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TMI Blog2005 (12) TMI 603X X X X Extracts X X X X X X X X Extracts X X X X ..... s on the same cause of action has been admitted by this Court. 2. Heard the counsel for the respondent and having regard to the fact that this is a statutory appeal, taking into account that the delay is bonafide after hearing the counsel for the appellant and the counsel for the respondents, who do not seriously object for the condonation of the delay to be allowed and also taking into account the connected appeals have been admitted, we condone the delay of 9 days. Delay condoned. 3. Admit Appeal Nos. 134, 137 to 139 of 2005 and 158 to 164 of 2005. 4. Appeals are taken up for final disposal on merits with consent of parties. 5. Since common question of fact arises in all these appeals, they are taken up together and a common order is passed by consent of parties. 6. In all these appeals the grievances of the appellants was that SEBI and the merchant banker had not valued the shares of the target company in accordance with the parameter laid down under Regulation 20(5) of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations, 1997 (hereinafter referred to as the Takeover code ). 7. It is another matter that the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gulation 20(5) of the Takeover Code. Thereafter Patni Co., Chartered Accountant, carried out valuation of the target company and submitted a report on 20.5.2004 to SEBI. They also forwarded the valuation report to the merchant bankers and the acquirers. (the report is placed before us as annexure D). The valuation was done on the basis of the market price of the shares of the target company and other methods as required under accounting principles and Patni revised the valuation to 63.50 per share by one method and Rs. 64.17 plus interest per share as per the method approved by the Supreme Court in Hindustan Lever employees Union case reported in AIR 1995 (1) Supp SCC 499. The acquirers felt aggrieved by the hike in the valuation and felt that the valuation by Deloitte at Rs. 43.02 as reasonable. The merchant bankers pursuant to this objection by the acquirers wrote a letter dated 9.3.2005 to SEBI on this aspect of the matter. SEBI permitted the merchant bankers to obtain valuation from a third Chartered Accountant. Accordingly, the merchant bankers in consultation with SEBI appointed Chadha Co. to carry out the valuation of the shares of the target company. Chadha Co., submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pheld by the Hon'ble Supreme Court in the case of Hindustan lever Limited. Subsequently, in April 2005, since further time had passed, the Manager to the Offer appointed M/s T.R. Chadha Co., Chartered Accountants as an independent valuer to carry out valuation. M/s T.R. Chadha and Co. arrived at a price of Rs. 60.04 per share, which is lower than the price arrived by Patni and Co., but is higher than the price set out in the Public Announcement. Since considerable time has passed and with a view to expedite and complete all formalities involved in the matter and bearing the interests of the Public shareholders in mind, the Acquirer, without prejudice to their rights, has agreed to revise the Offer Price to Rs. 64.17 per share, arrived as per the method upheld by the Hon'ble Supreme Court in the case of Hindustan Lever Limited and also being the price higher than the fair price considered by the three valuers. The Acquirer has agreed to adopt the highest possible price and are therefore offering their price vide this Corrigendum to the Public Announcement. The Acquirer has also agreed to pay interest at 10% p.a. on the Offer Price from 4th February 2003 as contemplated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... family. Ace Glass Containers the other acquirer is a group company of C. K. Somany group. Way back in the year 1994 Somany family was in management and control of four listed manufacturing companies viz., 1. Hindustan National Glass and Industries Limited 2. Hindustan Sanitaryware and Industries Limited (HIS) 3. Somany Pilkingtons Limited (SPL) and 4. Soma Textiles and Industries Limited (STIL) and an unlisted manufacturing company viz., Krishna Glass Limited. 14. At that relevant time the Somany family consisted of four groups namely H L Somany group, S K Somany group, C. K. Somany group and R K Somany group. As there was some disagreement between the brothers, the four groups entered into a settlement with regard to the business assets. Somany Pilkingtons Limited, Soma Textiles and Industries Limited and Krishna Glass Limited were jointly allotted to H L Somany group and S K Somany group in equal shares, Hindustan Sanitaryware and Industries Limited was exclusively allotted to R K Somany group. 15. Now we come to the status of holding in the target company, which is the subject matter of this appeal. C.K. Somany had 64% in the target company. 16. Even in 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suit alleging that the agreement was, in fact, to purchase the shares at price of Rs. 15/- per share. The agreement, which is sought to be enforced, is basically a family settlement. The respondent No. 2 was a company of the Somany family. Various groups of the family hold different percentage of shares in the said company. The major groups are C.K. Somany group, S.K. Somany group, H.L. Somany group and R.K. Somany group. In fact, the suit was filed by the other Somany group against the C.K. Somany group. At present the C.K. Somany group holds about 73.05 per cent equity shares in the H.N.G. Initially, when the suit was filed the aforesaid interim orders were passed restraining both the groups from dealing with and/or transferring their respective share holding. During the pendency of the suit the C.K. Somany group sought to acquire the share holding of the S.K. Somany group, which is around 7.75 per cent. In order to purchase the said shares, the C.K. Somany group had applied before this Court as on 13th September 2002 for modification of the earlier order and such prayer was allowed. Accordingly, the C.K. Somany group was granted liberty to purchase the shares of the S.K. Somany ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares of the S.K. Somany group at the price mutually agreed as between themselves. The said letter is dated December 25th, 2002. Significantly, the said letter do not form a part of the annexures to the petition. The said letter is also silent as to whether the petitioners are interested to offer for sale of their shares. It appears to me that the whole object of the SEBI Regulations permitting the existing shareholders to offer their shares for sale is to allow an opportunity to a miniscule minority in a company to sell their shares to the overwhelming majority shareholders at a price to be fixed by the SEBI so as to prevent the flexing of muscle by the majority shareholders with regard to fixation of price. Under these circumstances, if the petitioners are interested to offer in accordance with letter of offer, they are permitted to do so. Under these circumstances, the order dated April 12th, 1999 is modified to the extent that the saidorder the earlier interim orders will not come in the way of the petitioners offering to sell their shares in accordance with the letter of offer received by them. No further directions /or conditions are attached to the said modification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer was kept open for 20 days. The offer was opened on 31.8.2005 and closed on 19.9.2005. The appellants tendered their shares to the Share Transfer Agents of the Target Co., stating that they are tendering shares without prejudice to our rights and contentions in the matter . The acquirer and the Share Transfer Agents accepted the shares tendered by the appellants and made payment to all the appellants by cheque. The cheque was also sent in full and final settlement of the amount payable to the appellants. One such letter is placed before us and it would be relevant to extract the same below: MAHESHWARI DATAMATICS PVT.LTD., R.O. 6, Mangoe Lane (Surendra Mohan Ghosh Sarani) 2nd floor, Kolkata - 700 001. REGISTERED REF.MDPL/OFR/HNG/21 DATE; 1ST OCTOBER, 2005. MR GIRDHARILAL SULTANIA 2, RED CROSS PLACE KOLKATA 700 001. RE; OPEN OFFER BY ACE GLASS CONTAINERS LTD., AND C. K. SOMANY ( THE ACQUIERER ) TO THE SHAREHOLDERS OF HINDUSTHAN NATIONAL GLASS INDUSTRIES LTD., (HNG) FOR PURCHASE OF 21,91,664 FULLY PAID EQUITY SHARES OF Rs. 10/- EACH REPRESENTING 19.19% OF THE EQUITY CAPITAL BEING THE PUBLIC SHAREHOLDING OF HNG. DEAR SIR(S)/MADAM, WE THANK Y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21. The learned counsel relied on various judgements of the High Court and the Court of appeal in U.K. to hold that there was gross undervaluation of the shares. However, the learned counsel did not make any allegations of mala fide or mala fide in law against the approval of SEBI or against the valuation given by the various Chartered Accountants. He also submitted that the Supreme Court judgment in Hindustan Lever Employees case reported in 1995(1)Supp Supreme Court Cases 499 - relates to amalgamation while in the present case there must be strict compliance of Regulation 20(5). The main thrust of the argument of Mr. Mukherjee was that assets of the Ace Glass Containers, which was the subsidiary company of the target company, was not considered in valuing the shares. 22. Mr. S. K. Kapur, learned senior counsel for the contesting respondent, the acquirers, submitted that the scope of the appeal should be limited to determine whether the Merchant Bankers had made a fair assessment of the value of the shares of the target company. He further submitted that it does not lie in the lips of the appellant to blow hot and cold once the cheques have been encashed by the appellants, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or fraud but also for mistake or miscarriage of justice if the Chartered Accountant made an arithmetical error or took something into account which he ought not to have taken into account or interpreted the regulations wrongly or proceeded on some erroneous principles. Valuation of shares could be impeached on the ground that it affects the shareholders who have tendered the shares. It is equally settled law that if the figure given by the Chartered Accountant is so extravagantly large or so inadequately small, then the only conclusion would be that the expert must have made some error and the court would be at liberty to interfere. 28. In this case there has been no allegation of malafide against the three Chartered Accountants who have evaluated the value of the shares independently. 29. Therefore, the question that arises for consideration for all these appeals is whether the valuation of the shares was in accordance with the regulations. The offer price to acquire shares under regulation 10,11 and 12 are set out under Regulation 20. 30. Very briefly we shall deal with the two categories of offer prices. Where the shares are traded frequently, the offer price is determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was submitted, that the value per share would be Rs. 200/- or more and not Rs. 64.17 per share. The learned counsel for the appellant relied on a Judgement of the Calcutta High Court, reported in 1966 2 Company Law Journal Page 278 in the matter of Cannon Tea Co. Ltd., That was a case which related to amalgamation under section 391, 393 and 494 of the Companies Act, 1956. This Judgement has no application to the facts of the present case. That was a case where the court held that quotation of the stock exchange would be a safe and proper basis for fixing the ratio unless it is demonstrated that the Stock Exchange quotation was not reliable and does not represent the true value. This is a case dealing with the procedure contemplated under regulation 20(5). 20(5)(a) refers to negotiated price which triggered the code. The negotiated price admittedly was Rs. 40/- per share. If regulation 20(5)(a) and (b) were the only two considerations, the value of the share in the public offer would have been merely Rs. 40/-.per share. Notwithstanding that the Merchant Bankers went into the matter independently and carefully and evaluated the value of the shares in accordance with regulation 20(5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the price of shares in the target company. But to say that the entire assets of Ace Glass should be taken into account cannot be sustained. It was the submission of the appellant that Ace Glass was a subsidiary of the target company. But it was also admitted by the appellants that the target company only holds 50% of the equity share capital of Ace Glass. Towards this end, the definition of the term subsidiary as contained in section 4(1) of the Companies Act, 1956 is relevant. For ease of convenience, the same is extracted below: Meaning of holding company and subsidiary 1) For the purposes of this Act, a company shall, subject to the provisions of sub-section (3), be deemed to be a subsidiary of another if, but only if,-- a) that other control the composition of its Board of directors; or b) that other - i. where the first-mentioned company is an existing company in respect of which the holders of preference shares issued before the commencement of this Act have the same voting rights in all respects as the holders of equity shares, exercises or control more than half of the total voting power of such company; ii. where the first-mentioned company is an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss, which makes Ace Glass fall short of being a subsidiary. 34. There is nothing on record that can lead to any reasonable conclusion that there has been any perverse or gross error in the manner of computation of fair value of the share of the target company by any of the three independent expert valuers. With respect to one of the parameters namely return on net worth it was the appellants' contention that Patni Co., has not taken into account net worth of the target company which is a factor specified under regulation 20(5)(c) of the Take Over Regulations, return on net worth is a profitability indicator and is not a share valuation method by itself. There is no specific described formula for arriving at a value per share on the basis of return on net worth. Return on net worth has to be one of the factors in evaluation. In this case Patni Co., has calculated the yield value on the basis of the ratio by Supreme Court in Hindustan Lever reported in. 1995 Supp SCC 499. A careful perusal of paragraphs 3.2.1 of the report of Patni Co., marked before us as Exhibit 'D to the Written Reply clearly indicate that the return on n et worth has been calculated. Patni Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chant Bankers and exercising the provisions of proviso under section 20(5)(c) asked for an independent valuation of the shares by an accredited Chartered Accountant which was not accepted by the acquirer. Since the money was to come out of the acquirer's pocket, he wanted to lower the price as his independent valuer viz. Chadha arrived at Rs. 60.04. SEBI decided to go in for the highest of the three valuations. 38. To briefly sum up, the valuation of Deloitte (CA of Merchant Bankers) was Rs. 43/- per share, valuation of Patni Co., (SEBI's CA) Rs. 64.17, and the merchant banker sought to get the fresh valuation with the help of T. R. Chadha Co., and Chadha's valuation was Rs. 60.04. Of all the three, after application of mind SEBI chose the highest value and approved the same in the offer letter. 39. Curiously, the appellants brought out a valuation by their Chartered Accountant which valued the shares abnormally high Agarwal at Rs. 408/- Bajoria at Rs. 590/- per share. The difference between the valuations of Agarwal Bajoria itself was nearly Rs. 100/- per share. It is not prudent or in public interest to overlook the role of the regulator in fixing of a f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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