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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 ..... tion 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. It has been pleaded by the authorized representative/counsel of the intervention applicants that passing of resolution through postal ballot and e-voting without conducting personal/physical voting is violative of the rights of the identified shareholders to avoid free exchange of views and ideas amongst the identified shareholders. The Learned Senior Counsel for BTL has referred to Section 110 of the Act in which some types of business are not to be undertaken by postal ballot. It is pleaded that the present business is not covered by the exceptions and that holding of Extraordinary General Meeting at one location is burdensome for the shareholders since they find it difficult to travel long distance for attend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is filed under Section 66 of the Companies Act, 2013 (Act) read with Rule 2 of the National Company Law Tribunal (Procedure for Reduction of Share Capital) Rules, 2016 (Rules 2016). BTL was incorporated on 29.07.1985 as per master data at Annexure A-14 of 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 ₹ 50,000,000,000 divided into 5,000,000,000 of ₹ 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 share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the consideration of ₹ 163.25 per equity share was fixed and this consideration together with the dividend distribution tax of approximately 33.55 per equity share payable by BTL on account of the proposed capital reduction amounts to ₹ 196.80 per equity share, which is equal to the value determined by the valuers in the valuation report and confirmed by the fairness opinion. 6. It is stated that special resolution dated 26.07.2018 was passed by the shareholders and the voting status is as under :- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of BTL as per updated list as on 24.08.2018 in Form RSC-3 seeking their representations/objections, if any. Notices were also directed to be published in Form No. RSC-4 within seven days in daily Indian Express(English) and Jansatta (Hindi) (both NCR Delhi/Haryana edition) intimating the date of hearing. 12. The affidavit of compliance was furnished by Diary No. 4213 dated 29.10.2018. 13. Vide Diary No. 421 dated 28.01.2019, BTL submitted that it has received no objection/consent from all its creditors including the debenture trustee who has given no objection/consent on behalf of debenture holders. 14. The Registrar of Companies, NCT of Delhi and Haryana furnished report dated 29.11.2018 by Diary No. 1807 dated 10.12.2018. It was stated therein that no inspection or technical scrutiny of the Balance Sheet of BTL is pending and that certain complaints were received from the purported shareholders against the proposed scheme of reduction in share capital. The crux of the complaints and the reply furnished by BTL was given. It was concluded that in light of the discussion and in terms of Section 66(2) of the Act, the matter may be decided on merits. 15. The Regional Direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm:- Sl.No. Objections Response I Selective capital reduction is impermissible 1. Section 66 of the Act is meant for uniform and non discriminatory capital reduction. Selective capital reduction is unfair, unjustified, coercive, discriminatory and illegal. It is submitted that Section 66(1) allows a company to reduce its share capital in any manner whatsoever. Article 82C of the Petitioner Company's Articles of Association also allows it by way of special resolution and on compliance with Section 66 of the Act to reduce its share capital and any capital reserve fund or share premium account. It is a settled law as per Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. AIR 1971 SC 422 that the Articles of Association establishes a contract between the company and the members and between the members inter se. In the circumstances, the Intervenors having contracted to permit capital reduction through special resoluti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the special resolution dated July 26, 2018 supporting the aforesaid proposed scheme of capital reduction was passed with an overwhelming majority, i.e., with 99.90% of the shareholders casting their votes in favour of the resolution. 3. It is not the case that the At present, these ldentified Shareholders do not have any avenue to monetize their shareholding... The shares of the Petitioner Company are marketable among the public shareholders. It is submitted that there is no formal legal platform for the shareholders to sell their shares. The private dealings are carried out on a mutually negotiated price without a fair valuation of the shares contrary to the one carried out by the Valuers in the present scenario. II Objection with respect to the methodology adopted by valuers 4. Methodology adopted by the valuers, namely, Ernst Young Merchant Banking Services Private Limited ( Valuers ) in applying and making a deduction of 25% Discount for Lack of Mobility ( DLOM ) on the shares of the Pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility which will arise to the Petitioner Company solely on account of capital reduction and would not have arisen to the Petitioner Company otherwise. Further, while the amount of ₹ 163.25 per share paid to the shareholders will suffer DDT in the hands of the Petitioner Company, it will not be subject to capital gains tax in the hands of shareholders. As the DDT liability is directly and intrinsically related to capital reduction only and which would not have arisen to the Petitioner Company otherwise, it is only fair that the outflow of the company on account of capital reduction should factor in such DDT liability as well. 6. While raising funds by preferential issue of shares by Petitioner Company, the fair value of its price was declared as ₹ 310/- per share, and the SingTel group which holds 48.9% of the shareholding paid this value to the Petitioner Company. It is alleged that the real value of the shares of the Petitioner Company is much more than ₹ 310/- per share whereas the price offered to the minority shareholders is nearly half the said price. It is further alleged that the Petitioner Company, along with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The acquisition of shares by SingTel in 2005 at ₹ 502/- had been undertaken 5 years after the delisting offer. Therefore, the delisting offer cannot be used as a benchmark for the acquisition of shares by SingTel in 2005 which was a private transaction between two independent shareholders. The Petitioner Company has not conducted any buy back during 2006-2007. Even in the news reports annexed and relied upon by the concerned Intervenors, there is no reference to any buy back being conducted by the Petitioner Company. The purchase of shares by Singtel in 2009, 2013 and 2016 are also private transactions entered into between independent shareholders and the Petitioner Company is not a determinator of the transaction price. As regards issuance of shares to SingTel by the Petitioner Company in February 2018, the transaction was on the basis of independent valuation report in compliance with the applicable provisions of the Act. The proceeds of the preferential allotment had gone towards deleveraging the Petitioner Company's balance sheet, which thereby aided the equity valuation for all the shareholders, includin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2018. The said issue of shares would result in unlocking the value of the African business and would have a positive and appreciable effect on the valuations of BAL. This, in turn would have a positive and appreciable effect on the valuations of the Petitioner Company. BAL's investment in African markets would have appreciable effect on the valuation of the Petitioner Company is imaginary and without any basis. It is submitted that the investment in Africa or the opening of an Initial Public Offer in Africa has no correlation to the price of shares of the Petitioner Company and is independent of the same. 11. On November 3, 2017, the Petitioner Company acquired a 4.62% stake in Bharti Airtel Limited ( BAL ) from Inter Continental Investment Ltd. ( ICIL ) resulting in increase in the value of equity shares of the Petitioner Company. The transaction was done so as to make the Petitioner Company the holding company of BAL . The transaction of acquiring shares from ICIL as reported by the Petitioner Company themselves to the Securities and Exchange Board of India ( SEBI ) and the National Stock Exchange Ltd. as well a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... text. The Interveners' contention is devoid of any merit or substance whatsoever and is therefore untenable. In any event it may be relevant to mention that even the share price of BAL has fallen drastically though in any case the capital reduction process has no relevance with the share price of another listed entity. 12. M/s Ernst Young are the Internal Auditors of the Petitioner Company. In such a circumstance, it has been alleged that the report of Valuers does not constitute as an independent report of the valuation of shares to be paid to minority shareholders. It is submitted that the valuation was undertaken by Ernst Young Merchant Banking Services Private Limited , an independent company which is registered with SEBI as a merchant banker bearing registration number INM000010700. This company is not the Auditors of the Petitioner Company. III. Other miscellaneous objections 13. The Petitioner Company has a net debt of about ₹ 5000 crores. The priority of the management should be to serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... powers a company to transact any business other than the prescribed businesses through postal ballot. However, the following types of businesses are not to be transacted by way of postal ballot: Ordinary business Any business in respect of which directors or auditor has a right to be heard at any meeting. The list of ordinary businesses in given in subsection (2) of section 102. The following businesses transacted at annual general meeting are to be treated as ordinary businesses: the consideration of financial statements and the board's and auditors' reports; the declaration of any dividend; the appointment of directors in place of those retiring; the appointment of, and the fixing of the remuneration of, the auditors. Sub-section (2) of Section 110 of the Act provides that if a resolution is passed by the requisite majority of the shareholders by means of postal ballot, it shall be deemed to have been duly passed at a general meeting convened in that behalf. Postal Ballot process is a process to protect the interest and democracy of shareholders. The Annual/Extraordinary General Meetings are held at any one location and the shareholders find it burdensome and very diffic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Northern Region, Ministry of Corporate Affairs from the purported identified shareholders. We find that the issues raised therein are by and large the same as in the common reply affidavit supra except issues at serial no. i) Issue of share capital to SingTel International Investments Pvt. Ltd. (SingTel) in February, 2018 and therefore, there is no share capital in excess of the wants of BTL; ii) dividend not declared; iii) voting should have been taken only from identified shareholders; vii) shareholders expenses are low and therefore, reason given for decision for capital reduction in the notice under explanatory statement that it will reduce operation cost is without application of mind by the Board of Directors. These issues are also being considered in the present order. 23. We have discussed above that the representations received from shareholders given to BTL and reply was submitted by BTL by Diary No. 796 dated 15.02.2019. The broad allegations/objections identified by BTL in the representations are on similar lines as those identified in in the common reply affidavit supra, except for the objections in paras 5(2) and (3) that the scheme of buy back of BTL is violati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cured or his consent is obtained, make an order confirming the reduction of share capital on such terms and conditions as it deems fit: Provided that no application for reduction of share capital shall be sanctioned by the Tribunal unless the accounting treatment, proposed by the company for such reduction is in conformity with the accounting standards specified in section 133 or any other provision of this Act and a certificate to that effect by the company's auditor has been filed with the Tribunal. 26. The shareholding pattern of BTL is as under:- Shareholders Number of Shares Percentage(%) Bharti Group 1,305,663,496 50.01 SingTel Group 1,276,652,840 48.90 Identified Shareholders 28,457,840 1.09 Total 2,610,774,176 100.00 27. The proposal for reduction of share capital involves exit of only the identified shareholders on the ground that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, held that the question of reduction of share capital is treated as a matter of domestic concern and while reducing the share capital, the company can decide to extinguish some of its shares without dealing in the same manner as with all other shares of the same class. 31. A similar decision is rendered by the Hon'ble Delhi High Court in R.S. Live Media Pvt. Ltd. CO.PET.572/2013 and it was held in para No. 37 of the judgement 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 in which the company chooses to reduce its capital. 32. Therefore, the Hon'ble Delhi High Court has held that it is permissible for a company to reduce its share capital in a di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No separate class of equity shareholders is contemplated either by the Act or the Articles of Association of respondent company. Appellant is admittedly an equity shareholder. Therefore, he would fall within the same class of equity shareholders whose meeting was convened by the orders of the Company Court. On the express language of Section 391(1) it becomes clear that where a compromise or arrangement is proposed between the company and its members or any class of them a meeting of such members or class of them has to be convened. This clearly presupposes that if the Scheme arrangement or compromise is offered to any sub-class of members which has a separate interest and a separate scheme to consider, no question holding a separate meeting of sub-class would at all survive. It is for the company to decide what constitutes a separate class of shareholders, in accordance with what the proposed scheme purports to achieve. 36. The contention raised is therefore, not accepted. 37. The learned Senior Counsel for BTL has pleaded that before passing of the special resolution, BTL sent a notice of postal ballot/electronic voting along with explanatory statement to all the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contention raised in the preceding para based upon the preferential allotment to SingTel is irrelevant. 41. We may also state with reference to the other issues in the preceding para that in Reckitt Benckiser India Ltd. supra, the Hon'ble Delhi High Court has held that the question of reduction of share capital is treated as matter of domestic concern i.e. it is the decision of the majority which prevails. In the present case, the decision is not only by 99.9% of total shareholders but also by 76.35% of the identified shareholders. 42. The contentions are therefore, not accepted. 43. It has been argued by the learned counsel for intervention applicants that the identified shareholders cannot be forced to accept the reduction of their capital. Reference has been made in this regard to CP No. 162/2016 and RT CP No. 191/Chd/Hry/2017 dated 26.04.2019 in Re: The Doaba Industrial and Trading Co. Pvt. Ltd. and CP No. 163/2016 RT CP No. 123/Chd/Hry/2017 dated 26.04.2019 in the matter of The Punjab Business Supply Co. Pvt. Ltd. decided by this Bench. It is stated that in the applications for reduction of share capital, the petitioner companies had undertaken that in case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng personal/physical voting is violative of the rights of the identified shareholders to avoid free exchange of views and ideas amongst the identified shareholders. The Learned Senior Counsel for BTL has referred to Section 110 of the Act in which some types of business are not to be undertaken by postal ballot. It is pleaded that the present business is not covered by the exceptions and that holding of Extraordinary General Meeting at one location is burdensome for the shareholders since they find it difficult to travel long distance for attending the meeting and therefore, postal ballot helps increase voter participation. The plea raised is therefore, not accepted. 48. The explanatory statement pursuant to Section 102 of the Act states that in order to determine the consideration to be paid upon the proposed reduction of equity shares held by the identified shareholders, the valuer Ernst Young Merchant Banking Services Pvt. Ltd. has submitted the valuation report and fairness opinion report has also been obtained from a Merchant Banker SPA Capital Advisors Ltd. It is stated that the Board has considered the valuation report and the fairness opinion and is of the view that a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is stated that on 03.11.2017, BTL acquired a 4.62% stake in BAL from Inter Continental Investment Ltd. and this was done at 25% premium of the market value of the shares of BAL quoted in the stock exchanges. 51. The learned Senior Counsel for BTL has referred to the decision of Hon'ble Bombay High Court in Cadbury India Ltd. MANU/MH/2681/2014 : and Hon'ble Supreme Court in Hindustan Lever Employees Union Vs. Hindustan Lever Ltd. Ors.1995Supp(1)Supreme Court Cases 499. We find that in Cadbury India Ltd. supra (Section 7) : General Principles the Bombay High Court has held that before a court can decline sanction to a scheme on account of valuation, an objector to the scheme must first show that the valuation is ex-facie unreasonable i.e. so unreasonable that it cannot be accepted. It was also held that plausible rationale provided by a valuer is not be readily discarded merely because an objector has a different view. It was held that valuation is not an exact science and all valuations proceed on assumptions and to dislodge a valuation, it must be shown that those assumptions as such as could never have been made, and that they are so patently erroneous that the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e valuers assessed two primary approaches to arrive at DLOM i.e. multiple option pricing models (OPM) and empirical studies and also considered factors including view of leading authority in the field of valuation and finance i.e. Professor Aswath Damodaran; tax implications in case of hypothetical liquidity event for BTL's minority shareholders; tax implications of the proposed capital reduction; control premium and/or holding company discount. While capturing value of BTL in BAL on the basis of various approaches i.e. option pricing models; restricted stock studies; pre-IPO studies; application of illiquidity discount by Professor Damodaran, the valuers found that the range of DLOM broadly ranges between 19% to 30% (ignoring the pre-IPO studies) and considered it to appropriate to finally use 25% DLOM. The learned counsel for the intervention applicants have sought to plead that DLOM was not deducted in the valuation report taken into account for the valuation of preferential allotment of shares to SingTel. However, the intervention applicants have not submitted a copy of the relevant valuation report to prove their contention. Moreover, the approach of each valuer may be dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered by the valuers in coming to the conclusion that 25% DLOM and moreover, the valuers have categorically observed that DDT would have to be incurred by BTL. 56. The plea of BTL that the DDT liability is intrinsically and directly related to capital reduction is only to state the obvious. However, the capital reduction cannot be termed to be a benefit to the identified shareholders since the Board as well as shareholders of BTL are obliged to take decision only in favour of BTL's interests. The Board and shareholders of BTL have decided in favour of capital reduction and the consequential tax liability will also be of BTL. 57. In view of the above discussion, we conclude that prejudice is caused to the identified shareholders by the proposal in the explanatory statement that the dividend distribution tax of ₹ 33.55 per share will be further reduced from the value per share of ₹ 196.8 given by the valuer and the fairness opinion. The prejudice 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. In view of the findings in para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re given to BTL to supply the copy of the valuation report to the learned counsel for the objectors during the course of the day. It is therefore, pleaded that the valuation report was made available to the learned counsel in CA No. 553/2018 only on or after 01.02.2019. However, the application in CA No. 553/2018 (para 6 J) contains complete details in tabular form of share price for BAL of ₹ 368/-, DLOM of 25% and effective price per share of ₹ 196.8. It is submitted that these facts would show that on the visit of the advocates of the interveners to the corporate office of BTL, inspection of the valuation report was duly allowed. Reference is also made to e-mail dated 20.07.2018 from the applicant in CA No. 553/2018 to the compliance [email protected] (Annexure-III of CA No. 553/2018) stating that they had opportunity to meet Mr. Rohit Puri, Company Secretary and request was made to have shareholders' details as on 31.03.2018 and the same be supplied. It is pleaded by the Senior Counsel for BTL that this e-mail shows that the inspection of valuation report had been made and the only requirement left was not connected with the valuation report. In view of the discu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re capital. We note that as per Section 66(3) of the Act, the Tribunal can make an order confirming the reduction of share capital on such terms and conditions as it deems fit. 63. We therefore, consider the present case suitable for confirmation of the scheme for reduction of share capital subject to deduction of dividend distribution tax of ₹ 33.55 per equity share from the amount of ₹ 196.80 per equity share determined by the valuers for the purpose of determining the consideration offered to the identified shareholders upon capital reduction not being made. 64. As regards the requirements of Section 66 of the Act, we have already discussed above that the application is filed by BTL having share capital and specific special resolution has been passed with 99.9% of the shareholders casting their votes voting in favour of the resolution. The certificate issued by the statutory auditors as well as declaration by a Director of BTL that BTL is not in arrears in the repayment of deposits or interest thereon are at Annexure A-11 and A-12 of the application. Certificate of the statutory auditors of BTL certifying that the accounting treatment proposed by BTL for Reduct ..... X X X X Extracts X X X X X X X X Extracts X X X X
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