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TMI Blog2021 (3) TMI 943X X X X Extracts X X X X X X X X Extracts X X X X ..... l, Member ( Judicial ) The sanction of the Tribunal is sought under Sections 230 to 232 and other applicable provisions of the Companies Act, 2013 (the Act) to the Scheme of Merger (the Scheme) of Precious Trading and Investments Limited with Sheth Developers Private Limited and their respective shareholders. 2. We have heard the Learned Counsel for the Petitioner Companies, the representative of the Regional Director (Western Region), Ministry of Corporate Affairs, Mumbai and the Official Liquidator. No objector has come before the Tribunal to oppose the Scheme and nor any party has controverted any averments made in the Petition. 3. The Board of Directors of the Petitioner Companies in their respective board meetings held on 17th September 2019 approved the Scheme. On 3rd June 2020 the respective boards approved certain modifications thereto on the bases of which the present Petition is moved. The Appointed Date fixed under the Scheme is 1st April, 2019. 4. The First Petitioner Company is engaged in the business of investing in other companies. The Second Petitioner Company is engaged in the construction business as builders, contractors, erectors, constructors of bui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Transferor Company can be merged with the Transferee Company conveniently and can be carried on in conjunction more advantageously. No useful purpose is being served by operating two separate legal entities. (d) In the above circumstance, the merger of the Transferor Company with the Transferee Company in accordance with this Scheme and the relevant provisions of the Act, read with the Rules would therefore enable the Parties to utilize the financial resources as well as the managerial, technical, distribution and marketing resources of each other and it would be beneficial for the effective management and controlled supervision of the Transferee Company, thereby protecting the interest of the Transferor Company. (e) Further, as on date, there is no outstanding liability in the books of Transferor Company. Thus, its merger with the Transferee Company, would not have any adverse effect on the Transferee Company. (f) The merger under this Scheme will be beneficial to the Petitioner Companies, in the following manner: (i) facilities such as manpower, office space and other infrastructure could be better utilized by the Transferee Company and duplication of facilities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Petitioner Companies is accepted. 8. The Regional Director (Western Region), Ministry of Company Affairs, Mumbai, has filed its Report dated 31st August, 2020 inter alia stating therein that save and except as stated in para IV (a) to (l) of the Report, the Scheme is not prejudicial to the interest of shareholders and public. In response to the observations made by the Regional Director, the Petitioner Companies have given necessary undertakings and clarification vide their Affidavit dated 11th November, 2020. The observations made by the Regional Director and the clarifications and undertakings given by the Petitioner Companies are summarized below: Sr. No. Para (IV) RD Report / Observation dated 31 st August, 2020 Response of the Petitioner Companies (a) In compliance of AS-14 (IND AS-103), the Petitioner Companies shall pass such accounting entries which are necessary in connection with the scheme to comply with other applicable Accounting Standards such as AS-5(IND AS8) etc. As far as observations made in paragraph IV (a) of the Report of Regional Director is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounding order dated 4 th November, 2004 is annexed and marked as Annexure A to the Affidavit in Reply to the Report of Regional Director. It is further stated the post effectiveness of the Scheme, the Transferee Company will continue to remain in existence and no prejudice will be caused to any concerned parties. (d) Petitioner Company have to undertake to comply with section 232(3)(i) of Companies Act, 2013, where the transferor company is dissolved, the fee, if any, paid by the transferor company on its authorised capital shall be set-off against any fees payable by the transferee company on its authorised capital subsequent to the amalgamation and therefore, petitioners to affirm that they comply the provisions of the section. As far as observations made in paragraph IV (d) of the Report of Regional Director is concerned, the Petitioner Companies through its Counsel undertake to comply with the provisions of Section 232(3)(i) of the Companies Act, 2013 as regards to Combination of the Authorised Share Capital. (e) The Hon'ble Tribunal may kindly seek the undertaking that thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... far as observations made in paragraph IV (g) of the Report of Regional Director is concerned, the Petitioner Companies through its Counsel state that the Transferee Company have served notice upon Maharashtra Real Estate Regulatory Authority through speed post on 28 th July 2020, however, no comments were received. The Transferee Company through its Counsel further undertakes to comply with the applicable provisions of Real Estate Real Estate Regulation and Development Act, 2016 read with Maharashtra Rules and Regulation 2017. The Petitioner Companies through its counsel further state that the Transferor Company is not involved in the business of Real Estate, hence, the question applicability of Real Estate Regulation and Development Act, 2016 with Maharashtra Rules and Regulation, 2017 does not arise. (h) The Transferee Company have non- resident equity shareholders, accordingly, the Share Exchange price and price per share arrived should be minimum of fair price determined as per FEMA guidelines. Hence, valuer should certify that the price per share is as per FEMA guidelines. As far as observations made in paragraph IV ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. In this regard, the Petitioner has to submit the same for the record of Regional Director. 9. The undertakings filed by the Petitioner Companies in response to the said report are accepted. 10. The Official Liquidator has filed its report on 17th November, 2020 wherein certain observations made by M/s. R. D. Kundalia Co., Chartered Accountants have been captured and clarifications in that regard have been provided by the Petitioners. The relevant extracts from the Chartered Accountant s Report and the Petitioners clarifications to that effect have been reproduced herein under. A. Para 6.1 and Para 9.9 of the Report. Relevant Extract from the Chartered Accountant s Report: i. As per income tax records demand of ₹ 12,78,211/- for the AY: 2007- 08 has been raised on Oct 18, 2008. Against this outstanding demand Company has filed reply denying the liability many times latest being reply dated Jan 8, 2020. However, the same has not been entertained as yet. The Audit Report of PTIL is also silent about this demand. It has also filed its TDS returns during these periods. Demand status report under TRACES has not been provided by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. There has been delayed submission of Annual Report by the Company under Regulation 34 of SEBI (Listing Obligations and Disclosures Requirements) Regulations, 2015. v. The Company has also delayed in dissemination of disclosure of information with respect to execution of pledge Agreement under Regulation 30 of the SEBI (Listing Obligations and Disclosures Requirements) Regulations, 2015. 2. The Petitioners through their Counsel submit and clarify that the present status of each of the above observations made in the Secretarial Audit Report is as under: i. The First Petitioner Company has filed the requisite Form DIR-12 paying applicable fee including additional fee. ii. The First Petitioner Company inadvertently failed to file the Forms MGT-14 for the said meetings. It had duly filed Form MGT-15 with the Registrar of Companies within time, disclosing therein the business transacted in the annual general meeting and the result thereof. It has since filed an application with the Central Government in e-Form CG-1 vide SRN R74112822 and e-Form CG-1 vide SRN R74116823 for condonation of delay in filing Forms MGT-14 for approval of Director s Report and consolidated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chartered Accountant (CA) in his report has considered that the fair value of the First Petitioner Company as per the valuation report of the registered valuer is ₹ 295.47 crores as against the book net worth of ₹ 10.80 crores. Thus, the net worth of the First Petitioner Company has appreciated more than 29 times. 3. That the current liabilities and provisions of the First Petitioner Company as on 31st March, 2019 was only ₹ 67,000. To meet these liabilities the First Petitioner Company had sufficient cash balance of ₹ 75,000. This position has further improved, and as on 31st January, 2020 the outstanding current liabilities have reduced to ₹ 13,000 whereas the cash balance has increased to ₹ 42.02 lakhs. Even in terms of short-term liquidity position, the First Petitioner Company has sufficient liquidity. 4. It is further submitted that adverse inference cannot be drawn on the going concern status of an investing entity like the First Petitioner Company, merely on basis of non-existence of annual profits or reporting of small operating losses. The going concern status of First Petitioner Company cannot be questioned with sufficient sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered DCF as a valuation methodology in this case. C) Market Approach - In the present case, although: PTIL is a listed entity on BSE, it is not frequently and actively traded in the open market. Hence, the value per share of PTIL based on the market price is not considered. As the company does not have an established track record, all the key financial indicators are not completely reliable for valuation purpose thus, a steady state of operations and profitability was not achieved as on valuation date. Accordingly, the Market Approach was not considered appropriate for the determination of the fair value of the business. 2. In view of the above, the CA s remark that the valuation has been done using DCF method is not correct as far as valuation of shares of First Petitioner Company is considered. Further, in valuing the shares of First Petitioner Company using Net Asset Approach, the fair value of investments made by First Petitioner Company is determined on the following basis as can be discerned from the relevant extract of the report of the valuer. 1. Sheth Developers and Realtors (P) Ltd is an associate company of PTIL. I have been informed that SDRIL ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gorised under either category in the prescribed format. 5. Thus, using net asset approach as well as income approach, the valuer has arrived at the same value for the proposed preference shares. The above valuation by the registered valuer and the exchange ratio arrived at on the basis of said valuation has also been accepted as fair by registered Merchant Banker Arihant Capital Private Limited in their fairness report. The Shareholders have also unanimously approved scheme including valuation. E. Para 9.4 and Para 9.11 of the Report Relevant Extract from the Chartered Accountant s Report: i. Based on verification of documents including financial statements we understand that: 1. The funds of the Company were invested in to associated companies via subscription to equity shares or preference shares. 2. The Company had invested a sum of ₹ 876.80 Lakhs in Non- Cumulative Preference Shares of M/s Sheth Shelter Pvt Ltd (SSPL) having coupon rate of 6%. However, in past five years SSPL had-not earned any profit and hence not distributed any dividend. Moreover, being a non-cumulative in nature the Company has no-right to receive dividends of any pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made in hindsight on the commercial wisdom of the investment is unwarranted. The comments are beyond the scope of the audit/review. 2. The audit/review is concerned with financial affairs, and compliance of law and procedure (which is not questioned). It (the audit/review) is not intended to be a review of the commercial wisdom of corporate decisions unless there is any reason to doubt the bona fide of the investment. No such doubt or basis for any such doubt exists or is referred to in the report. There are no developments with reference to the investment in Preference shares in the five years under audit/review. 3. With respect to investment in equity shares of SDRIL, it is emphasized that the said investment has appreciated significantly. As against cost/book value of ₹ 76 lakhs, the fair value of this investment as adopted by the registered valuer in his valuation report is ₹ 285.43 crores. Thus, though no dividend has been received from this investment, there is huge return on capital invested of more than 370 times. Even the shortfall in cash flow has in fact, been made good in 2019-20 when the capital reduction by SDRIL yielded a huge amount of ₹ 147. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .7, with respect to investments made by the First Petitioner Company the CA states: Under the facts and circumstances as mentioned above, we are of the view that a question on merits of decision to invest in associated Companies ought to be examined. Clarifications given by the First Petitioner/Transferor Company a. The Petitioners through their Counsel submit that the prima facie view of the CA on the grounds that the First Petitioner Company has not received any dividend from the investment made in preference shares of SSPL and equity shares of SDRIL, the First Petitioner Company reiterates that the CA ought to have considered the capital appreciation in the value of the investments and should not draw adverse conclusion merely because no dividend income is earned from these investments. b. Also, it ought to be considered that the investment in preference shares of SSPL was made far back in 2004. One cannot examine the viability of an investment in hindsight. One ought to consider the same at the time when investments made. c. Investment in the preference shares of SSPL in 2004 is outside the scope of the audit/review. In any case, the investment was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en post the Act up to FY 2017-18, no resolution under Section 185 or Section 186 of the Act was required in 2014-15, 2015-16 or 2016-17. The observation challenging that the loan was without the authority of the Company is therefore incorrect. Any conclusion drawn on the basis of the incorrect observation has to be ignored inter alia as being without any basis. c. The loan given to SSPL was wholly repaid during FY 2017-18. Thus, no loss has been caused to the Company and no prejudice can be alleged. d. In FY 2017-18, the First Petitioner Company granted a separate loan to Second Petitioner Company of ₹ 1.43 crore. Due approval of shareholders of the Company under Section 185 of the Act had been obtained at the time of grant of loan to Second Petitioner Company. e. Further, the said loan has been repaid by Second Petitioner Company in instalments. As observed by the CA in his report, the loan outstanding as on 31st March, 2019 was ₹ 1.26 crore. The said loan was further repaid during FY 2019-20 and the balance outstanding as on 31st January, 2020 was only 0.29 crore. f. It is submitted that as both investments and loans are fully explained. As the mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we are satisfied with the clarification given by the First Petitioner/Transferor Company that the said liability would be borne by the Transferee Company. b. The observation of the CA regarding the non-filing of E-forms in DIR- 12, MGT-14 etc., we are satisfied with the explanation given by the First Petitioner/Transferor Company and hence this would not come in the way of approval of the Scheme. c. The objection of the CA regarding the failure of the Statutory Auditor for making no remark on the going concern status etc. would not affect the approval of the Scheme. d. With respect to the objection of the CA regarding the valuation, we are of the view that the shareholders in their commercial wisdom have accepted the said valuation. Hence there is no scope for interference by this Bench. e. With regard to the objection of the CA that the funds of First Petitioner/Transferor Company were invested into the Associate Companies and the affairs of the First Petitioner/Transferor Company are managed in a manner prejudicial to the interest of the company or its members or to the public interest, we find that there being no violation of any statutory provisions or such ..... X X X X Extracts X X X X X X X X Extracts X X X X
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