2020 (10) TMI 1254 - Tri - Companies Law

Scheme for reduction of Share Capital - objection of the 3.59% of minority shareholders as a whole - legitimate expectation to be adequately compensated with regard to valuation of shares - rights of minority shareholders - HELD THAT - The objectors have to be distinguished in three different groups (i) 9 Objectors have acquired the shares of the Petitioner Company after the EGM was conducted i.e. they did not hold any shares as on the date of the EGM (ii) 11 Objectors in aggregate holding 9, 148 equity shares of the Petitioner Company as on the date of the EGM have not attended and / or voted at the EGM and (iii) 2 Objectors namely Mr. Puneet Kumar and Ms. Sangeeta Gupta jointly holding 20, 205 equity shares in the Petitioner Company voted in favour of the Resolution approving the reduction of the share capital. Therefore the moot question arises as to the locus standi of such objectors who have acquired shares post the EGM and shareholders who voted in favor of the resolution be that as it may we consider the objection raised by the entire group. This bench is only concerned with the first issue of objection of the 3.59% of minority shareholders as a whole is with regard to their legitimate expectation to be adequately compensated with regard to valuation of shares. The rights of minority shareholders qua the Valuation of shares as per the two Valuers and the Fairness report has to be examined. Method of valuation and assumptions carried out by the Valuers - HELD THAT - The details captured in the two valuation report depict the assumptions and calculations considered by them while concluding the share price of the petitioner company. Whether the proposed scheme has the effect of wiping out entirely a class of shareholders namely the non-promoter shareholders though on payment of certain compensation in view of the objection raised by them and whether such selective reduction can be allowed? - HELD THAT - Section 66 of the 2013 Act expressly permits companies to undertake reduction of their share capital in any manner i.e. including by way of selective reduction of share capital as laid down by numerous High Courts - Given the facts of the present case and that the objectors being class of Non-Promoter shareholders who have been offered to exit at a certain price as fixed by the valuation of shares and in consideration of the several decisions cited above it is concluded that selective reduction is permissible under Sec.66 of the Companies Act. Objection raised by RD is that the report of ROC Pune that no complaint has been received but one M. Punit Kumar regarding Syngenta has complained that the company is paying only 43.4 % of Fair Market Price and cheating the small shareholders therefore the company is seeking to bump of entire 12, 373 Public Shareholders/11, 81, 036 Equity Shares consisting of 3.59% at an offer price Rs. 2, 445/- Per Share - HELD THAT - Such selective reduction of capital is not within the letter and spirit of Section 66 of the Act. This is against the public interest as the present value/status of the company is also due to public participation. The selective reduction is detrimental to the public participation in equity market. The objections are untenable in view of ratio laid down by Hon ble Supreme Court and Hon ble High Courts. The objection of the RD cannot be accepted on two grounds 1) that they have not considered the Valuation Report produced by the Petitioner Company 2) The dictum of several Courts where they have allowed the Selective Reduction in view of corporate governance and democratic rights of the Company to reduce its share capital by calling it an Domestic/internal decision of the company. The petitioner company has complied with the statutory compliances by sending notices to the Regional Director Western Regional Ministry of Corporate Affairs (RD) and the Registrar of Company Pune. No notice has been issued to SEBI as the petitioner company is not a listed company. The notice of hearing of the company petition was published in Indian Express (Pune Edition) and Lok Satta (Pune Edition) on 06.02.2018 the company does not have any deposits as certified by its auditors. The petitioner has no secured creditors and notice of the petition was served upon each of the unsecured creditors. Application for reduction of share capital is allowed subject to the directions issued.

Summary

Issues Involved:
1. Legitimacy of the capital reduction.
2. Fair valuation of shares.
3. Compliance with Section 66 of the Companies Act, 2013.
4. Objections raised by minority shareholders and the Regional Director.

Detailed Analysis:

1. Legitimacy of the Capital Reduction:
The Petitioner Company decided to reduce its issued, subscribed, and paid-up share capital by cancelling and extinguishing 3.59% of the total shares held by public shareholders. This decision was made due to the lack of marketability of shares post-delisting from the Bombay Stock Exchange in 2007. The reduction aimed to provide an exit opportunity to public shareholders at a fair valuation.

2. Fair Valuation of Shares:
The Petitioner Company engaged two independent valuers, Price Waterhouse & Co. LLP (PWC) and Haribhakti & Co. LLP, to determine the fair value of the shares. PWC valued the shares at Rs. 2444.70 per share, while Haribhakti valued them at Rs. 2333.36 per share. The Board of Directors adopted the higher valuation of Rs. 2444.70, rounding it off to Rs. 2445 per share. A SEBI registered Merchant Banker, Avendus Capital Private Limited, provided a fairness opinion on these valuations.

3. Compliance with Section 66 of the Companies Act, 2013:
The reduction was undertaken in accordance with Section 66 of the Companies Act, 2013, and the National Company Law Tribunal (Procedure for Reduction of Share Capital of Company) Rules, 2016. The Petitioner Company passed a special resolution approving the reduction in an Extra-Ordinary General Meeting (EGM) held on 8th December 2017. The resolution received overwhelming approval from the shareholders, with 99.87% voting in favor.

4. Objections Raised by Minority Shareholders and the Regional Director:
Several objections were raised by minority shareholders and the Regional Director (RD):
- Minority Shareholders: They argued that the reduction was unfair, as it deprived them of potential future benefits and growth prospects. They also contended that the valuation was inadequate and that the reduction aimed to give promoters 100% control over the company.
- Regional Director: The RD received complaints alleging that the company was paying only 43.4% of the fair market price, which was detrimental to public shareholders. The RD argued that the selective reduction was against public interest and the spirit of Section 66.

Findings:
- Valuation Reasonableness: The Tribunal referred to the Mumbai High Court judgment in Re Cadbury India Limited, which emphasized that valuations must be ex-facie unreasonable to be rejected. The Tribunal found that the valuation provided by PWC and Haribhakti was reasonable and not based on erroneous assumptions.
- Selective Reduction: The Tribunal noted that selective reduction of share capital is legally permissible under Section 66 of the Companies Act, 2013. It cited several judgments, including Re: R.S. Live Media Pvt. Ltd and Re: Elpro International Ltd., which upheld selective reductions.
- Objections by RD: The Tribunal rejected the RD's objections, stating that the RD did not consider the valuation report and that selective reduction is permissible under corporate governance principles.

Conclusion:
The Tribunal allowed the application for reduction of share capital, subject to the directions provided. The issued, subscribed, and paid-up capital of the company was reduced from Rs. 16,47,18,540 to Rs. 15,88,13,360 by cancelling and extinguishing 3.59% of the total shares held by public shareholders. The Tribunal found that the reduction complied with Section 66 of the Companies Act, 2013, and that the valuation provided was fair and reasonable.