9911796707
TMI Blog2025 (1) TMI 555X X X X Extracts X X X X X X X X Extracts X X X X ..... nised methods for valuation of shares and the valuers, as well as the amalgamating companies cannot be faulted for using it. It is also to be noted that DCF method relies on future earnings, rather than ownership of assets. The allegation that valuer has not verified the information before valuation is answered by the Amicus Curiae himself that work of the valuer does not include an audit and that he is not required to express any audit opinion or any other form of assurance on this information, and generally a valuer would consider circumstances existing on the valuation date. It is found that no objection to the Scheme was raised by any of the statutory or regulatory authority, except the Income Tax Department. The Competition Commission of India has stated that the Scheme does not cause any appreciable adverse impact on competition and they have no objection to its approval. The Competition Commission of India, The Registrar of Companies and The Regional Director, Ministry of Corporate Affairs have not raised any objections viz. a viz. compliance of various provisions of the Companies Act, 2013 and Competition Act. SEBI and Stock Exchanges have not raised any compliance issue re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Gandhi, Sr. Advocate with Mr. Vaibhav Sharma, Ms. Salina Chalana, Advocates for R- 1. Mr. Vaibhav Sharma, Advocate for R- 2 3 JUDGMENT ( Hybrid Mode ) [ Per : Ajai Das Mehrotra , Member ( Technical ) ] Company Appeal (AT) No. 120 of 2023 is filed by Indiabulls Real Estate Ltd. (hereinafter called the IBREL or the Transferee Company ), NAM Estates Private Limited (hereinafter called the NAMEPL or the Transferor Company No. 1 ) and Embassy One Commercial Property Developments Private Limited (hereinafter called EOCPDPL or the Transferor Company No. 2 ) against the order dated 09.05.2023 in CA No. 9/2023 CA No. 29/2023 and CP (CAA) No. 14/Chd/Hry/2022 passed by Ld. NCLT Chandigarh Bench, Chandigarh, wherein the Second Motion Company Petition filed by Transferee Company under Section 230-232 of Companies Act, 2013 and other applicable provisions of the Act read with Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, in relation to the Scheme of Amalgamation between Transferee Company and Transferor Company No. 1 and Transferor Company No. 2, was rejected by Ld. NCLT, Chandigarh. 2. Company Appeal (AT) Nos. 215 and 216 of 2023 is filed by Tejo Ratna Kongara against t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived by the Petitioner Company or any of its representatives till date. v) The Competition Commission of India, in letter dated 24.02.2021 gave their no objection stating that the proposed combination is not likely to have any appreciable adverse effect on competition in India in any relevant market(s) and the proposed combination is approved under Section 31(1) of the Competition Commission Act, 2002 . vi) The Statutory Auditors confirmed that the Scheme is in compliance with the applicable Indian Accounting Standards as specified in Section 133 of Companies Act, 2013. vii) The Registrar of Companies and the Regional Director initially raised some observations which were clarified by the Petitioners Companies, and in para 15, the Ld. NCLT noted as under: In view of the aforementioned clarifications submitted by the petitioners, it is held that no adverse conclusion in this regard can be inferred. viii) Through CA 9 of 2023, Sri Tejo Ratna Kongara sought substitution in place of Sh. Dhanekula Dharanish in CA No. 192 of 2022 which sought intervention in the main company petition. It was submitted that Shri Tejo Ratna Kongara had purchased 20,100 equity shares of Transferee Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land doesn t belong to it. The value of this asset has been estimated at Rs. 581 crores and the land for development was 100 acres, and it was decided by parties that 67% built-up area was for the Embassy group and 33% belonged to Cornerstone group. Cornerstone had failed to acquire 20 acres and the total land available for development is only 80 acres. The reduction of the measurements of assets (land) has not been conveyed to IBREL and its shareholders. As per the Embassy group approximately 8 acres of land still needs to be acquired by the Cornerstone group out of the 80 acres. The Embassy group has valued the land on the basis of joint development agreement for 80 acres. It was further mentioned that in the valuation certificate , the purpose of valuation was shown for secured lending purposes , and not for any amalgamation or merger purposes. Other issues raised regarding valuation were that only residential development can take place on the subject property, however valuation is made assuming commercial development, and that there were issues regarding Title/Litigations and use of some of the properties as collaterals for borrowings. xvi) (a) In response to the allegations of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vikas Gadkari/BDO* (wrongly stated as IBDO in the order of NCLT) have stated number of limitations, qualifications, exclusions and disclaimers in the report. It was noted that the Valuer had not done any independent evaluation or appraisal of the assets of the company and no analysis of any potential or actual litigation or possible unasserted claims has been made. xix) The main issue for discussion is whether a Fair equity swap ratio determined solely on the basis of information furnished by the management without the valuer making any independent verification of the same be accepted as a basis of a credible amalgamation process . xx) The relevant provisions of Sections 230, 232 and 247 of the Companies Act, 2013 were extracted as also the relevant ICAI Valuation Standards. The Insolvency and Bankruptcy Board of India (hereinafter called IBBI ) guidelines dated 01.09.2020 were extracted and discussed. xxi) It was noted that assets and liabilities positions of the amalgamating companies were not placed on the websites of the amalgamating companies and the revised JDA in the Embassy Cornerstone Project was not discussed in the valuation report. xxii) Considering the complicated iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w :- 1. It is recognized that a Registered Valuer (RV), shall prepare the valuation report of the company based on information and records concerned as provided by the management. The management remains liable for the correctness and veracity thereof. However, significant inputs provided to the RV by the management/owners should be considered, investigated and /or corroborated by the Valuer. The various projections of business growth, profitability, and cash flows etc, which are used in the valuation report are the company's estimates. The RV should consider the reliability and credibility of projections after testing the assumptions made by the management / owners / company in given market conditions and after sufficient inspection, enquiry, computation and analysis. The RV may disagree with the projections if they are conjectural or bordering on the unreal and accordingly make necessary modifications. The RV is required to comply with Section 247 of the Companies Act 2013 read with Companies (Registered Valuers Valuation) Rules, 2017 as amended as well as comply with Relevant Valuation Standards. (Refer Paras 5 6). Compliance with Guidelines on Use of Caveats, Limitations Dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision for reverting to the original ratio of 67:33 upon completion of acquisition of the balance lands by the Landowner. Further clarity is required as to how the swap ratio could be revised post the valuation date of 18th August,2020 whether the revision adequately compensates Embassy Group for loss in value due to reduction in the area of the land to be developed. It is also not clear as to whether all material facts were disclosed to the stakeholders relating to the revision in the swap ratio. The swap ratio should not be contrary to any law, should not violate public interest and the same should be fair and approved by overwhelming majority of the shareholders of the companies involved. The scheme should not defeat the right of the Income- Tax Department to take appropriate recourse for recovering the Income-Tax liabilities of the Transferor /Transferee Companies. (The report wrongly uses the word swap instead of profit sharing at places in the report) ( Emphasis supplied ) 6. In its oral and written submissions, the Learned Sr. Counsel for the Appellant submitted that the proposed scheme of merger/amalgamation involved three entities viz. IBREL the Transferee Company, NAMEPL t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself states that The valuation shall not be constituted as an audit or review in accordance with the auditing standards applicable in India, accounting/ financial/ commercial/ legal/ tax/ environmental due diligence or forensic/investigation services, and shall not include verification or validation work. Thus, verification or investigation is not required to be done during the valuation exercise. (h) The Ld. NCLT, Chandigarh had incorrectly assumed that Valuer was required to do independent verification of the assets of the amalgamating companies. (i) There are multiple projects under each of the company under going amalgamation. The controversy created is regarding Cornerstone project of NAMEPL, Transferor Company No. 1. The NAMEPL itself is having 11 projects in total land area of 757.63 acres. The projects under amalgamating company No. 1 NAMEPL are as under: Projects under amalgamating company 1 Land in acres 1 Embassy Grove, Residential, Bengaluru 4.78 2 Embassy Lake Terraces, Residential, Bengaluru 17.20 3 Embassy Boulevard, Residential, Bengaluru 51.75 4 Embassy Pristine, Residential, Bengaluru 14.50 5 Embassy Residency, Residential, Chennai 10.00 6 Embassy One, Residenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s: (i) Mihir H. Mafatlal Vs. Mafatlal Industries Limited [(1996) 10 SCL 70], where the Hon ble Supreme Court held that courts should not scrutinize the scheme when shareholders have exercised their commercial wisdom. (ii) Hindustan Lever Employees Union vs. Hindustan Lever Limited [(1994) 2 SCL 157 (SC)], where it was held that once the requisite majority approves the scheme, the court should not interfere. (iii) RHI India Private Limited and Ors. vs. Union of India (MANU/NL/0013/2021), where it was held that even NCLT has limited power to overrule the commercial wisdom of shareholders. In conclusion, it was submitted that the order of Ld. NCLT, Chandigarh be set aside and the Scheme of Amalgamation be approved. 9. The Respondent, Income Tax Department in its counter affidavit dated 22.11.2023 has submitted that reduction in the acreage of the land to be developed as part of JDA with Cornerstone was not informed to IBREL and to its shareholders, nor it was considered in valuation of assets and Ld. NCLT, Chandigarh was right in not granting approval to the scheme. Without prejudice to the submissions, it was stated that if the Appellate Tribunal is considering the matter based on me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorities shall not be prejudicially affected by the proposed merger under the Scheme. The Appellants reiterated the position of the Cornerstone project stating that it was communicated to them after the valuations that only 80 acres were acquired by the joint venture partner and thereafter, the profit sharing ratio was altered from 67:33 to 74:26, enhancing the share of Embassy Group, which ensured that similar cashflow comes to the Appellant Companies. Since the valuation was based on DCF Method, the reduction in acreage will not have any significant impact as the revised profit sharing ratio will ensure similar cashflow. 12. The Learned Counsel for Tejo Ratna Kongara, the Appellant in Company Appeal (AT) No. 215-216 of 2023 submitted that they had objected to the Scheme of Amalgamation and are aggrieved by the order of rejection of their objection by Ld. NCLT, Chandigarh. It was submitted that the objector had purchased shares from Mr. Dhanekula Dharanish and wanted substitution in his place in CA No. 192 of 2022 for which Interlocutory Application CA No. 9 of 2020 was filed before the Ld. NCLT. Shri Tejo Ratna Kongara had purchased 20,100 equity shares of the Transferee compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.003%. The previous shareholder Mr. Dhanekula Dharanish had already filed CA No. 192 of 2022 before the Ld. NCLT, Chandigarh raising certain objections against the Scheme. Under the SPA, it was claimed that Mr. Tejo Ratna Kongara inherited the right to persist with the objections filed by Mr. Dhanekula Dharanish. ii) Mr. Tejo Ratna Kongara purchased the shares fully aware of the ongoing amalgamation proceedings and the objections raised by Mr. Dhanekula Dharanish, and his motive merely seems to impede the amalgamation proceedings. iii) Mr. Dhanekula Dharanish never raised any objections nor participated in the meeting of shareholders held on 12.02.2022. iv) The provisions of Section 230(4) of the Companies Act, 2013 explicitly stipulate a minimum threshold of 10% shareholding as eligibility to raise any objection to the Scheme of Amalgamation. v) The Scheme of amalgamation was approved by overwhelming majority of 99.9987%, which is much beyond the threshold required under Section 230 of the Companies Act, 2013. vi) The allegations raised by Mr. Dhanekula Dharanish were examined in detail and were addressed by statutory regulators including SEBI, BSE before giving their clearances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved it. 18. To answer to the controversy, we first examine the issue whether the valuation method used, and the consequent valuation, is acceptable or not. 19. The valuation of shares has been done by two recognised independent valuers, one in Mumbai and the other in Pune. The valuation was done by N.S. Kumar and Company and BDO Valuation Advisory LLP and both the valuers are registered with IBBI. Both the valuation reports were examined and a report on fair equity share exchange ratio was given by a third expert, namely, o3 Capital Global Advisory Pvt. Ltd. which is a category I Merchant Banker. None of the parties to the dispute, or statutory authorities or anyone else has raised any objection regarding the competence or expertise of the valuers or the Merchant Banker, to carry out the said valuations, so admittedly, services of two competent professional valuers and one Category I Merchant Banker were utilized by the proponents of the Scheme to carry out the necessary valuation. Both Valuers, in their affidavits filed before Ld. NCLT have stood by and affirmed the correctness of their valuations. 20. The valuation of shares has been done by both the Valuers under discounted cash ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) .. (iii) .. (c) Valuation of shares and securities,- (a) .. (b) .. (c) .. [(2)] Notwithstanding anything contained in sub-clause (b) or subclause (c), as the case may be, of clause (c) of sub-rule (1):- (A) the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of the /explanation to clause (viib) of sub-section (2) of /section 56 shall be the value, on the valuation date, of such unquoted equity shares, as shall be determined under sub-clause (a), sub-clause (b), sub-clause (c) or sub-clause (e), at the option of the assessee, where the consideration received by the assessee is from a resident ; and under sub-clauses (a) to (e) at the option of the assessee, where the consideration received by the assessee is from a non-resident, in the following manner:- (a) .. (b) the fair market value of the unquoted equity shares determined by a merchant banker as per the Discounted Free Cash Flow method; (c) .. 22. The International Valuation Standards also recognise DCF as method for valuation of shares. Valuation Approaches and Methods state that: 50.1. Although there are many ways to implement the income approach, methods under the income appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gnised methods for valuation of shares and the valuers, as well as the amalgamating companies cannot be faulted for using it. It is also to be noted that DCF method relies on future earnings, rather than ownership of assets. 25. The allegation that valuer has not verified the information before valuation is answered by the Amicus Curiae himself that work of the valuer does not include an audit and that he is not required to express any audit opinion or any other form of assurance on this information, and generally a valuer would consider circumstances existing on the valuation date. The opinion of Amicus Curiae is reproduced in para 5 supra. This aspect was also examined by SEBI in the present case and their finding (Vol. 3, pg. 445 of Annexure A-13) is as under c. On the issue of the disclaimers by the valuers that they have not done any independent technical valuation or appraisal of title search of the assets or liabilities of the Company or its subsidiaries/associates, the following is stated: i. xxx ii. The ICAI Valuation Standards were perused, and it is observed that the standards state that valuation shall not be constituted as an audit or review in accordance with the audi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on by Cornerstone Group to the amalgamating companies, and they were unaware about it. Consequently, the said information was also not available to the shareholders when they were approving the Scheme. However, we find that valuation of shares has been done on DCF method, which is concerned more with the future income generation and less with the assets held by the company. Admittedly, the Profit Sharing Ratio (PSR) in the Cornerstone Project was initially 67% for Embassy group and 33% for Cornerstone Group. On being aware of the shortage in acquisition, the PSR was revised to 74% for Embassy group and 26% for Cornerstone Group. On specific query by Ld. NCLT, the valuers in their affidavit have stated that after revision of PSR, the cash flow to the amalgamating companies is not affected at all. 30. We are also conscious of the fact that nearly 100% of the shareholders have approved the Scheme. Business is done in a dynamic, and not a static environment, and the assets and liabilities of the business change continuously impacting the valuation of the enterprise. We are aware that the price of shares of the company in stock exchange, which is reflection of the valuation, changes ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hasis supplied ) 33. The Court s obligation is to be satisfied that the valuation was in accordance with law and it was carried out by an independent body. While stating so, the Hon ble Supreme Court in Hindustan Lever Employees Union v Hindustan Lever Ltd. and Ors.,1995 Supp (1) SCC 499, has given the following guidance : 3. But what was lost sight of was that the jurisdiction of the Court in sanctioning a claim of merger is not to ascertain with mathematical accuracy if the determination satisfied the arithmetical test. A company court does not exercise an appellate jurisdiction. It exercises a jurisdiction founded on fairness. It is not required to interfere only because the figure arrived at by the valuer was not as better as it would have been if another method would have been adopted. What is imperative is that such determination should not have been contrary to law and that it was not unfair to the shareholders of the company which was being merged. The Court's obligation is to be satisfied that valuation was in accordance with law and it was carried out by an independent body. The High Court appears to be correct in its approach that this test was satisfied as even thou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e valuation of shares done by the experts. 36. Hon ble Supreme Court in Duncans Industries Ltd. vs. State of U.P. and Ors. (2000) 1 SCC 633 in paragraph 15 has held as under: 15. The question of valuation is basically a question of fact and this court in normally reluctant to interfere with the finding on such a question of fact if it is based on relevant material on record . Following this Judgment, Hon ble Supreme Court in the case of G.L. Sultania and Anr. vs. SEBI and Ors. (2007) 5 SCC 133, paragraph 31 and 32 has held that valuation of shares is a technical, complex issue which should be appropriately left to the wisdom of the experts. The relevant portion is as under: 31. In Duncans Industries Ltd. vs. State of U.P. this court held that the question of valuation is basically a question of fact and this court is normally reluctant to interfere with the finding on such a question of fact if it is based on relevant material on record. Similarly, in Miheer h. Mafatlal v. Mafatlal Industries Ltd. this Court sounded a note of caution observing that valuation of shares is a technical and complex problem which can be appropriately left to the consideration of experts in the field of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tyrannise the majority . .. 50. Further, I do no find any unfairness or unjustness in the scheme. The A.P.I.L shareholders have accepted the swap ratio and whatever was computed in the scheme. Commercial wisdom of the A.P.I.L. shareholders cannot be subjected to appeal before this court. In may opinion, broadly the scheme by and large, is fair and just to both the parties and all the shareholders and the creditors and the same deserves to be sanctioned. There is hardly any valid dissent to the scheme which is approved almost unanimously, even by those from the A.P.I.L. who stand to gain less immediately in short ran . ( Emphasis supplied ) 38. It has been held by the Hon ble Gujarat High Court in the case of Alfa Quartz Ltd. vs. Cymex Time Ltd. 1997 SCC Online Guj 265 that even where there are allegations of unfairness of share exchange ratio, court should not interfere as the same has been accepted without demur by the overwhelming majority of the shareholders of the amalgamating companies. The relevant portion of the said judgment is reproduced below: 12. It has been pointed out that the shareholders of the transferor-compa-nies are proposed to be allotted more shares which seem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1999 SCC Online AP 92, while rejecting the request of the objector seeking details of valuation, the High Court of Andhra Pradesh, following the judgment of Supreme Court in Kamala Sugar Mills Ltd. ( 1984) 55 Company Cases 308 made following observations: .. From this law of the Hon ble Supreme Court it is clear that it is enough if the expert opinion is obtained regarding the valuation and fixation of the exchange ratio and the mathematical calculation as to how those valuers had arrived at would be a technical and complex problem and should be left to the consideration of such experts in the field of accountancy only . (para 8) 41. Hon ble Gujarat High Court in APCO Industries Ltd., In re 1995 SCC Online Guj 284 has held that when there is no evidence of fraud or malafides on part of Valuers, and standard method of valuation is followed, the objection to the valuation should be overruled. The relevant part of the judgement is as under: 14. It is sought to he urged that the exchange ratio of 150 shares to be allotted by the transferee-company for each share held of the transferor-company is, apparently, on a high side. But, it requires to be appreciated that the exchange ratio ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorities for resolution. Ultimately, the court sanctioned the scheme but preserved the tax authorities' rights to pursue any related liabilities independently. The relevant extract of the judgement is as follows:- 70. If the Court is indeed to sanction the Scheme, the powers of the Income Tax Department must remain intact. The authorities relied on by the petitioners also support this proposition, with the only exception being a situation where the Scheme itself has only one purpose, which is to create a vehicle to evade the payment of tax, rather than mere avoidance of tax. It is also true that the scope of objection that may be raised by the Central Government and the Regional Director is larger, and that of the tax authorities is confined to the question of revenue. It is not open to this Court, in the exercise of company Jurisdiction, to sit over the views of the shareholders and Board of Directors of the petitioner companies, unless their views were against the framework of law and public policy, which, as discussed above, is not the conclusion reached here. It is purely a business decision based on commercial considerations.... 72. In view of the approval accorded by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Scheme with nearly 100% majority. The amalgamating companies have numerous real estate projects and it was only in one project that the joint venture partner had acquired lesser land area. The amalgamating Transferor company is only a developer in this project and was informed later about lesser acquisition of land, after the valuation was done. The valuation has been done under DCF method, which is concerned more about future income than assets of the company. In any case, the profit sharing ratio with joint venture partner (Cornerstone Group, which is an independent unrelated group), was subsequently revised in favour of Embassy Group to ensure similar cash flow. In the conspectus of facts of this case enumerated above, we hold that learned NCLT had no grounds to reject the scheme on the issue of valuation or share swap ratio. 45. Though it does not find any mention in the order of Ld. NCLT, Chandigarh, the issue of land regarding Concord India Pvt. Ltd. has been raised by the objector before this Tribunal. The Appellant in their submissions dated 24.09.2024 have clarified that land in question was very much in possession of the Embassy group as on the date of valuation and co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a valid recognised method for valuation of shares. Whatever discrepancy was noticed regarding acquisition of land by the joint venture partner, which was not in the knowledge of the amalgamating companies at the time valuation was done, has subsequently been set right by revision of profit-sharing ratio of Cornerstone Project which has ensured that there is no variation in the cash flow in the project. Statutory Auditors have confirmed that the Scheme is in compliance with applicable Indian Accounting Standards. The Scheme has been approved by overwhelming majority of nearly 100% shareholders and 100% of the creditors, and that the Scheme has already been approved by Ld. NCLT, Bengaluru with reference to the Transferor Companies. We note the judicial guidance that approval by overwhelming majority of shareholders indicates fairness of the Scheme, and that in normal course, the Tribunal should not interfere in the valuation done by the experts using one of the standard prescribed valuation method. We also note that no objection was raised against the Scheme by the Regulatory bodies like Competition Commission of India, Central Government through Regional Director, MCA, Registrar ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
