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TMI Blog2023 (4) TMI 668X X X X Extracts X X X X X X X X Extracts X X X X ..... ference number REMCL/CO/PP/P-85/RTC/1000MW/2022 dated 14 July 2022 (hereinafter referred to as "Request for Selection"). Shorn of details, the controversy that has arisen before this Court is that the Petitioner was found ineligible to participate in the tender process since the "net worth" quoted by it was inclusive of the value of its preference shares, which, in the view of the Respondent ought to be excluded from such net worth and pursuant to such exclusion, the "net worth" criteria set out under the Request for Selection is not being satisfied. The short issue that is to be decided in this case is whether the value of preference shares can be included while computing "net worth" and accordingly, whether the Respondent erred in declaring the Petitioner ineligible to participate in the tender process in terms of the Request for Selection. 2. The Petitioner, TEQ Green Power XIII Pvt. Ltd. is a wholly owned subsidiary of O2 Power SG PTE. LTD (hereinafter referred to as "O2 Power"), is primarily engaged in generation and supply of power for the purposes of procurement by various nodal agencies and distribution companies. The Respondent, Railway Energy Management Company Limited i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the respondent to the same, the present petition along with pending applications, is disposed of with liberty to the petitioner to approach the court in altered circumstances..." vi. In furtherance of the directions of the Ld. Single Judge, on 16.12.2022, the Respondent issued the Impugned Decision, inter alia communicating that the Petitioner's bid stood excluded on the grounds that it "...is disqualified at Technical Stage based on the Net Worth of the Parent company is less than the required criteria after exclusion of redeemable preference shares in net worth calculation......". 4. Challenging the decision of the Respondent disqualifying the Petitioner from further stage of the tender process, the Petitioner has approached this Court by filing the instant petition. 5. Mr. Jayant Mehta, learned Senior Advocate for the Petitioner, submits that the preference shares issued by O2 Power are redeemable only on the option of the issuer and there is no tenure attached to the shares. He contends that under Section 2(57) of the Companies Act the definition of net worth uses the expression 'paid-up share capital' which is defined under Section 2(64) of the Companies Act to mean tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the policy of pick and choose, then Writ Courts must not interfere exercising its jurisdiction under Article 226 of the Constitution of India. 8. Ms. Anand places reliance on a Judgment dated 19.12.2022 passed by this Court in GKC Projects Limited v. National Highways Authority of India, W.P.(C) 11752/2022, wherein this Court had refused to interfere with the decision of the tenderer to restrict net worth only on the basis of reserves created out of revenue profits alone. She has relied on Section 129 of the Companies Act read with Schedule III Clause 9 under which a preference share is classified as a liability and redeemable preferences are classified under non-current borrowings or liabilities. She contends that applying the said principles, preference shares are liabilities and, therefore, the decision to exclude preference shares from the definition of the net worth of the company cannot be faulted with. She further states that the financial statement of O2 Power to state that preference share capital has been enlisted separately and, therefore, in terms of the accounting standards, they ought to be treated as liabilities. 9. Mr. Mehta states that a balance sheet is requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of bid submission...... b) The net worth to be considered for the above purpose will be the cumulative net-worth of the Bidding Company or Consortium together with the Net Worth of those Affiliates of the Bidder(s) that undertake to contribute the required equity funding and performance bank guarantees in case the Bidder(s) fail to do so in accordance with the RfS. (c) Net Worth to be considered for this clause shall be the total Net Worth as calculated in accordance with the Companies Act, 2013 and any further amendments thereto..." (emphasis supplied) 13. Under Clause 4.3.1 net worth of a bidder is required to be equal to or greater than Rs. 3 Crore per MW during the financial year preceding the submission of the bid, computed within the scheme and mandate of the Companies Act. The clause also provides that net worth is the cumulative net worth of the bidder along with its affiliates that undertake to contribute the equity funding and performance bank guarantees in cases where bidders fail to do so in accordance with Request for Selection and most importantly, the net worth shall be net worth as calculated in accordance with the Companies Act. 14. In the instant case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital: Provided that nothing contained in this Act shall affect the rights of the preference shareholders who are entitled to participate in the proceeds of winding up before the commencement of this Act. Explanation- For the purposes of this section,- (i) "equity share capital", with reference to any company limited by shares, means all share capital which is not preference share capital; (ii) "preference share capital" with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to- (a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and (b) repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company;" (iii) capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of such redemption; (b) no such shares shall be redeemed unless they are fully paid; (c) where such shares are proposed to be redeemed out of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account, and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the Capital Redemption Reserve Account were paid-up share capital of the company; and (d) (i) in case of such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133, the premium, if any, payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed: Provided also that premium, if any, payable on redemption of any preference shares issued on or before the commencement of this Act by any such company shall be provided f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of redemption and no preference shares shall be redeemed unless they are fully paid. Section 55 also provides that preference shares may be redeemed within a period not exceeding 20 years from the date of their issue. A perusal of Section 55, therefore, provides that preference shares cannot be redeemed within the share capital of the company. It, therefore, means that other than two sources i.e., out of profits and out of proceeds of fresh issue of shares, no other source can be used for redemption of preference shares. Clause 4.3.1 (c) of the NIT states that net-worth is to be considered in accordance with the Companies Act, 2013. In the NIT, the tenderer has not specifically excluded preference shares from the definition of net-worth. 21. It has been stated before us, on affidavit, that the preference shares in question are preference shares redeemable at the instance of the issuer without any fixed term or tenure attached to these shares. A perusal simpliciter of the aforestated provisions makes it amply clear that such shares would form part of paid-up share ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is contrary to the Sections of the Companies Act. Clause 4.3.1(c) of the NIT does not exclude preference shares from the definition of net-worth rather it states that net-worth is to be considered for this clause shall be the total net worth as calculated in accordance with the Companies Act, 2013, then the net-worth has to be calculated as per the Companies Act, 2013 and no other method can be permitted to be adopted. There is no reason as to why the tender must exclude preference shares while calculating the net-worth. Respondents cannot be permitted to adopt a method which runs contrary to the provisions. Even though there are no allegation of mala fides or that the method has been calculated to favour any particular party, since the decision has been arrived at in violation of the statute, this Court cannot be a party to uphold any decision which is contrary to the plain reading of the statute. 25. As stated before, balance sheet is not an indicator of the true net worth of a company. Balance sheet reflects the share capital of a company and its treatment as an asset or liability to the company on the date of preparation of the balance sheet. It is not disputed that balance s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culating net worth is contrary to the definition of net worth given under the Companies Act. Reliance placed by the Respondent on the Judgment of GKC Projects (Supra) is not apt for the reason that in that case the tenderer had decided not to include only reserves arising out of the revenue profits alone while calculating the net worth which is not contrary to the statute. However, in the facts of the present case, the tenderer has decided to exclude preference shares from the definition of net worth on a wrong notion that preference shares is a liability which is contrary to the Sections in Companies Act. Only when the preference shares are redeemable at the instance of the shareholders then only the preference shares can be called as a liability and not in all cases. Preference shares are redeemed out of profits or out of a fresh issue meant for the purpose and not from the existing share capital. Since the entire basis of calculating net worth by the Respondent is contrary to the provisions of the statute, this Court has no other option but to hold that the decision of the tenderer to exclude preference shares from the calculation of net worth is arbitrary and irrational. In vie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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