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TMI Blog2022 (11) TMI 807X X X X Extracts X X X X X X X X Extracts X X X X ..... ennai in CA/21/66(1)/CB/2017 (hereinafter called 'Impugned Order). 2. The Appellant is aggrieved by the Impugned Order mainly on the ground that it has been passed in a mechanical manner by only reiterating the observations made by the Division Bench of NCLT, Chennai in its earlier order dated 4.10.2017, without paying attention to the fact that the Respondent Company Reed Relays did not follow the guidelines/procedure laid down in the Exit Circulars and Delisting Regulations of Securities and Exchange Board of India (in short 'SEBI'). 3. It is recalled that an order was passed by the NCLT, Chennai in CP/21/66(1)/CB/2017 on 4.10.2017 regarding the petition of M/s. Mahendra G. Wadhwani, which was assailed by him in appeal bearing CA(AT)/337/2017 before the National Company Law Appellate Tribunal (in short 'NCLAT') which, by order dated 17.4.2018, set aside the order of NCLT, Chennai stating as follows:- "46. In view of the above discussions, we are not giving our judgement/decision on the other various issues/counter issues raised by the parties in the appeal. The impugned order dated 4.10.2017 passed by the Tribunal is set aside. The matter is remanded back to the Tribunal to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 4.10.2017 no longer existed in law. The NCLT has not passed a fresh order, but has simply said that after careful study of the relevant material, this Tribunal is of the opinion that the earlier order passed on 4.10.2017 does not warrant any modification, and thus it has effectively maintained the earlier order dated 4.10.2017. (ii) The Impugned Order has been passed in an application made under section 66 of the Companies Act, 2013, which is regarding reduction of share capital, whereas the buy-back of shares was done under section 100 of the Companies Act, 1956. Since, the Special Resolution was passed under section 52 of the Companies Act, 2013, which provides for use of Security Premium Account for Buy-Back of shares, the intention was always to Buy-Back of shares and therefore, the application under section 66 was not maintainable. (iii) The voting in the EGM dated 12.12.2016 in which decision for reduction of share capital was taken, show the votes cast by the promoters clubbed with votes cast by non-promoter shareholders, whereas the votes of promoters shareholders and non-promoters shareholders should have been shown separately to show clearly the views/opinion of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven for providing exit to non-promoter shareholders. (xi) The 5th Exit Circular dated 10.10.2016 provided the modality/procedure for exit to public, non-promoter shareholders which should have been followed. According to Annexure 'A' of this circular, there had to be a public announcement by the promoter of the company in one national newspaper and one regional newspaper with material information relating to exit opportunities to its shareholders, which should have included the proposed exit price per share. Thereafter, the exiting shareholders were required to tender their shares to the company and the promoter was required to open an escrow account in favour of the independent valuer/designated stock exchange and the total estimated amount of consideration based on the exit price and number of outstanding public shareholders was to be deposited in the escrow account. The payment of exit shareholders was to be made by the promoters and not the company and the promoters had to certify to the satisfaction of the designated stock exchange that appropriate procedure has been followed for providing exit to the shareholders. This procedure was not followed by the Respondent No. 1 Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.12.2016 and at that time section 100-104 of the erstwhile Companies Act, 1956 were in force. With the enactment and coming in force of the Companies Act, 2013 on 15.12.2016, the Respondent No. 1 Company applied for necessary approval by filing petition section 66 of the Companies Act, 2013 because provision of section 66 of the Companies Act, 2013 is pari materia to section 100 of the Companies Act, 1956. (v) Madras Stock Exchange ("MSE") was in the process of getting de-recognised and exclusively listed companies (ELCs) earlier listed with MSE, were required to either get listed on a nation-wide stock exchange or provide exit to its public, non-promoter shareholders. Since the Respondent No. 1 company did not enter into any listing agreement with a nation-wide stock exchange, it ceased to be a listed company, a fact which is taken note in the Impugned Order in paragraphs 8-9 and therefore, Respondent No.1 company which was no longer a listed company, was not required to follow SEBI Listing Regulations and also its circulars including the various Exit Circulars. (vi) The SEBI's Exit Circular dated 17.4.2015 provide a time period of 18 months to either get listed on a nation-w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court has held in the matter of Hindustan Lever Employees' Union vs. Hindustan Lever Ltd. (AIR (1995) SC 470) that the valuation of shares is a technical and complex issue, which can be appropriately left to the accounting expert and merely because some other method of valuation could be resorted to, which could possibly be more favourable to the objector, this alone cannot militate against granting approval to the modality adopted by the company, and the court's obligation is to see that valuation was done in accordance with law and it was carried out by an independent body. (xii) After the order of NCLT dated 18.9.2019, Respondent No 1 Company transferred requisite funds to a Special Bank Account in HDFC Bank, which has thereafter, issued demand drafts/warrants to the company's shareholders and out of 2506 such non-promoter shareholders, more than 1430 shareholders have encashed their warrants as on 31.12.2019. The Appellant has also acquired further shares of Respondent No. 1 Company, after passing of the concerned Special Resolution, even though he has objected to the reduction of the shares capital. Thus all the former non-promoter shareholders, including the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and reasons considered appropriate by the Company. 12. The Learned Senior Counsel for Respondents has cited the following judgments in support: - (i) The Hon'ble Delhi High Court in the matter of Reckitt Benckiser (India) Ltd. vs Unknown (122 (2005) DLT 612) and Sandvik Asia Limited vs Bharat Kumar Padamsi (MANU/MH/0237/2009). (ii) The Hon'ble Supreme Court of India in the matter of Hindustan Lever Employees' Union v/s Hindustan Lever Ltd. [1994 SUPPL (4) SCR 723] and G.L. Sultania and Anr. v/s SEBI [2006 67 SCL 71 SAT]. 13. The issues that are relevant in deciding this appeal are as follows:- (i) Whether the Adjudicating Authority hearing the matter in a Single Member Bench was legally competent to consider the matter after remand by NCLAT, , which matter was earlier heard by a Division Bench of NCLT? (ii) Whether the Special Resolution passed under sections 100-104 of the erstwhile Companies Act, 1956 read with section 52 of the Companies Act, 2013 is in the nature of buy-back shares of non-promoters' shareholders and is akin to providing them exit as contemplated under the Exit Circulars of SEBI? (iii) Whether the Respondent Company was not required to follow the va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We note that sub-section (3) of section 419 of the Companies Act, 2013 provides that if a Single Member Bench comprising of a Single Judicial Member is constituted by President of NCLT in respect of such class of cases or such matters pertaining to such class of cases, then such a Bench would be considered competent to hear such cases. We also note that the Single Member (Judicial) Bench constituted at NCLT, Chennai by the order of the Hon'ble President, NCLT on 27.11.2017 in exercise of powers under section 419 of the Companies Act, 2013, whose copy is attached with the report of the Learned Amicus Curiae, the Single Judicial Member, Bench was entrusted with powers to dispose of cases relating to Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016. Thus, it is clear that the Single Judicial Member Bench that heard the case and passed the Impugned Order was validly constituted by the Hon'ble President of NCLT. We also note that while the case was being reheard by NCLT, Chennai Bench, after remand by order dated 17.4.2017 of the NCLAT, the Appellant never raised any question or issue regarding any defect in the constitution of the Single Judicial Member Bench. We are, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange has been de-recognized. Therefore, either Madras Stock Exchange has to get itself listed on any other nationwide stock exchange or provide exit to its shareholders following its various Exit Circulars, particularly Exit circular dated 10.10.2016. Since Madras Stock Exchange had decided not get itself listed on any nationwide stock exchange, it has to provide exit to its non-promoters' shareholders and the mechanism/modality for providing exit to such shareholders was stipulated by SEBI in the various Exit Circulars starting with circulars dated 29.12.2008, 13.5.2014, 22.5.2014, 17.4.2015 and 10.10.2016. These circulars which are reproduced in Appeal paper book, Vol. II of the documents filed by the Appellant (vide dy. No. 30794), take note of the fact that exclusively listed company has got de-listed and therefore, the exiting non-promoters' shareholders have to be provided exit option as stipulated in these circulars, particularly circulars dated 29.12.2008 and 17.4.2015 and finally circular dated 10.10.2016. 18. We note that the application for reduction of share capital has been certified by the company under section 66 of now prevailing Companies Act, 2013. Clause (ii) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is to be specified by SEBI. Thereafter, circular dated 17.4.2015 allows a timeline of 18 months within which such companies have to obtain listing after complying with the listing requirements of the nationwide stock exchange subject to certain conditions or provide exit to its public, non-promoter shareholders. Again, an Exit Circular issued by SEBI on 10.10.2016 (called the 5th Exit Circular), provides a 'procedure to provide exit to investors' in para 4 (d), wherein it is clarified that the exclusively listed companies shall be required to ensure compliance with the procedure for exit which is prescribed in 'Annexure A' attached to this circular. Further para 5(a) of this 5th Exit Circular provides that the period of three months from 10.10.2016 i.e. date of the circular, is provided to the ELC to submit its plan of action to the designated stock exchange for providing exit to its public shareholders. The provision in Annexure A make it clear that the promoter of the Company shall acquire shares of such companies from public shareholders and a procedure outlining public announcement in at least one national daily newspaper with wide circulation and one regional language new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10/- each, which are the shares held by the non-promoters' shareholders by paying against the each cancelled share a sum of Rs.107/- per equity share of Rs. 10/-. It is clear that while the circular dated 10.10.2016 of SEBI had already been issued, which the company should have known, the Company's Board did not take note of this circular in its Board meeting on 13.10.2016 and followed a procedure that had not been stipulated by SEBI through its Exit Circulars, and which actually meant compulsory buy-back of shares rather than the opportunity of voluntary exit option. 22. The Learned Senior Counsel for Appellant has also pointed to certain assumptions and conditions stated in the valuation report, which make the valuation report itself not fully reflective of the correct valuation of shares. In particular, he has adverted to the following statements in the valuation report of the valuer P. Pattabiraman & Company (attached pp. 653-659 of the appeal paperbook, Vol IV) :- '5. LIMITATIONS Xx xx xx xx o. We have not studied the Company's statutory obligations and procedures to be complied with regard to exit opportunity. Xx xx xx xx 6. Capital & Reserves: An amount of Rs.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our view, once SEBI has issued very detailed and clear guidelines vide its circular dated 10.10.2016, it was incumbent on the Company to take it into consideration and restart the procedure, since it had a total time period of 75 days to provide exit option to its public shareholders starting from 10.10.2016. Such a move would have brought in greater confidence among its exiting shareholders, regarding transparency and fairness in the entire process, an obligation that the Company had towards its public shareholders, even if they were in minority. Moreover, the use of Premium Security Account by the Company to buy-back the shares instead of the buy-back by the promoters using their own funds, is also an infringement of the procedure laid down by the SEBI in its Exit Circular dated 10.10.2016 and it is clear that thereby the remaining promoter shareholders have been 100% owners of the company. 24. In examining and answering the issue no. (iii) stated in paragraph 13, we have also examined the issue no. (v) in paragraph 13, which is whether the company's funds could have been used for buy-back of shares of the exiting non-promoter shareholders in view of the guidelines issued b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en to its public shareholders (other than promoters) at a value to be determined as per the methodology of valuation of share provided in Exit Circular dated 10.10.2016. This exit option to be given to the shareholders is voluntary, whereas the Special Resolution adopted by the company in its EGM held on 12.12.2016 under Section 100 of the Companies Act, 1956 provides for compulsory buyback of shares, which is not in consonance to SEBI guidelines issued for providing exit option to the public shareholders of ELCs of a de-recognized Regional Stock Exchange. Thus, we note that under the guise of providing an exit option to non-promoter shareholders in terms of the Exit Circulars issued by SEBI, the company has resorted to reduction of share capital under Section 66 of the Companies Act, 2013 leading to compulsory buyback of shares. By such an action the promoters have become 100% shareholders of Respondent No. 1 company by using company's funds to buy-back the non-promoters' share, which is certainly not the intention in providing voluntary exit to these shareholders. 28. The Learned Sr. Counsel for Appellant has also distinguished the judgment of Hon'ble Supreme Court in the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te that the judgment of Hon'ble Delhi High Court in the matter of Nestle India Limited (supra) and of Hon'ble Madras High Court in the matter of Parry's Confectionaries Ltd. (supra) would also not apply in the present case because the use of promoters' funds has been stipulated in the Exit Circular dated 10.10.2016 whereas in the cases cited the use of Securities Premium Account in paying off shareholders was found to be permitted under section 52 (1) of the Companies Act, 2013. 32. We also note that the judgment of Hon'ble Supreme Court in the matter of GL Sultania vs SEBI (supra) regarding non-interference by the court in the matter of valuation of shares would hold when the experts have valued the shares using their expertise and knowledge, whereas in the present case, the basis of selection of the valuer and the valuation of shares done by the selected valuer are both under question due to uncertainties in valuation arising out of many assumptions. The valuer has himself mentioned these drawbacks in the valuation report, and noted that in case the cash reserves, bank balance etc. of the company were to be taken into account, the valuation of shares by DCF method would be subst ..... X X X X Extracts X X X X X X X X Extracts X X X X
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