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TMI Blog2018 (8) TMI 2052X X X X Extracts X X X X X X X X Extracts X X X X ..... ER Per Ravikumar Duraisamy, Member Heard Advocates for the Petitioner Company, Heard the representatives or Regional Director, Western Region ( RD ) and Registrar of Companies, Ministry of Corporate Affairs, Mumbai ( ROC ). 2. The Advocate appearing for the Petitioner Company states that the Petition has been filed to seek sanction to the Scheme of Arrangement amongst Hindustan Unilever, Limited and its members ( Scheme ), pursuant to the provisions of Sections 230 and other relevant provisions of the Companies Act, 2013 ( 2013 Act ) [erstwhile provisions of Sections 391 of the Companies Act, 1956 ( 1956 Act )]. 3. The Petitioner Company is engaged inter alia in the business of manufacturing, marketing, distribution and/or sale of soaps, detergents, personal care products, beverages, processed foods etc. The shares of the Petitioner Company are listed on the BSE Limited (BSE) and the National Stock Exchange of India Limited (NSE). The Petitioner Company had applied to the said stock exchanges for their no-objection to file the Scheme of Arrangement in the Hon'ble Bombay High Court for sanction. The BSE by its letter dated 8th March, 2016 and NSE by Its letter d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Payout to the Members (as defined in the Scheme), in such manner and to such extent, as the Board (as defined in the Scheme), in its sole discretion, may decide, from time to time and in accordance with the provisions of the Act and other applicable laws. The Board of Directors of the Petitioner Company has approved the said Scheme by passing its board resolution which is annexed to the Petition. Pursuant to the directions of the Hon'ble Bombay High Court vide its order dated 29th April, 2016, meeting of the equity shareholders of Petitioner Company was held and the Scheme was approved by 1516 equity shareholders holding in aggregate 1,74,28,08,028 equity shares constituting 97.24% in number and representing 99.24% in holding of the equity shares which was more than the requisite majority in number and shareholding of the equity shareholders of the Petitioner Company who voted at the said meeting either in person or by proxy or by authorised representative at the meeting through e-voting and through remote e-voting. 4. The Advocate for the Petitioner Company states that the Petitioner Company has complied with all the directions passed by the Hon'ble Bombay High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The observations made / contentions raised by the ROC in the Report in respect of the Scheme are summarized as follows: a. Scheme is framed to circumvent the provisions of Section 123 of 2013 Act and the 2014 Rules; b. The Scheme is not an arrangement and hence cannot be filed under Section 391-394 of the 1956 Act or Section 230 232 of the 2013 Act; c. Mere Revision / Re-classification of Accounting Entries / Financial Statements is cloaked in the form of a Scheme. Accordingly, the same falls under Section 131 of the 2013 Act; d. The Scheme is incomplete / hypothetical since manner and extent payout is not specified; e. The amount of ₹ 2187.33 crores is not a General Reserve but is instead 'Other Reserves - statutorily created under Section 205(2A) of the 1956 Act read with the Companies (Transfer of Profits to Reserves) Rules, 1975. Accordingly, proposed transfer vide the Scheme is illegal; f. Lack of transparency and good governance; g. Appointed date clause the scheme is in violation of Section 232(6) and 232(3)(a) of the 2013 Act and hence needs amendment; h. Effective date clause in the scheme is in violation of Section 232(6) of the 2013 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Company's 'General Reserves' to be credited / transferred to the balance of the Profit and Loss Account of the Petitioner Company shall be reclassified as and constitute accumulated profits of the Petitioner Company for the previous financial years, arrived at after providing for depreciation in accordance with the provisions of the Act and remaining undistributed in the manner provided in the Act and other applicable laws.; (iii) There is no provision either in the 1956 Act, the 2013 Act or any other law which prohibits a company from crediting amounts standing in the General Reserve to the Surplus of the Profit and Loss Account. There Is therefore no restriction in law in relation to the treatment of general reserves as envisaged under the Scheme; (iv) 2 nd proviso to Section 123(1) and the 2014 Rules apply only in years when there is an inadequacy or absence of profit. It does not apply when there is no inadequacy or absence of profit in any particular year. This is not a case of a year of inadequacy or absence of profit; (v) 2nd proviso to Section 123 (1) and the 2014 Rules (relied upon by the RD ROC) do not apply at all. Consequently, the RD's c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has sanctioned a substantially scheme of arrangement under Sections 391 - 394 of the 1956 Act, and has therefore considered such a scheme to be an arrangement; (vii) In light of the definition of arrangement and judicial pronouncements on the import of the said term, which is of wide ambit and import, there Is no basis for the ROC to suggest that the Scheme contemplated does not constitute an arrangement between the Petitioner Company and its Members. 14. With regard to the observations of the ROC set out in Paragraph 9(c) hereinabove, Advocate appearing for the Petitioner Company submits inter alia as follows: (i) The contentions of the ROC proceed on an incorrect appreciation of Section 131(1) of the 2013 Act; (ii) Section 131 does not contain the term reclassification . It pertains to revision of the balance sheet or Board report; (iii) The word reclassification used in the Scheme is not a defined term and has not been used as purported to be understood by the ROC and RD in Sections 131, 129 and 134 of the Companies Act, 2013 and has been used in the ordinary sense of the word; (iv) Section 131 of the 2013 Act, which deals with voluntary revision of financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king into account all relevant factors Including applicable regulatory and fiscal considerations, the nature and quantum of each payout and subject to payment of applicable taxes; (iv) The Petitioner Company is a successful company which has demonstrated consistent growth, sustained improvement in profitability and robust: cash Generation over the years. The Petitioner Company has maintained a strong track record of operating cash generation and distribution to its shareholders. The Petitioner Company has net cash and cash equivalent and investments of ₹ 5,056.34 Crores as on 31st March, 2016, and does not have any secured or unsecured loans, fixed deposits or preference shares, which entail repayment obligations; (v) The Petitioner Company has a strong track record of paying regular dividends to its shareholders - cumulative dividends to the tune of ₹ 15,335.73 crores have been declared during the period from Financial Year 2010 - 11 to Financial Year 2014 - 15, which has been confirmed by the RD in his Report; (vi) The funds transferred out of its profits under Section 205(2A) of the 1956 Act which are accumulated and represented in the General Reserves are i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent contained in the Scheme is in compliance with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the Circulars issued thereunder and all applicable accounting standards notified by the Government of India under the 2013 Act. 17. On a query raised by the Bench as to whether the Scheme is in public interest the Advocate for the Petitioner Company submitted inter alia as follows: (i) That the Scheme is not prejudicial to the public interest in any way; (ii) There is no provision either in the 2013 Act or any other law that prohibits the crediting / transfer of amounts lying in General Reserves' to the 'Profit and Loss Account.' Consequently, the Scheme does not violate any law; (iii) The Scheme neither affects the general public in any manner nor causes any loss or detriment to any public authority; (iv) Neither the RD nor ROC has been able to show any specific adverse impact on public interest by sanction of this Scheme. It is respectfully submitted that it is incumbent upon the RD / ROC to highlight specifically how the Scheme, its incidents or consequences have an alleged adverse impact on public interest. No scheme can be rejec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment required over the next few years. The company has distributed regular dividends to its shareholders during the last 12 Financial Years. The Company has paid a cumulative dividend of ₹ 15,335.75 crores from Financial Year 2010-11 to 2014-15. [t is also noted that the company has distributed an average of nearly ₹ 2986 crores as dividend in the past 5 Financial Years. In view of the concerns raised by the Regional Director and Registrar of Companies, this Bench directs the Company/Board of Directors to obtain prior approval of its shareholders (through AGM/EGM) on any occasion/events in which outflow is more than ₹ 100 crores other than as Dividend. The Petitioner Company has to comply with all applicable Tax Legislations and has to pay all taxes consequent to the proposed Scheme of Arrangement, if any. Considering the above aspects we are therefore satisfied with the explanation and clarification given by the Petitioner Company to the query raised by the Bench. We are therefore of the view that the Scheme is required to be sanctioned. 20. From the material on record, the Scheme appears to be fair and reasonable and is not violative of any provisions of law ..... X X X X Extracts X X X X X X X X Extracts X X X X
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