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TMI Blog2017 (6) TMI 1319X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for by the Petitioner. Eventually Grant Thornton submitted its final valuation report on 8th April, 2015 which was subsequently challenged by the Petitioner by filing C.A. No. 923/2015, which is the present company application, where the principal contention of the Petitioner was that the valuer was required to value the shares of the company as on 31st March, 2010 and that it had taken into consideration figures beyond 31st March, 2010 which was allegedly not permitted and that the valuer had taken the actual figures from the audited balance sheets instead of the projected figures as is required under the Discounted Cash Flows method. There was no specific direction by the Company Law Board at any point of time regarding the use of a specific auditing standard to be employed by the valuer during valuation of the shares of R1 Company. The valuer's final valuation report could be challenged on the grounds of patent illegality, fraud, collusion or partiality, which has not been proven in the present case. The valuer's report under such circumstances cannot be contested and be set aside if either of the parties is not satisfied with the valuation. There is no reason t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies in the initial stages that they would be arranging the entire equity funding required by R2, R2 and R3 did not invest equity in R1. Furthermore, the Petitioner contended that most of R2's contribution was brought in as subordinate debt for which R1 had to pay interest at the rates much higher than market rates, and as a consequence, R1 was unable to declare dividends for the entire period that the Petitioner was with R1 showing that all profits of R1 were channelled to service the interest owed to R1. 4. The Petitioner further contended that upon request to R2 and R3 for arranging funds for the operational expenses of R1, he was asked of recover the operational expenses from rolling out the Common Service Centres, which created undue pressure on the business model of R2 which was intended to encourage and partner the Village Level Entrepreneurs. 5. The Petitioner further contended that as opposed to the initial understanding between the Petitioner and the Respondents was that R2 being an NBFC would be providing loans to the village level entrepreneurs for their business and R2 would then sell a portfolio of the loans to a bank, however R2 did not provide t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of R1 and R2 had decreased to 5%. However, according to the Petitioner, on further examination of bank records of R1 and R2 revealed that either R1 or R2 companies had received no amounts for the transfer of their respective shareholdings to Sadbhav, despite the said transfer being reflected from the annual report for the financial year 2009-2010 where it has been reflected that Sadbhav has paid an amount of ₹ 22.12 Crores for the purchase of 19,500 shares of MBCNL. The Petitioner contended that R1's accounts for financial year 2009-2010 were finalized in May, 2010, without reference to the sale of shares of R1 in MBCNL to Sadbhav. The Petitioner contended that in the light of the apathetic treatment meted out to him by the Respondents, he had expressed his intent to R3 to leave R1 and requested that his shareholding in R2 be purchased by R2 and had asked for a fair valuation of his shares in R1 on 25th May, 2010. The Petitioner contended that R3 had informed the Petitioner that the value of R1 was only ₹ 2 Crores and that the Petitioner was entitled to only 10% of the said amount. 9. The Petitioner contended that the valuation of the shares of R1 company w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to dilute the shareholding of the Petitioner in R1 by unlawful means was also contended to have been oppressive by the Petitioner. The Petitioner contended that his principal grievance in the said petition was that the valuation of his holdings in the company was being systematically and intentionally diluted in a mala fide attempt to oppress the applicant and mismanage the affairs of the Company. 12. The Petitioner contended in the application that in the course of hearing on 25th March, 2011 it was submitted on behalf of the Petitioner that he was willing to sell out his shares on fair valuation and in the course of next hearing on 5th April 2011, the Respondents also expressed their willingness to buy out the shares of the Petitioner on fair valuation. Accordingly by an order dated 24th June, 2011, a valuer namely, M/s. Grant Thornton was appointed by the Company Law Board for the purpose of far valuation of shares of the Respondent Company. According to the Petitioner, despite having received the orders for the appointment of a valuer on 24th June, 2011, the engagement letter being GTA/AL/DP/AC/KOL/13-14/0059 was sent to the valuer dated 19th November, 2013, which clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directed by the Company Law Board. The Petitioner contends that for valuation for the purpose of minority shareholders of the Company, especially for closely held companies, due diligence ought to have been exercised by the valuer. The Petitioner contended that the fair value of the shares are to result from a correction of the inequalities that arise from the conflicts of interest between majority and minority shareholders and cannot be reached without an examination of these conflicts at a positive level. 16. The Petitioner contended that the valuer had only based its analysis upon the management inputs of majority shareholders post valuation date, and that there were several issues of management and deliberate unlawful and negative acts by the management of the majority shareholders that the Petitioner has highlighted and claimed in the said petition. The Petitioner contends that the negative actual performance of the Company post 2010 cannot be attributed to the minority shareholders who left the organization close to the valuation date and therefore, keeping the interest of such minority shareholders proper valuation needed to be carried out. The Petitioner contends t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o contend that the EBIDTA projections through the entire period of nine years leaving 2011-12, is considered to be hugely negative, obtained by the valuer from the Company as mentioned by them. Moreover, the Petitioner further contended that the circumstances as of 31st March, 2010 were not as such, and the EBIDTA margin for 2008-09 and 2009-10 were 3.98% and 15.63% respectively which showed a growing trend. 18. The Petitioner contended that the standard clause in the engagement letter for all valuation engagements was to be undertaken at the instance of the client and cannot be deemed to be an acceptable practice. Therefore, the Petitioner has prayed that a new valuer be appointed afresh in terms of the order dated 24th June, 2011 for the purpose of fair valuation of shares of R1 forthwith, who shall be additionally directed to independently investigate and verify the information and statements provided by the R1 Company for their accuracy and completeness before arriving at a valuation for its shares and strictly in terms of the prescribed auditing standards. 19. The Respondent at the very outset has contended that the application is not maintainable as the al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and could not have allowed subjective opinion to influence the valuation. The Respondents contended that submission made by the Petitioner, regarding the fair value that was to be taken at the time of valuation would depend on the theory producing the values and the most persuasive fair value based on positive analysis of hypothetical market value had to be considered, was baseless. 22. The Respondent contended that it was not within the scope of work of the valuer to conduct a diligence with regard to the facts and figures produced before them. The Respondent has denied all allegations of mismanagement by the Petitioner in the application. The Respondent contended further that the valuer had applied two methods of valuation and the values under both the methods were negative. The Respondent went on to contend that DCF method is a universally accepted and preferred method of valuation for a going concern as it concentrates on future cash generation potential of a business, which is carried out using financial projections for subsequent years of the business/company that is being valued. The Respondent further contended that in the event of unavailability of projections ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the scope for challenge of a valuation conducted pursuant to an order of the Company Law Board was extremely limited and such valuation could only be challenged under very rare circumstances such as fraud, collusion or partiality, which have not been proved in the present case. The Respondent further contended that the purported opinion of the Chartered Accountant hired by the Petitioner was of no value as the observations made were technical in nature and did not demonstrate any patent error or mistake on the part of Grant Thornton. Additionally the Respondent contended that the Chartered Accountant had not been able to give an alternative value of the shares of the Company which the Tribunal can consider. 27. The Petitioner in the written notes among other things has contended that the valuer had used the real facts and figures as available in the balance sheets instead of reasonable projections as prevailing on 31st March, 2010 which followed a dismal performance of the subsequent management post the resignation of the Petitioner from such management. The Petitioner has reiterated the method used by the valuer to arrive at the final report as had been submitted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich was allegedly not permitted and that the valuer had taken the actual figures from the audited balance sheets instead of the projected figures as is required under the Discounted Cash Flows method. 30. In the case of G.L. Sultania and Another vs. Securities and Exchange Board of India and others, (2007) 5 SCC 133, it was observed that it appears to us that the appellant expects this Court to act as an expert itself. This, we are forbidden from doing. Unless it is shown that some well-accepted principle of valuation has been departed from without any reason, or that the approach adopted is patently erroneous or that relevant factors have not been considered by the valuer or that the valuation was made on fundamentally erroneous basis or that the valuer adopted a demonstrably wrong approach or a fundamental error going to the root of the matter this Court would not interfere with the valuation of an expert. As noticed in Miheer H. Mafatlal vs. Mafatlal Industries Ltd., (1997) 1 SCC 579, valuation of shares is a technical and complex problem which can be appropriately left to the consideration of experts in the field of accountancy. So many imponderables enter into the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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