f ) approval of BSE and NSE. 29.9 In compliance with the order dated 26th April, 2011: (i) E-Form 61 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtilizers Ltd. (KFL) and Ikisan Limited before this Court. 30.1 On 10th January, 2011, the Board of Directors of KFL and the Board of Directors of IKISAN passed Resolutions approving the 2011 Composite Scheme. 30.2 On 17th February, 2011, KFL filed Company Summons for Direction No. 126 of 2011 before this Court enclosing therewith the following documents : (i) Memorandum of Association and Articles of Association of KFL, erstwhile NFCL, Ikisan and NORL (the order dated 27th August, 2010 approving the 2010 Scheme was appended to the Memorandum andArticles of Association of Ikisan). (ii) Audited accounts as on 31 March 2010 of KFL, erstwhile NFCL and Ikisan; (iii) Unaudited accounts as on 31 September 2010 of erstwhile NFCL; (iv) Unaudited accounts as on 31 December 2010 of KFL, Ikisan and NORL; (v) 2011 Composite Scheme; (vi) Board resolution dated 10 January 2011; (vii) List of equity shareholders; (viii) Consent letters of the equity shareholders (according their approval to the 2011 Composite Scheme). 30.3 On 17th February, 2011 Ikisan filed Company Summons for Direction No. 125 of 2011 before the Bombay High Court enclosing therewith the following documents : (i) 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 394A of the Companies Act, 1956; (ii) served on the concerned Registrar of Companies; (iii) served on the Official Liquidator, High Court, Bombay pursuant to Section 394 (1) of the Companies Act,1956; (iv) published in the Free Press Journal in English and Maharashtra Times in Marathi, both circulated in Mumbai; and (v) served by R.P.A.D. upon all its secured and unsecured creditors. 30.9 In Compliance with the order dated 15th April, 2011, KFL and Ikisan: (i) Submitted a copy of Company Scheme Petition Nos. 234 and 235 of 2011 along with all annexures thereto to the Regional Director. A copy of e-form - 61 (i.e copy of petition filed with Registrar of Companies), Valuation Report, certified audited accounts along with directors' and auditors' report of KFL for the last four years, certified audited statement of accounts along with the directors' and auditors' report of Ikisan for the last three years, list of shareholders along with shareholding of Ikisan and KFL, list of directors of Ikisan and KFL and Company Summons for Direction Nos. 125 and 126 of 2011 were also inter alia submitted to the Regional Director; (ii) Submitted a copy of Company Scheme Petition Nos. 23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oved by the Bombay High Court on 17 June 2011 and the Andhra Pradesh High Court on 27 June 2011. Copies of the certified orders were also forwarded. 30.12 On 27th July, 2011, BSE and NSE were informed that the Board of Directors of erstwhile NFCL at its meeting held on 27 July 2011, have fixed 01 September 2011 as the Record Date for the purpose of determining the shareholders eligible to receive shares in NORL and KFL, subject to confirmation from the stock exchanges. 30.13 On 28th July, 2011, erstwhile NFCL forwarded applications to BSE and NSE for fixing 1st September 2011 as the 'Record Date for determining the shareholders eligible to receive shares of NORL and KFL. 30.14 On 30th July, 2011, the 2011 Composite Scheme was made effective. Erstwhile NFCL filed e-form 21 with the ROC. 30.15 On 30th July, 2011, BSE and NSE were informed that the 2011 Composite Scheme was made effective from 30 July 2011. 31. It is therefore submitted on behalf of the Petitioner that the aforestated facts belies the allegation of suppression made by SEBI. 32. SEBI has submitted that at the time of seeking approval for the 2011 Composite Scheme of arrangement and merger of NFCL, KFL and Ikisan, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agreement was amended would show that the objective behind insertion of Clause 24(f ) was to enable the Stock Exchanges to be able to peruse the schemes so as to be able to check the schemes for violation of securities laws. As submitted by the Petitioner, in the course of granting the Clause 24(f ) approval, the Stock Exchanges had: (a) in compliance with Clause 24(i), accepted the certificate of the Statutory Auditors of the erstwhile NFCL, recording that the accounting treatment mentioned in the 2011 Composite Scheme is in compliance with the generally accepted accounting principles and applicable accounting standards notified under Section 211(3C) of the Companies Act, 1956 and that there is no deviation from the same; and (b) examined the valuation report of Grant Thornton including the swap ratio mentioned therein and the fairness opinion of Keynote Corporate Services Ltd. ("Keynote") obtained in compliance of Clause 24(h) of Listing Agreement. The approval granted by the Stock Exchanges after seeing the relevant documents including the valuation report and fairness opinion by the Stock Exchanges also shows that the question of suppression of valuation report or any relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Ikisan, which have been submitted with Company Scheme Petition No. 285 of 2011, clearly reflects that in 2009 the value of trademarks and customer contracts (pre 2010 scheme) were nil and that the trademarks and customer contracts in the audited accounts for the year ended 31st March 2010 are recorded at ₹ 36.4 crores and ₹ 18.2 crores at their respective fair values. The allegation of SEBI during the course of oral submissions before this Court was that the 2011 GT Report (Second GT Report) was suppressed from this Court. In its written submissions, SEBI has now sought to allege that the 2010 GT Report has been suppressed from this Court. In any event it is well settled that in considering schemes under the provisions of Sections 391 and 394 of the Companies Act, 1956, the Company court does not in ordinary course look into aspects of consideration and valuation. The standard procedures prescribed by this Court do not require the Valuation Report to be submitted before the Court and hence the same had not been filed. Therefore, NFCL has discharged its duty of candour and good faith by placing the second GT report of 2011 before all concerned with the aspects of val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch have been complied with, informed the Court that the Scheme is in the interest of the shareholders of the Company. The question therefore of setting aside the orders sanctioning the Scheme of Arrangement and Amalgamation or sanctioning amendments to the Scheme on the ground of alleged suppression thereby perpetrating a fraud on this Court does not arise. 36. SEBI has in its Review Petition not challenged the first G.T. Report but has emphatically submitted that the valuation of intangible assets (trademarks and customer contracts) in the books of Ikisan is contrary to Accounting Standards 14 and 26. 37. It is submitted on behalf of the Petitioner: (i) that the relevant Accounting Standard applicable to the 2010 Scheme is Accounting Standard 14 (AS-14). The relevant para of AS-14 which indicates the main principle is the para in bold italic type i.e. para 36 of AS-14.The same reads thus: "36. In preparing the transferee company's financial statements, the assets and liabilities of the transferor company should be incorporated at their existing carrying amounts or, alternatively, the consideration should be allocated to individual identifiable assets and liabilities on the bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible, whether recorded or not in the books of accounts) of whatsoever nature such as licenses, permits, quotas, approvals, lease, tenancy rights, permissions, incentives, know how, software, databases, user base, customer lists, trademarks, trade names, developed technologies, etc. if any, and all other rights, title, interest, contracts, consent, approvals or powers of every kind nature and descriptions whatsoever shall under the provisions of Sections 391 to 394 of the Act and pursuant to the Orders of the High Court or any other appropriate authority sanctioning this Scheme and without further act, instrument or deed, but subject to the existing charges affecting the same as on the Effective Date be transferred and/or deemed to be transferred to and vested in the Transferee Company so as to become the properties and assets of the Transferee Company. 6.1. The Transferee Company shall record all assets and liabilities (as mentioned in clause 4) of the Transferor Company, at their fair values. The Board of Directors of the Transferee Company will have the absolute discretion as to determination of the fair value of any asset of liability" (e) Thus the fact that the fair value was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen the resultant values of the assets and liabilities would neither be at fair value / acquisition cost or book value as per the financial statements of the transferor companies." Significantly, the same has not been dealt with in the Affidavit in Rejoinder filed by SEBI. Though an attempt to deal with the same is made by M/s. Bansi Mehta & Co. in their letter dated 2nd September 2013 (Page 1874), however, it is significant to note that save and except for reiterating the stand already taken by Bansi Mehta & Co. in its previous report dated 25th September 2012, there is no attempt to deal with the contentions raised by the Petitioner in their affidavit dated 25th April 2013. What the letter of Bansi Mehta & Co. dated 2nd September 2013 seeks to do is to once again rely upon AS-10 in support of its interpretation of AS-14 to suggest that the 'fair value of the consideration' not being over ₹ 86,910/-, the assets in the books of the transferee company post merger could only have been recognized to that extent. (v) that M/s. Bansi Mehta have in their letter dated 2nd September 2013 (page 1874) once again relied upon AS-10, AS-14 and AS - 26. The said letter after quoting para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the assets, of another company (referred to as the acquired company) in consideration for payment in cash or by issue of shares or other securities in the acquiring company or partly in one form and partly in the other. The distinguishing feature of an acquisition is that the acquired company is not dissolved and its separate entity continues to exist." (g) Paragraph 17 of AS-14 deals with the subject of reserves on amalgamation and reads as under: "17. If the amalgamation is an 'amalgamation in the nature of purchase', the identity of the reserves, other than the statutory reserves dealt with in paragraph 18, is not preserved. The amount of the consideration is deducted from the value of the net assets of the transferor company acquired by the transferee company. If the result of the computation is negative, the difference is debited to goodwill arising on amalgamation and dealt with in the manner stated in paragraphs 19-20. If the result of the computation is positive, the difference is credited to Capital Reserve." (h) Paragraph 37 of AS 14 provides inter alia as under: "37. Any excess of the amount of the consideration over the value of the net assets of the transferor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e book value can be shown as the value of assets on the assets side and the difference is shown on the liabilities side - hence the value of assets shown in the balance sheet of the transferee still cannot exceed the total amount of consideration i.e. in the present case could not have exceeded ₹ 86,910/-. 39. It is submitted on behalf of the Petitioner that the above contentions raised by SEBI are wholly misconceived and in fact contrary to each other. It is submitted that as can be seen from clause 1 hereinabove, SEBI has sought to contend that the consideration is to be allocated to individual assets and liabilities on the basis of "their fair values" subject to a maximum ceiling of the consideration. Such an interpretation placed by SEBI in paragraph 26(i) is contrary to SEBI's own submissions in clause (iii), wherein it has been contended that the consideration under the scheme is to be compared with the "book value" and if the consideration is lower than the book value, the difference is to be treated as capital reserve on the liability side of the balance sheet. It is submitted that if the interpretation placed by SEBI is to be accepted, it would result in a situation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 2010 Report of Grant Thornton violates accounting standards, it is also pertinent to note that SEBI has in the Review Petitions chosen not to seek any reliefs qua the GT Report of 2010 or seek recall/review of the order sanctioning the 2010 Scheme. In view thereof, the question of setting aside or recalling the order dated 17th June, 2011, sanctioning the Scheme of Arrangement and Amalgamation and order dated 22nd July, 2011 sanctioning amendments to the Scheme on the basis of an alleged defect in accounting in the GT Report of 2010 does not arise. 41. This Court has hereinabove already recorded its finding that SEBI has failed to establish any fraud played by NFCL/KFL by way of suppression of facts and is therefore not entitled to the reliefs as prayed for in the above Applications. However, SEBI has in support of its case also alleged that NFCL/KFL has perpetrated a fraud on the shareholders of NFCL in view of several other grounds which are set out and dealt with hereunder: 42. (i) At the time of the sanction of the 2011 composite Scheme the balance sheet of Ikisan contained certain fictitious assets which were grossly overvalued. 42.1 According to SEBI, at the time of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncern do not provide for recording valuations for self-generated intangible assets) does not ipso facto mean that the assets are not worth nothing. It also does not mean that because the same may not have been fair valued and therefore reflected in the Balance Sheet as nil, would ipso facto mean that valuation is ex facie inflated/exaggerated merely because what was shown as "nil" in the balance sheet is fair valued at ₹ 54 crores. SEBI is now attempting to improve its case by alleging that the Trade Marks and Customer Contracts were "fictitious assets". For SEBI, to now call these assets 'fictitious' only to buttress its case of fraud would amount to SEBI attempting to plead a new case that too in the form of Written Submissions, without any such case having been pleaded on oath and without any particulars of the alleged fraud and without an opportunity being given to NFCL to respond to the same. 42.4 I am in agreement with the Petitioner that the trademarks and customer contracts cannot be termed as "fictitious assets" as alleged by SEBI. It is true that Ikisan was incorporated in 2000 but it is not as if Ikisan did not do any business between 2000 and 2010. The fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for development 2009, Beijing (WCID 2009); Discussions with the Management of Ikisan; NSE and BSE websites In addition to the above, we have also obtained such other information and explanations which were considered relevant for the purpose of our analysis." 42.5 SEBI has inter alia contended that GT accepted the information/projections provided by the Management "at face value" However, GT in response to the said contention of SEBI has by its letter dated 2nd July, 2013, (Exhibit A Page 1862 at pgs. 1863 and 1864 of the Affidavit in Sur-Rejoinder), expressly denied the contentions raised by SEBI and has inter alia stated as follows: "For any valuation exercise, future projections are provided by the management of the company who are responsible for a making business plan for steering the future performance of their company. The vision and targets are set by the management of the company and the performance of the company is guided by this business plan drawn by the management. Since the financial forecasts or projections are future oriented, one can take due care by checking for reasonableness of the strategy/ future plan on the company, which has already been done as part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e products of iKisan Ltd. 4. Studied data on the business opportunity prepared by NMMI, Market Intelligence department of Government of India as well as analyst reports capturing Micro Irrigation business. 5. Cross checked data given by external agencies with the projections provided by the company to test for reasonability. Based on the above, the contention that information provided by management was accepted at face value by Grant Thornton is incorrect." 43. Therefore, in my view, the allegation that the intangible assets of Ikisan were "fictitious" which means non-existent, is without any justification or basis. Equally unjustified is the allegation with regard to overvaluation and its effect which is discussed hereunder, whilst dealing with SEBI's submission that the valuation done by Grant Thornton in its Report dated 24th June, 2010 is unrealistic, perverse and incredibly high. 44. (ii) The valuation done by Grant Thornton in its report dated 24th June, 2010 is unrealistic, perverse and incredibly high. 44.1 SEBI has submitted that the valuation done by Grant Thornton in its report dated 24th June, 2010 is unrealistic, perverse and incredibly high due to the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation Report dated 24 June 2010. SEBI has only questioned the manner in which the assets and liabilities of Ikisan have been cast post its merger with City Pulse as being patently inconsistent with the requirements under AS-10 and AS-14 by relying on M/s. Bansi Mehta & Co.'s Report dated 25 September 2012, whilst filing the Review Petition. 44.3 NFCL has submitted that the contention raised by SEBI to the effect that the valuation is unrealistic, perverse and incredibly high and the reasons given in support thereof are incorrect. I am in agreement with the submissions made by NFCL in this behalf. 44.4 The contention raised by SEBI to the effect that the valuation is "unrealistic, perverse and incredibly high" on account of the fact that GT has taken the useful life of Ikisan's trademarks to be indefinite cannot be accepted since the same appears to suggest that an intangible asset/trademark would not have any growth or revenue generation potential. It is not even SEBI's case, either in the pleadings or in the submissions made before this Court, that the trademarks of Ikisan could be used only for a limited number of years and not thereafter. In fact, even under the Trade Marks Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere projected at ₹ 12.6 crores, the actual revenue was only ₹ 6.76 crores, is nothing but an attempt on the part of SEBI to challenge the valuation which is inherently based on future projections by applying what is essentially a hindsight view. Valuation being an exercise required to be conducted at a particular point of time is to be carried out on the basis of the projections made of the revenues in future as on the date of valuation, which has to be based on the valuer's own fair judgment. The exercise of valuation must be viewed as on the date of valuation - looking forward and cannot be reviewed in hindsight. Such an approach would not be fair. 44.7 The contention raised by SEBI to the effect that the valuation is "unrealistic, perverse and incredibly high" on account of the fact that GT had used arbitrary growth rates to project the revenue for the year beyond 2012 and has not provided any rationale for arriving at the growth rates also cannot be accepted in view of what is stated hereinabove as well as the fact that the GT Report and the letter of GT dated 22nd July 2013 make it clear that GT had reviewed the data provided by the Management for reasonableness a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valuations. One special case of asset-based valuation if liquidation valuation, where we value assets based on the presumption that they have to be sold now. In theory, this should be equal to the value obtained from DCF valuations of individual assets, but the urgency associated with liquidating assets quickly may result in a discount on the value. How large the discount will be will depend on the number of potential buyers for the assets, the assets characteristics, and the state of the economy." 44.9 Though SEBI has for the first time challenged the Second GT Report dated 6th January, 2011 only in its rejoinder dated 5th July, 2013, SEBI has in the said rejoinder not challenged the first GT Report. In fact the First GT Report does not in any manner affect the swap ratio of the Composite Scheme. Admittedly, SEBI has relied upon the Report of M/s Bansi Mehta & Co. which questioned the Accounting Treatment of intangibles in the books of Ikisan as per the 2010 Scheme but at no stage has SEBI questioned the GT Report dated 24 June 2010 anywhere in the pleadings. The Petitioner is therefore correct in its submission that having realised that merely stating that the valuation of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a group infused approximately ₹ 29.50 crores of additional share capital into Ikisan. Ikisan appears to have utilized part of this fresh capital to purchase fixed assets in the form of land and buildings. SEBI has submitted that this additional capital was infused into Ikisan so that the promoters would get additional shares of NFCL upon the subsequent merger of Ikisan with NFCL and KFL. As pointed out by the Petitioner, the promoters of Ikisan had infused a sum of ₹ 30 crores into Ikisan for setting up a micro-irrigation plant. To fund the project cost, Ikisan had also taken a loan of ₹ 20 crores. It therefore cannot be held that a sum of ₹ 30 crores was infused into Ikisan by its promoters with the objective of getting shares of the value of ₹ 240 crores as alleged by SEBI. The swap ratio arrived at in the 2011 Composite Scheme is on the basis of the projected cash flows in accordance with the DCF Method. SEBI has overlooked the fact that Ikisan was engaged in two businesses viz. the agri portal business and the micro irrigation business. The Valuation Report of GT takes into account the projected cash flows for the two businesses. Merely because a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort as well as in the letter dated 22nd July 2013 justified the reasons for adopting the DCF method of valuation. In the letter dated 22nd July 2013, GT has stated as under: "With respect to the use of valuation method please note that for determination of share swap ratio in case of merger of two or more entities, a relative valuation exercise is carried out where a consistent and suitable approach is applied to value all the entities in the merger. Accordingly, consistent approach was applied to value residual business of NFCL as well as Micro Irrigation and Agri-Portal Business of iKisan Limited. Further, we had considered three approaches for valuation of these businesses; viz. Asset Based Approach (Net Assets Value Method) Market Approach (Market Price and Market Multiple Method) and Cash Flow Based Approach (Discounted Cash Flow Method (DCF Method) As explained in the Valuation Report, under the Net Asset Value method, the net assets of a company as per its financial statements are considered. This method ignores the future return the assets can produce and is calculated using historical accounting data that may not reflect the worth of the business. Hence, this method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exchanges at a significant valuation. A few of such cases have been highlighted below- 1. Piramal Life Sciences Limited (PLSL) Very low historical revenues- INR 2.8 Cr & INR 5.2 Cr in FY12 and FY13. Significant losses historically - negative INR 7.2 Cr and 6.3 Cr in FY12 and FY13 Despite low revenues and huge losses the company's shares are being traded at a valuation (market cap) in the range of INR 77 Cr to 65 Cr 2. Instagram No revenue generation Facebook bought Instagram for USD 1 Billion. 3. Pinterest No revenue generation The company sold USD 200 million in stock to new and current investors for less than 10% of the company, effectively valuing it at USD 2.5 billion. 4. Flipkart In FY 10 the revenue was INR 11.6Cr, In FY11 revenue was about INR 50 Crore. As per industry estimates, in 2012, Flipkart raised about INR 825 Crore at current forex value (US# 150 million) which implies a total value of about INR 4,675 crore (US$ 850 million) from its existing investors Accel Partners and Tiger Global Management in the fourth round of funding. 5. Regeneron Pharmaceuti cals (REGN) For 9 out of 10 years in the past, REGN has been consistently making losses. The oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... free growing business. GT had, as can be seen in their report, taken all these factors into consideration while arriving at the swap ratio. Further SEBI has also failed to appreciate that the figures provided in paragraph 31 (A) of SEBI's submissions are of NFCL (premerger), inclusive of the oil division business which was demerged pursuant to the 2011 Composite Scheme. SEBI has at no point in time contended that NFCL has been undervalued. The entire basis of SEBI's contention with regard to swap ratio has been that Ikisan has been overvalued. Again, SEBI has sought to compare NFCL with Ikisan on the basis of their respective assets. However, what SEBI has failed to appreciate is the fact that the valuation of the two entities was based on the DCF method of the merged entity and not on the basis of either the fixed assets or the past performance of the 2 entities, viz. Ikisan and NFCL. The contention of SEBI that KFL was a shell company with no operations fails to take into account the fact that the swap ratio under the 2011 scheme was not based on the operations of KFL but was based on the projected cash flow of the merged Ikisan and the residual businesses of the erstwhile NFCL. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to suppress vital information from this Court. It is submitted that there is nothing confidential about such financial projections. It is also submitted that it is incorrect to state that GT had independently verified the reasonableness and consistency of the data supplied - what Grant Thornton has done is to review - the data for consistency and reasonableness but it expressly states that it has not independently investigated or otherwise verified the data provided. There is a clear difference between review of data and its verification. SEBI has further submitted that the assertion made in the arguments that the share exchange ratio in respect of the 2011 composite scheme was not worked out on the basis of the net asset value of Ikisan and that the value of Trademarks and Customer Contracts of Ikisan as reflected in its balance sheet would have no impact on the determination of the exchange ratio for the promoters' shareholding in Ikisan, is not correct and an analysis of the GT Report I and Grant Thornton's letters and responses itself establishes that the financial projections utilized for a DCF analysis are necessarily affected by the extent of the underlying assets of a compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are relevant in order to ascertain the value of the business of Ikisan, as submitted by the Petitioner, does not advance the case of SEBI because firstly these are intangible assets. Secondly, these assets being in the nature of brands/goodwill can only be valued on the basis of future projections of income which these brands/goodwill will generate in the future. Therefore of necessity these assets cannot be valued on the same basis or employing the same method of valuation as apply to tangible assets. Thirdly, it is a well settled position of law with regard to valuations, that valuation is not an exact science and can never be done with arithmetic precision. The attempt on the part of SEBI to challenge the valuation which is by its very nature based on projections by applying what is essentially a hindsight view that the performance did not match the projection is unknown to the law on valuations. Valuation being an exercise required to be conducted at a particular point of time has of necessity to be carried out on the basis of whatever information is available on the date of the valuation and a projection of future revenue that the valuer may fairly make on the basis of such in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot to be compelled to disclose the same. In any event neither SEBI nor any shareholder ever demanded the financial projections prior to the filing of the Review Petition. 48.9 With regard to the submission that the material furnished by the Management was reviewed and not verified by GT and that the Report does not indicate that these factors were taken into account by GT, as correctly submitted by the Petitioner, SEBI's contention is largely semantic. Whereas SEBI has sought to rely upon the distinction between review and verify, the question which needs to be addressed is whether GT has blindly accepted the data provided by the management as sought to be contended by SEBI. SEBI has overlooked what GT has confirmed in its subsequent letter dated 22nd July, 2013 at page 1862 of the Affidavit in Sur-Rejoinder in which GT has categorically stated as under: "However, a general study, analyses and checks for reasonableness of the future projections provided for valuation as is customary for issuing a valuation report had been carried out. For any valuation exercise, future projections are provided by the management of the company who are responsible for making a business plan for ste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 2010-2011 and for which Ikisan had incurred capital expenditure of ₹ 21.17 crores and had sales of ₹ 0.05 crores [Ikisan Financial statement for year ended 31 March 2011, Note 6, Vol. IV Page 1278 and 1286-1288]. By any stretch of imagination such a business could not have been responsible for a leap in valuation of over ₹ 200 crores. It is also submitted that the number of hits on the original Ikisan website does not alter these hard figures since these hits apparently never translated into high sales or revenue. 49.2 It is submitted on behalf of NFCL that it has never been the argument of NFCL either in oral or written submissions that "one's mindset has to be radically modernized to eschew the traditional approach of a "bricks and mortar" value in favour of a modern "the sky is the limit" approach to valuation". The only example which SEBI has attempted to deal with is of Facebook in answer to which SEBI has adopted a dismissive approach by alleging that "Ikisan is no Facebook" which argument, however overlooks the fact that by making such an argument SEBI itself is accepting Facebook as an instance of a non bricks or mortar business enjoying a high valua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven by the Regional Director and the Official Liquidator. On 8th September, 2010, the Scheme was made effective. Before the order was passed by this Court on 17th June, 2011 sanctioning the scheme of arrangement and amalgamation (2011 Composite Scheme), SEBI had received a complaint from a shareholder of NFCL alleging that the consideration offered under the Scheme to the shareholders of NFCL is detrimental to the interest of the equity shareholders of NFCL and will result in a total loss of ₹ 862.66 crores to the equity shareholders of NFCL. SEBI did not take any steps upon receipt of the said complaint but forwarded the same to the BSE and has also not explained as to what steps were taken by SEBI to pursue the complaint thereafter with the BSE. The 2011 Composite Scheme was sanctioned by an order dated 17th June, 2011. The said sanction was granted after considering the approval granted by the BSE/NSE and the Regional Director and also after taking into consideration the fact that the Composite Scheme was passed by 99.83 per cent of the shareholders in number and 89.45 per cent in value at the court convened meeting of the erstwhile NFCL i.e. much more than the statutory ..... X X X X Extracts X X X X X X X X Extracts X X X X
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