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2021 (3) TMI 231 - AT - Companies LawReduction of share capital - question of public participation in the equity market - minority shareholders adequately compensated to their legitimate expectation with regard to valuation of shares - method of valuation and assumptions carried out by the Valuers - HELD THAT - From the NAV method it is amply clear that the Company is going concern with positive networth. Learned NCLT has taken into consideration the valuation report which was made in the year 2017 which was submitted on 25.10.2017 by PWC and on 26.10.2017 by Haribhakti. Learned NCLT Mumbai passed its order on 27.10.2020 almost three years after the submission of valuation report. In our view the valuation reports as made in 2017 are not as on date when learned NCLT passed its order on 27.10.2020. The statement made in the explanatory statement with regard to payment of DDT by the Company now taken a stand that the said DDT was abolished and the shareholders are under the obligation to pay the same. When in such a situation the Company takes its stand in a changed scenario the Company also should follow the same principles by adopting a method of re- valuation of shares. The Company cannot take duel stand to its advantage. The public shareholders/non-promotors shareholders have not been adequately compensated for the reason that the valuation done in the year 2017 had been taken into consideration even after three years it was passed. We are of the view that there is a drastic change in the growth of the Company. It is clear that if the Company makes profits the same need to be shared with the public shareholders/non- promotor shareholders which are exiting from the Company by surrendering their shares. As stated supra we are not going into the veracity of the fairness of the valuation reports and not finding fault with the valuation done by the Valuers. We also hold that the reduction of the share capital is in accordance with law and we do not interfere with the same. We are concerned that the public shareholders/non-Promotor shareholders economic interest need to be protected by paying latest fair value - The shareholders in a Company has every right to sell their shares as and when they get good price meaning thereby the shareholders have every right to trade shares as and when they get good price. However in the present case the Company passed its resolution for reduction of the share capital to an extent of 11, 81, 036 equity shares constituting 3.59 %. Since in the EGM the majority shareholders approved the reduction of share capital public shareholders/non-promotor shareholders have no option except to surrender their shares to the Company by extinguishing their shares and exit from the Company whatever price is fixed by the Company. Therefore the shareholders in the present case expects justification from the Courts/Tribunals. Even though the public shareholders/non promotor shareholders had objected to the reduction of share capital in the EGH but the majority shareholders i.e. promotor group having majority passed the resolution in favour of reduction of share capital. The Company is hereby directed to revalue the shares by a registered/independent valuers to value the shares of the Company and the Company shall pay the fair price arrived at by the valuer based on the latest audited accounts of the Company - The Company is directed to place all the audited accounts of the Company as required by the valuer to value the shares.
Issues Involved
1. Legitimacy of the reduction of share capital. 2. Adequacy of compensation to minority shareholders. 3. Methodology of share valuation. 4. Taxation implications, specifically Dividend Distribution Tax (DDT). Detailed Analysis Legitimacy of the Reduction of Share Capital: The Respondent-Company sought to reduce its equity share capital under Section 66 of the Companies Act, 2013, by extinguishing all non-promoter shareholders. The Appellants argued that the reduction was unjustified as the company is financially sound and making profits. The Respondent-Company countered that Section 66 does not discriminate against any class of shareholders and allows reduction in any manner, including selective reduction. The Tribunal agreed with the Respondent, stating that selective reduction is permissible and does not discriminate against any class of shareholders. Adequacy of Compensation to Minority Shareholders: The Appellants contended that the valuation used to compensate minority shareholders was outdated (from 2017) and did not reflect the company's current financial status. The Tribunal noted that the valuation reports were indeed three years old and that the company had made substantial profits since then. It emphasized that public shareholders are entitled to a fair price for their shares, which should reflect the company's current financial performance. The Tribunal directed the company to revalue the shares based on the latest audited accounts and pay the higher value arrived at by independent valuers. Methodology of Share Valuation: The Appellants questioned the methodology used by the valuers, arguing that the valuation did not consider the company's growth over the past three years. The Respondent-Company had engaged two independent valuers, M/s Price Waterhouse & Co. LLP and Haribhakti & Co. LLP, who provided their valuation reports in 2017. The Tribunal did not delve into the merits or demerits of the valuation methodology but focused on ensuring that the valuation reflects the company's current financial status. It directed the company to appoint independent valuers to revalue the shares based on the latest financial statements. Taxation Implications (DDT): The Appellants argued that the company should bear the Dividend Distribution Tax (DDT) as stated in the explanatory statement of the EOGM notice. However, the Tribunal noted that the DDT was abolished by the Finance Act, 2020, and the obligation to pay DDT now falls on individual shareholders. The Tribunal agreed with the Respondent's stance that the change in law could not be challenged in this forum and upheld the company's position on DDT. Conclusion: The Tribunal directed the Respondent-Company to revalue the shares by independent valuers based on the latest audited accounts and pay the higher value determined. It upheld the reduction of share capital but emphasized the need for fair compensation to minority shareholders. The Tribunal did not interfere with the DDT provision as amended by the Finance Act, 2020. The appeal was allowed in these terms, ensuring that the public shareholders receive a fair price reflecting the company's current financial status.
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