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TMI Blog2016 (4) TMI 965X X X X Extracts X X X X X X X X Extracts X X X X ..... Bombay, with the concerned Superintendent of Stamps, for the purpose of adjudication of stamp duty payable, if any, on the same within 60 days from the date of the Order. The Petitioners are directed to file a certified copy of the order along with a copy of the Scheme of Amalgamation with the concerned Registrar of Companies, electronically, along with E Form INC-28 in addition to physical copy as per the relevant provisions of the Companies Act, 1956/2013 whichever is applicable. - COMPANY SCHEME PETITION NO.854, 855 OF 2014, COMPANY SUMMONS FOR DIRECTION NO. 727, 728 OF 2014 - - - Dated:- 8-9-2015 - S.C. GUPTE, J. Mr.Vinay Chauhan with Mr.Rajesh Shah i/b. Rajesh Shah Co. for Petitioner. Mr.Shiraz Rustomjee, Senior Advocate with Mr.Mihir Modi i/b. K. Ashar Co. for SEBI Mr.A.R. Verma , Regional Director Mr.S. Ramakantha, Official Liquidator. P.C. : This petition, filed under Sections 391 to 394 of the Companies Act, 1956, seeks sanction of the Court to a scheme of amalgamation ( Scheme ) between Arss Engineering Ltd. ( transferor company ) and Trio Mercantile Trading Ltd. ( transferee company ). 2. The Scheme broadly envisages transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under the Scheme, three equity shares of the transferee company, which is a listed company, are to be allotted for every five equity shares held by the shareholders of the transferor company, which is an unlisted company; (iv) Considering the worth of the transferee company's shares on the stock exchanges, this swap ratio implies that the shareholders of the transferor company would receive an approximate value of ₹ 17.64 crores on an investment of ₹ 10.05 crores, thus making a profit of about 75% in a matter of a few months. Based on these facts, the thrust of SEBI's submissions is that this effectively means a kind of a preferential allotment of shares of a listed company, i.e. the transferee company, (the initial allotment of shares at ₹ 10.05 crores in the transferor company appearing to be merely to enable the allottees to obtain shares in the transferee company under the Scheme), without the company having to make mandatory disclosures or otherwise comply with ICDR, and besides, in the process, the allottees of these shares (i.e. the shareholders of the transferor company) are devised to make unjust gains at the cost of the transferee company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conditions of continuous listing of equity shares as specified in the listing agreement with the recognised stock exchange; and (d) Permanent Account number of the proposed allottees to be obtained by the issuer. The ICDR prohibits preferential issue of specified securities to an allottee, if the allottee has sold equity shares of the issuer during the six months preceding the relevant date. (This condition is subject to a relaxation which SEBI may grant under the proviso to Regulation 72.) So also, it prohibits issue of specified securities, on a preferential basis, to an allottee being a person belonging to promoter(s) or the promoter group having previously subscribed through warrants of an issuer, but failed to exercise the warrants. The ICDR requires certain disclosures to be made in terms of Regulation 73. These include disclosure of various particulars mentioned therein in the explanatory statement to the notice of the general meeting proposed for passing of the special resolution for preferential allotment. These particulars include objects of the preferential issue, the proposal of promoters, directors or key management personnel, etc., to subscribe to the offer, shareh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to comply with the conditions of continuous listing of equity shares specified in the listing agreement; the disclosures to be made to the general meeting proposed for passing of the special resolution, which are specified in Regulation 73 of ICDR, are required to be broadly captured in the explanatory statement to the notice of the general meeting. Many of these particulars actually form part of the scheme petition and relevant disclosures to be made to the general meeting. A certificate of statutory auditors in this behalf is also to be placed before the general meeting. As required by the SEBI circulars of 8 May 2003, 3 September 2009, 4 February 2013 and 21 May 2013, listed companies, whose shares have to be issued as consideration for the Scheme of Arrangement, have to comply with several obligations. The listed companies are inter alia required to file the draft scheme with the stock exchanges in terms of Clause 24(f) of the listing agreement. They have to submit several documents mentioned in Part A of Annexure 1 to the circular of 4 February 2013. These include, apart from the draft Scheme of Arrangement, the valuation report from an independent Chartered Accountant, a repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtered Accountant's report used by the Petitioner to determine the share swap ratio. Let us now examine this aspect of the matter. 11. The basis of valuation of the shares of the transferor and transferee companies to arrive at the share swap ratio in the report of the Chartered Accountant may be explained thus : The recognized methods of valuation considered by the valuers were (a) Net Asset Value Method (NAV), (b) Profit Earning Capacity Method (PECV), and (c) Market Price Method (MV). Having regard to these, the valuation was based on the following facts. The valuers, for calculating NAV, took into account the financials of the transferor and transferee companies for the year ended 31 March 2013. PECV was considered only for the transferee company based on P/E ratio recognized by market sources, but not for the transferor company since that company was formed only in the year 2008 and there had been no significant business activity in the company since, 2012-13 being the first year the company was involved in engineering projects and when equity capital was increased. Whilst MV of the transferee company was based on last twenty six weeks before the relevant date (that d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferor company would work out to ₹ 10.06, the values considered for the individual method values themselves being correct. It is of course debatable whether in the facts of the case, considering that the PECV and MV of the transferor company would be nil, only the NAVs of the two companies ought to have been considered and not the valuations by the other two methods. But then there are approaches and schools of thought. One approach or school of thought could be different from the others. Valuation is not an exact science. It is rather like an art. The valuer has to exercise judicial discretion, take into account all relevant factors and employ methods which are suitable for the particular facts and circumstances of each individual case and there arrive at what according to him is a fair valuation. What the Court has to do, whilst scrutinizing such valuation for exercising its jurisdiction to sanction a scheme of arrangement, (which, as I have noted above, is merely to see that laws and commercial morality are not breached and no unfair treatment is given to any of the stakeholders) is whether the exercise is bona fide and legitimate, and yields a result, which is not pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... weighted average worked out at ₹ 18 on the basis thereof). Thus, even on the submission of SEBI concerning the appropriate relevant date, there is no demonstrable unfairness in the determination of the value of the transferee company's shares for the purposes of the Scheme. 15. Anyway, the foregoing discussion shows that the matter of determining an appropriate share swap ratio here is more of a 'matter of commerce', than a 'matter of commercial morality'. The shareholders of the transferee company are expected to take a decision on the consideration fixed under the scheme based on their commercial wisdom. They have indeed taken such a decision. In not one but two duly convened meetings of shareholders, the share swap ratio has been approved by the shareholders. Even the shareholders, who are members of public and who may not be themselves in a position to take an informed decision on the subject, have had the benefit of not only the auditor's report, but even an independent SEBI approved Merchant Banker's report. There are enough checks and balances in the regulatory framework and corresponding availability of information in the public domain i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... posits and receivables, resulting in price rice of scrip of the company. Investors are then lured to make their investment decisions on those manipulated inflated results, using the above devices which will amount to market abuse. The Supreme Court sounded the following word of caution whilst underlining the role of SEBI as market regulator. 42. SEBI, the market regulator, has to deal sternly with companies and their Directors indulging in manipulative and deceptive devices, insider trading etc. or else they will be failing in their duty to promote orderly and healthy growth of the Securities market. Economic offence, people of this country should know, is a serious crime which, if not properly dealt with, as it should be, will affect not only country s economic growth, but also slow the inflow of foreign investment by genuine investors and also casts a slur on India s securities market. Message should go that our country will not tolerate market abuse and that we are governed by the rule of law . Fraud, deceit, artificiality, SEBI should ensure, have no place in the securities market of this country and market security is our motto. People with power and money and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities market or hoodwinking of the applicable provisions of law here. 18. Mr.Rustomjee submitted that the ostensible purpose of the scheme in the present case appears to be different from the real purpose. He relies upon the rationale of the scheme mentioned in Clause 2 of the scheme. The rationale mentioned in the scheme was that the merger of the two companies was envisaged for the following objectives: 2.1 Consolidation of business, synergize operational advantages and achieve economies of scale of operations; 2.2 Optimum and efficient utilization of capital, resources, assets and facilities; 2.3 Removal of intercompany transfers, removing taxation at multiple stages and increasing product margin. 2.4 Enhancement of competitive strengths including financial resources; 2.5 Better management and focus on growing the businesses. Mr.Rustomjee submits that considering the facts that the transferor company has hardly carried on business of providing consultancy or engineering services to infrastructure or construction etc., that the company had hardly made any business after its incorporation, and that even funds received by the company from the allottees of prefe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have ratified the Scheme by the requisite majority. Consequently the Company Court's jurisdiction to that extent is peripheral and supervisory and not appellate. The Court acts like an umpire in a game of cricket who has to see that both the teams play their game according to the rules and do not overstep the limits. But subject to that how best the game is to be played is left to the players and not to the umpire. The Supreme Court also quoted in this behalf a passage from Buckley on Companies Act, which is to the following effect : In exercising its power of sanction the Court will see, first that the provisions of the statute have been complied with, second, that the class was fairly represented by those who attended the meeting and that statutory majority are acting bona fide and are not coercing the minority in order to promote interest adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve. The court does not sit merely to see that the majority are acting bona fide and thereupon to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant. 9. Once the aforesaid broad parameters about the requirements of a scheme for getting sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the Court there would be a better scheme for the company and its members or creditors for whom the scheme is framed. The Court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the Court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction. These principles were reiterated by the Supreme Court in the case of Meghal Homes (P) Ltd. vs. Shree Niwas Girni K.K. Samiti (2007) 7 SCC 753. At the same time, the Court in Meghal Homes (P) Ltd. noted as follows : We may straightaway notice that this Court did not have occasion to consider whether any additional tests have to be satisfied when the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a copy of this order and the Scheme duly authenticated by the Company Registrar, High Court (O.S.), Bombay, with the concerned Superintendent of Stamps, for the purpose of adjudication of stamp duty payable, if any, on the same within 60 days from the date of the Order. 24. The Petitioners are directed to file a certified copy of the order along with a copy of the Scheme of Amalgamation with the concerned Registrar of Companies, electronically, along with E Form INC-28 in addition to physical copy as per the relevant provisions of the Companies Act, 1956/2013 whichever is applicable. 25. The Petitioner Companies to pay costs of ₹ 10,000/- each to the Regional Director, Western Region, Mumbai and the Petitioners in the Company Scheme Petition No.854 of 2014 to pay costs of ₹ 10,000/- to the Official Liquidator, High Court, Bombay. Cost to be paid within fourteen weeks from the date of the Order. 26. Filing and issuance of the drawn up order is dispensed with. 27. All concerned regulatory authorities to act on a copy of this order along with Scheme duly authenticated by the Company Registrar, High Court (O.S.)., Bombay. 28. On the application of SEBI, this o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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