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TMI Blog2019 (9) TMI 1427X X X X Extracts X X X X X X X X Extracts X X X X ..... the petition. The registered address is Airtel Centre Plot No. 16, Udyog Vihar, Phase-IV, Gurugram 122001. Therefore, the jurisdiction lies with this Bench of the Tribunal. 2. It is stated that the authorized capital of BTL is Rs. 50,000,000,000 divided into 5,000,000,000 of Rs. 10/- each of which 2,610,774,176 shares have been issued and fully paid up. It is stated that BTL was delisted from all stock exchanges on which it was previously listed i.e. stock exchanges of Delhi, Mumbai, Ludhiana and Kolkata in accordance with the provisions of the applicable laws. It is stated that BTL has around 4942 public shareholders holding equity shares representing approximately 1.09% of the share capital of the BTL (Identified Shareholders) as on 15.06.2018 who had not accepted exit at the time of delisting or those who have become shareholders through private dealings/off market dealings amongst public shareholders. The shareholding pattern of BTL as on the date of filing of the petition on 02.08.2018 is stated to be as follows:- Shareholders Number of Shares Percentage(%) Bharti Group 1,305,663,496 50.01 SingTel Group 1,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; Particulars Mode Yes No Total No. of shareholders Evoting + Ballots 616 118 734 No. of Shares 2,590,287,113 2,468,435 2,592,755,548 Percentage 99.90 0.10 100.00 Final Voting Status - Identified Shareholders Particulars Mode Yes No Total No. of shareholders Evoting + Ballots 608 118 726 No. of shares 7,968,887 2,468,435 10,437,322 Percentage 76.35 23.65 100.00 7. It is submitted that as on 31.07.2018, BTL is not in arrears in the repayment of the deposits or the interest thereon and certificate issued by the auditor of BTL and declaration by a Director is annexed as Annexures A-11 and A-12 of the petition. 8. The certificate issued by the statutory auditor of BTL to the effect that the Accounting Standard proposed by BTL for the reduction of share capital is in conforming with the Accounting Standard specified in Section 133 of the Act or any other provisions of the Act is stated to be annexed as Annexure A-13. 9. It is stated that as on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) of the Act, the matter may be decided on merits. 15. The Regional Director, Northern Region, Ministry of Corporate Affairs, New Delhi submitted report by Diary No. 457 dated 29.01.2019. The copy of the report of the ROC dated 29.11.2018 was enclosed. The submissions of BTL submitted by letter dated 16.11.2018 before the ROC were also considered. It was finally stated by the Regional Director, Northern Region, Ministry of Corporate Affairs that having examined the scheme and considering the reply of BTL and report of ROC, it appears that the BTL has followed the procedure prescribed in the Act for the reduction of share capital and the Tribunal may pass orders as may deem fit and proper in the facts and circumstances of the case. 16. Vide order 01.02.2019, it was noted that as per office report, various representations of certain more persons objecting to the scheme have been received and the Registry will supply copies thereof to the Senior Counsel for BTL. The affidavit on behalf of BTL in reply to the representation received was submitted by Diary No. 796 dated 15.02.2019,. In para No. 2 thereof it was stated that representations filed by six shareholders were supplied to BT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ights of the company. Further, there are several judicial precedents to show that selective capital reduction is permissible. Thus, in Reckitt Benckiser (India) Ltd., (2005) 122 DLT 612 the Hon'ble Delhi High Court has arrived at the finding that a company limited by shares is permitted to reduce its share capital in any manner, meaning thereby a selective reduction is permissible within the framework of law. The aforesaid decision was followed in a subsequent decision dated March 31, 2014 of the Delhi High Court In the matter of RS Livemedia Pvt. Ltd. [Co. Pet 572 of 2013] wherein it was held as follows: "37. In view of the above discussion, the questions viz,: Whether it is permissible for a company to reduce its share capital in a disproportionate manner and whether it is permissible that consideration payable to different shareholders on account of reduction of share capital is calculated at different rates, must be answered in the affirmative. The mode, manner and incidence of reduction has been regarded as a matter of domestic concern and there is no restriction under the Act which curtails the discretion of a company in adopting the manner i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is completely baseless. DLOM is an adjustment which according to the independent Valuers is required for the lack of marketability, in order to arrive at the fair value of the Petitioner Company shares held by Identified Shareholders. For arriving at a figure, the independent Valuers have taken into consideration various factors including the event of no liquidity post delisting of the shares and the prospects of liquidity event for minority shareholders, and non-payment of dividends post delisting. The independent Valuers have further assessed two primary approaches to arrive at DLOM namely Multiple Option Pricing models and empirical studies. The same has been substantiated in detail in the valuation report dated June 19, 2018 submitted by the Valuers and provided as Annexure A4 to the Petition. The aforesaid opinion of the Valuers has also been considered by M/s SPA Capital Advisors Ltd., who is a category I Merchant banker in its Fairness Report. In, In Re: Reduction of Equity Share Capital of Organon (India) Limited MANU/MH/0534/2010, M/s Grant Thornton had in its report stated that it is common to apply a discount for lack of marketability in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The last capital infusion by SingTel was in February, 2018, wherein the Petitioner Company had allotted 85.45 million of its shares (1.73%) to SingTel through a preferential allotment. The preferential allotment to SingTel was done basis the then prevailing market price of BAL i.e., when BAL shares were trading at approx. Rs. 500/- per share on Stock Exchanges, which translated into the Petitioner Company's share price of Rs. 310/- per share. The proceeds of the preferential allotment had gone towards deleveraging the Petitioner Company's balance sheet and which thereby aided the equity valuation for all the shareholders, including the minority shareholders. Since the preferential allotment, the telecom stocks have all declined by approximately 30% levels given the continued tariff wars, leading to softness in the industry. Hence, the pricing provided in the proposed scheme of capital reduction is not comparable to preferential allotment made to SingTel and is a deliberate attempt to mislead the Hon'ble Tribunal. 7. The Petitioner Company has been providing discounted share price to the minority shareholders at all times. Bare minimum offering is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nning of the year, the share price was in the range of early Rs. 500, and has since declined. It is alleged that the period of 2 weeks is a short period of time to determine the value of an investment based on VWAP. It is submitted that two week of VWAP reflects the true value and is considered by the Valuer who has submitted a detailed valuation report which has been shared with the Interveners. The valuation report states as follows: "We have considered it appropriate to take an average of total turnover and total traded quantity for two weeks preceding 31 May 2018 to arrive at the market value per share of BAL" 9. Certain brokerage reports in relation to share price of BAL during the period Apri-May, 2018 indicated that the stock price of BAL during this period was depressed and there was an opportunity for investors to purchase the shares and gain value in the long term, as the target price for BAL shares was much higher than the prevailing market price of BAL's shares. It is submitted that brokerage reports are based on the broker's understanding of market dynamics. In this context, it was pointed out in our reply dated February 15, 2019 to Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing shares at premium should be adopted in valuation of the Petitioner Company shares. It is submitted that the transaction mentioned is an independent transaction between the Petitioner Company and ICIL, which was executed on a Stock Exchange viz. BSE Limited and was done at the then prevailing price quoted at the Stock Exchanges in compliance with all applicable laws and regulations. The said transaction was in the shares of BAL and has no nexus or relationship with the proposed scheme of capital reduction undertaken by the company. It is further worthwhile to note that the Petitioner Company is the promoter company of BAL, and ICIL is a person acting in concert with the Petitioner Company. In November 2017, the Petitioner Company had acquired 4.62% stake of BAL from ICIL. The provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 ("Takeover Regulations") requires that the acquisition price per share for an inter-se transaction between persons acting in concert shall not be higher by more than 25% of the volume-weighted average market price for a period of 60 (sixty) trading days preceding the date of issuance of notice, under Regulation 10(5) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpressed their consent to the proposed scheme of capital reduction, the Interveners have no locus to stall a legitimate and fair process initiated by the Petitioner Company, for the benefit of Identified Shareholders. It is denied that the stated reason for selective capital reduction is saving of administrative costs, as alleged. On the contrary, the primary objective for selective capital reduction, as clearly set out in the affidavit dated September 27, 2018 filed by the Petitioner, is to provide the Identified Shareholders a mechanism to monetize their shareholding at a fair price and through a transparent process. Further, the Petitioner has filed the present petition only after an overwhelming majority of the shareholders, constituting 99.90% of the shareholders, who cast their votes, including the Identified Shareholders voted in favour of resolution for selective capital reduction. 14. The Petitioner Company's proposal to pass the resolution through postal ballot and e-voting without conducting in personal/physical voting is violative of the right of the Identified Shareholders - with the intent to avoid free exchange of views and ideas amongst the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L on 13.09.2019; it was submitted that no reply is to be filed; it was further submitted that the application may be heard on 13.09.2019 along with other applications; and accordingly, arguments in CA No. 746/2019 were also heard along with other CAs. 21. We may add that CA No. 499/2019 in CA No. 59/2019 is an application for directions filed on behalf of the intervention applicants in CA No. 59/2019 under Rule 11 of National Company Law Tribunal Rules, 2016 for placing on record the additional documents along with supporting affidavits relating to purchase of equity shares of Bharti Airtel Ltd. (BAL) by BTL as per intimation filed on 29.10.2017 under Regulation 10 (5) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 for acquiring 4.62 shares of BAL at a price not exceeding 25% weighted average of last six days average closing price. The broad allegations/objections are included in the common reply affidavit filed vide Diary No. 2527 dated 17.05.2019 at serial No. 11 thereof. The additional documents are therefore, taken on record and CA No. 499/2019 is disposed of. 22. For the purposes of the present order, we are taking into consideration the broad al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its shares in respect of the share capital not paid up; or (b) either with or without extinguishing or reducing liability on any of its shares,-- (i) cancel any paid-up share capital which is lost or is unrepresented by available assets; or (ii) pay off any paid-up share capital which is in excess of the wants of the company, alter its memorandum by reducing the amount of its share capital and of its shares accordingly: Provided that no such reduction shall be made if the company is in arrears in the repayment of any deposits accepted by it, either before or after the commencement of this Act, or the interest payable thereon. (2) The Tribunal shall give notice of every application made to it under sub-section (1) to the Central Government, Registrar and to the Securities and Exchange Board, in the case of listed companies, and the creditors of the company and shall take into consideration the representations, if any, made to it by that Government, Registrar, the Securities and Exchange Board and the creditors within a period of three months from the date of receipt of the notice: Provided that where no representation has been received from the Central Government, Regist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter of domestic concern, i.e. it is the decision of the majority which prevails. (ii) If majority by special resolution decides to reduce share capital of the company, it has also right to decide as to how this reduction should be carried into effect. (iii) While reducing the share capital company can decide to extinguish some of its shares without dealing in the same manner as with all other shares of the same class. Consequently, it is purely a domestic matter and is to be decided as to whether each member shall have his share proportionately reduced, or whether some members shall retain their shares unreduced, the shares of others being extinguished totally, receiving a just equivalent. (iv) The company limited by shares is permitted to reduce its share capital in any manner, meaning thereby a selective reduction is permissible within the framework of law (see Re. Denver Hotel Co., 1893 (1) Chancery Division 495). (v) When the matter comes to the Court, before confirming the proposed reduction the Court has to be satisfied that (i) there is no unfair or inequitable transaction and (ii) all the creditors entitled to object to the reduction have either consented or been pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction is fair and equitable and it is also just and reasonable. 35. One of the contentions raised by the learned authorized representative/counsel for the intervention applicants is that the proposed reduction is a selective reduction and hence, BTL should take voting only from the identified shareholders. A similar submission was made before the Hon'ble Delhi High Court in Reckitt Benckiser India Ltd. supra. It was held by the Hon'ble Delhi High Court in para No. 31 as follows:- "31. A submission was made by learned Counsel for the objector about the holding of the class meetings. However, it is rightly contended by learned Counsel for the petitioner that holding of class meetings is not a requirement under the provisions of Section 100 of the Act in contradistinction to such a requirement in Section 391 of the Act. Section 100 merely prescribes that the shareholders of a company proposing to reduce its share capital are required to pass a special resolution approving the proposed reduction of share capital. This principal of law can be found in the Supreme Court judgment in the case of Mihir H. Mafatlal v. Mafatlal Industries Ltd., (1996) 87 CC 792 (SC), and the rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 018 and therefore, the claim that BTL has paid up share capital which in excess of wants of BTL in June, 2018 against the intent of Section 66 of the Act. It is also pleaded that BTL does not have an investor friendly attitude since dividend was not declared. It is pleaded that there are minimal shareholders expenses and therefore, one of the reasons given in the explanatory statement pursuant to Section 102 of the Act is not justified. It is also pleaded that the shares of BTL are marketable among public shareholders. 39. We may first state that the averment made in the explanatory statement pursuant to Section 102 of the Act regarding capital reduction enabling BTL to save the administrative and other costs is an additional reason given to support the resolution for reduction of share capital and was given in the context of servicing a very small percentage of shareholding held by large number of shareholders distributed all over the country and overseas. 40. We note that the learned Senior Counsel for BTL has argued that its case is covered by the main provisions of Section 66 (1) by which a company having a share capital may by a special resolution, reduce the share capital i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to be taxed under the provisions of Income Tax Act. In the affidavit on behalf of BTL filed in reply to the representations received (Diary No. 796 dated 15.02.2019), it has been submitted by BTL that the present scheme is filed in pursuance to Section 66 of the Act and the objectors are deliberately misleading the Tribunal by terming the scheme as a 'buy back'. 46. We find that the provision regarding purchase of its own shares by a company is contained in Section 68 of the Act. The petition presently under consideration is filed under Section 66 of the Act for confirmation of reduction of share capital. Therefore, the satisfaction of the conditions provided for under Section 68 of the Act are irrelevant in the present proceeding. We may also add here that Section 66(6) of the Act provides that nothing in Section 66 shall apply to 'buy back' of its own securities by a company under Section 68 of the Act and therefore, the Sections are regarded as independent. The contention raised is not accepted. 47. It has been pleaded by the authorized representative/counsel of the intervention applicants that passing of resolution through postal ballot and e-voting withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er DLOM is thereby computed at Rs. 196.80. 50. It is pleaded by the learned authorized representative/counsel for the intervention applicants that the methodology adopted by the valuers for making a deduction of 25% DLOM is arbitrary and flawed and imposed with a view to extinguish the shares of the minority shareholders at the lowest possible price. As regards dividend distribution tax (DDT) it is pleaded that the tax is to be borne by BTL and cannot be transferred to the shareholders. It is pleaded that while raising funds by preferential shares to SingTel, the value was Rs. 310 per share whereas the price offered to the minority shareholders is nearly half the said price. It is argued that for estimating the value of the investment of BTL in BAL, two- week volume weighted average price as on 31.05.2018 was adopted even though the share price of BAL suffered much market fluctuation in the time frame of January, 2018 to May, 2018- the share price going as high as Rs. 542 and as low as Rs. 352. It is pleaded that BAL has made significant investments in Africa and the positive and appreciable effect on the valuation of BTL was not taken into account. It is stated that on 03.11.2017 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the time frame and also to take into consideration other matters claimed by the intervention applicants e.g. significant investments by BAL in Africa and trading/transactions in shares of BAL before the two week period. As regards preferential allotment to SingTel in February 2018, it is stated by BTL that this was done on the basis of the then prevailing market price of BAL of approx. Rs. 500 per share on stock exchanges which translated into share price of BTL of Rs. 310 per share. It is stated by BTL that the value of the shares issued to SingTel was as per independent valuation report in compliance with the applicable provisions of the Act. It is submitted by BTL that since the preferential allotment, the telecom stocks declined by approx. 30% levels given the continued tariff wars, leading to softness in the industry. Therefore, the comparison between the price at which BTL offered shares to SingTel cannot be compared with the pricing in the scheme of capital reduction. 53. As regards the deduction for DLOM, we find that a detailed discussion has been made in this regard by the valuer in the valuation report dated 19.06.2018. The valuers assessed two primary approaches to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile considering the basis for DLOM and assessment of DLOM, the valuers have taken into consideration the tax incidence/implications. It was observed by the valuers that where BTL's minority shareholders get an opportunity to sell/liquidate their shares, there would be tax incidence in the hands of the respective minority shareholders and in the current proposed scheme for selective capital reduction, the tax incidence in the form of DDT would have to be incurred by BTL over and above the consideration being paid to the minority shareholders. The valuers considered the implication of potential sales of some shares in BAL to arrange funds for distribution to minority shareholders and estimated the net sale proceeds to be approx.. 78.45% to 88.352%. In step 2, the implication of capital reduction was determined and it was observed that if one ignores the impact on account of pre-existing cash/cash equivalents and credit for cost of acquisition in capital gains computation in step 1, the cumulative overall cost to BTL would be in the range of approx. 27% to 35%. Therefore, the tax incidence/implications have been considered by the valuers in coming to the conclusion that 25% DLOM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvention applicants that the explanatory statement pursuant to Section 102 of the Act was not accompanied by a copy of the valuation report as well as the fairness opinion and therefore, the sanctity of the postal ballot was defeated. We find that in the explanatory statement pursuant to Section 102 of the Act, it was noted that the valuation report as well as fairness opinion are available for inspection at the registered office and corporate office of BTL on all working days between 11.00 a.m. (IST) to 1.00 p.m. (IST) up to and including the last date of voting on the postal ballot/e-voting. The learned counsel in CA No. 553/2018 referred to para 6 F of the application and stated that the advocates of the interveners visited the corporate office of BTL on 20.07.2018 for clarification regarding the valuation of shares but the valuation report was not shared citing reasons such as "confidential information". The learned Senior Counsel for BTL has stated that CA No. 553/2018 was the first intervention application and was filed on 05.11.2018. It is submitted that as per order dated 01.02.2019, directions were given to BTL to supply the copy of the valuation report to the learned coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... solution for reduction of capital, unless there is some patent unfairness regarding the fair value of the shares or there is lack of an overwhelming majority of non-promoter shareholders who vote in favour of the resolution. 62. In the present case, we have found no patent unfairness in the valuation report dated 19.06.2018. We have however held that the deduction of DDT from the value per share as per the valuation report dated 19.06.2018, causes prejudice to the identified shareholders and is a concerted attempt to force a class of shareholders to divest themselves of their holdings at a rate far below what is reasonable, fair and just and connotes a form of discrimination. We note that 76.35% of the identified shareholders voting on the special resolution accepted even the reduced value of Rs. 163.25 per equity share after deduction of DDT from the value per share as per the valuation report dated 19.06.2018. We note that there are no objections to the scheme from the creditors. We therefore, do not consider it appropriate to decline the sanction of the scheme for reduction of share capital. We note that as per Section 66(3) of the Act, the Tribunal can make an order confirming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bing the capital structure of BTL be dispensed with. 66. The minute approved by the Tribunal under Section 66(5) of the Act is as follows: "The capital of Bharti Telecom Limited is henceforth Rs. 25,82,31,63,360, divided into 258,23,16,336 equity shares of Rs. 10/- each, reduced from Rs. 2610,77,41,760 divided into 261,07,74,176 equity shares of Rs. 10/- each, and such reduction be effected by cancelling and extinguishing, in the aggregate, 1.09% of the total issued, subscribed and paid-up equity share capital of Bharti Telecom Limited, comprising 28,457,840 equity shares of Rs. 10/- each held by identified shareholders of Bharti Telecom Limited (i.e., the holders of the equity shares of Bharti Telecom Limited other than Bharti Enterprises (Holding) Private Limited, Pastel Limited, Magenta Investments Limited, SingTel International Investments Private Limited and Indian Continent Investments Limited). At the date of the registration of this minute 258,23,16,336 equity shares have been issued and are deemed to be fully paid (and the remaining 241,76,83,664 equity shares are unissued)." 67. As per Rule 6(2) of the Rules, the above order confirming the reduction of share capital b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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