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TMI Blog2009 (7) TMI 767X X X X Extracts X X X X X X X X Extracts X X X X ..... or deed pursuant to section 394 of the Companies Act, 1956. 2. The Demerged Company was incorporated under the provisions of the Indian Companies Act, 1956 in Mumbai on 15-7-2004 under the name "Reliance Infrastructure Developers Private Limited.". Subsequently, the said name has undergone change and the present name of the Demerged Company is "Reliance Communications Limited" with effect from 7-6-2006. On the other hand, Resulting Company was incorporated on 16-4-2001 in the name and style of "Reliance Communications Rajasthan Private Limited". Subsequently, that name has been changed and the present name of the resulting Company is "Reliance Infratel Limited". The Resulting Company is a subsidiary of the Demerged Company. Originally, the Demerged Company held 100 per cent shares in the Resulting Company. However, at present, it has been reduced to 95 per cent, and 5 per cent shares in the Resulting Company are held by Institutions and Banks. 3. The authorised share capital of the Demerged Company is 300,00,00,000 equity shares of Rs. 5 each, valuing Rs. 1500 crores. The issued, subscribed and paid-up capital of the Demerged Company is 2,06,40,26,881 equity shares of Rs. 5 each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and certificated by M/s. Chaturvedi and Shah, Chartered Accountants. 5. To effectuate the decision of the Board of Directors, both the Companies filed separate Company Applications being Company Application Nos. 438/2009 and 439/2009 respectively before the Company Judge for directions. On 23-4-2009, the respective companies were directed to convene meeting of the equity shareholders at the specified place, date and time for the purpose of considering and if thought fit, approving with or without modification the arrangement embodied in the Scheme of Arrangement. The said order further nominated persons who were to act as Chairman of the meeting or any adjourned meeting and to report the result of the meeting to the Company Judge. It was further ordered that the convening and holding of the meeting of the sole secured creditor of the Demerged Company to consider and approve the proposed Scheme of Arrangement was dispensed with in view of the averment in Paragraph 18 of the affidavit that the Scheme would not affect the sole secured creditor. The Court was also pleased to dispense with convening and holding of the meeting of unsecured creditors of both Companies in view of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hareholders with overwhelming majority as high as constituting 99.32 per cent in number and representing 99.9999 per cent in value, present and voting in person or by proxy or by authorised representative voted in favour of the Scheme. Only 15 equity shareholders holding 2038 shares of Rs. 5 each fully paid-up representing in value the sum of Rs. 10,190 constituting 0.6784 per cent in number and representing 0.0001 per cent in value, present and voting in person or by proxy or by authorised representative voted against the Scheme. The report mentions that the Scheme was approved by the shareholders with requisite majority. 7. Insofar as Chairman's report submitted by Justice M.H. Kania (Retired Chief Justice of India) of the meeting of the equity shareholders of the Resulting Company, it is stated that the meeting was held on the appointed place, time and date after issuance of notices in terms of the order of the Court. In the said meeting, the shareholders requested for more time to study the Scheme and with the unanimous approval of the shareholders present, the Chairman adjourned the meeting to Friday, 5-6-2009 at the same time and same venue. On that date, in all 20 members r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred to in the affidavit, it was found that the Scheme was not prejudicial to the interest of the shareholders and the public. Insofar as the points raised by the Regional Director for consideration of the Scheme, the same read thus : "7. The Deponent further submits that : (a )As per the explanatory statement under section 393 of the Companies Act, 1956 circulated to the members of R. Com. and RITL, the net consideration payable by RITL to R. Com. is Rs. 6718.87 crores after adjustment of the liabilities attributable to Optic Fiber Undertaking. In this connection the deponent further submits that clause 2.2 of the scheme dealing with the consideration does not quantify the net consideration payable by RITL on transfer of Optic Fiber Undertaking from R. Com. Hence the petitioners may be directed to file an undertaking before this Hon'ble High Court on the net consideration involved in the scheme. (b )Clause 2.4-3 of the scheme is not in conformity with mandatory Accounting Standard-11 prescribed by the Institute of Chartered Accountants of India. Hence Resulting Company may be directed to comply with Accounting Standard -11 as applicable to it in respect of losses on account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quity shareholders convened pursuant to the direction issued by this Court, but had opposed the Scheme of Arrangement by voting (through proxy) against the Scheme. He has, however, stated that he had sent his objection to Registrar of Companies and Regional Director dated 9-7-2009, which reads thus : "9th July 2009, The Registrar of Companies, Everest Building, 100, Marine Drive, Mumbai-400 002. The Regional Director, Ministry of Corporate Affairs, Everest Building, 100, Marine Drive, Mumbai-400 002. Sir, Sub : Scheme of arrangement between Reliance Communications Limited ("Company") and Reliance Infratel Limited (RITL). I am a shareholder of the Company and holding 55 shares under the DP Id-Client Ids IN30017510197978 and 250 shares under the DP Id - Client Ids 1302340000196414. The Company has filed a petition before the Hon'ble Court of Judicature at Bombay for approving the scheme of arrangement to de-merge the Optic Fiber Undertaking of the Company to RITL. I had opposed the scheme of arrangement as it was not possible to ascertain another the scheme of arrangement was in the interest of the shareholders and hence I had voted (by proxy) against the resolution in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be followed by the Company as mentioned in para 2.3-3 of the Scheme of Arrangement for accounting the difference between the consideration and the net book value is not in line with the Accounting Standards prescribed by the Companies (Accounting Standards) Rules, 2006. 7. Similarly, the Company's proposal as mentioned in para 2.3-4 of the Scheme of Arrangement to utilize the above surplus amount for meeting the future foreign exchange losses is not relevant to the demerger. Since all the critical information required to form an opinion about the benefits that will accrue to the Company and the shareholders are not available in the subject scheme of arrangement, I oppose the subject scheme of arrangement and will be filing necessary petitions before the Hon'ble High Court of Judicature at Bombay. I request you to seek all the above information from the Company before affirming to the Hon'ble Court that the subject scheme is not prejudicial to the interest of the shareholders. Thanking you, Yours faithfully, Sd/-." 12. According to this Applicant, he has not received any response to the abovesaid representation. He has further stated that on 11-7-2009, one Mr. Ramjibhai Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case." 14. This Applicant asserts that they are one of the Creditor of the Demerged Company as the Company owes a sum of Rs. 74,51,125. According to this Applicant, even though an unsecured creditor, no notice of the Petition has been served, nor any intimation with regard to the proposed Scheme was received. Whereas, incorrect statement is made by the Company of such compliance. On this basis, the Applicant contends that the order passed by this Court of dispensation of convening of meeting of the unsecured creditors, deserves to be set-aside. According to this Applicant, no meeting was held. As per his information, as of 31-12-2008, the Demerged Company has an unsecured loan of about Rs. 27,000 crores and current liabilities of Rs. 31,000 crores. 15. There are two other Applications filed on 13-7-2009 being company Application No. 760/2009 and 761/2009 by Rajkot Saher/Jilla Grahak Suraksha Mandal praying for following reliefs : "(a )That this Hon'ble High Court may be pleased to dismiss and set-aside the order passed in Company Applications in Company Petition No. 487 Company Petition No. 488 as not maintainable being the same is against public interest and in violation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubstance in this grievance. Indeed, the said Applicant is a shareholder and had opposed the Scheme of Arrangement by voting, albeit through proxy. However, he did not think it necessary to remain personally present in the meeting so as to educate the other shareholders about the shortcomings, drawbacks or irregularities and illegalities in the proposed Scheme. As observed by the Apex Court in the case of Miheer H. Mafatlal v. Mafatlal Industries Ltd. AIR 1997 SC 506 (See paragraphs 32, 34 and 39), the objections now raised by such Applicant either before the Registrar of Companies/Regional Director or for that matter, before this Court, at the time of opposing the Scheme which was put for the sanction of the Court are clearly afterthought and for the sake of it. It is too late in the day for such objector to contend that the Scheme was unfair to him or other similarly placed persons. As a matter of fact, the Applicant admits that he was inspired to file Applications before this Court and to intervene to oppose the sanction of the proposed Scheme only after being persuaded by Mr. Ramjibhai Mavani, founder President of Rajkot Saher/Jilla Grahak Suraksha Mandal. In the affidavit, he h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulting Company. The opposition constituted only a minscule fraction of 0.6784 per cent in number and representing 0.0001 per cent in value of the Demerged Company. In that, only 15 equity shareholders holding 2038 equity shares of Rs. 5 each fully paid up representing in value sum of Rs. 10,190 voted against the Scheme. Whereas, the overwhelming majority of the shareholders consciously voted in favour of the Scheme. Accordingly, I am convinced that there was no reason to adjourn the matter for the reason stated by the said intervenor. If at all, the Applicant was so keen, he ought to have approached this Court well in advance to seek appropriate directions and not make such grievance for the first time on the date of hearing of the Petition. The only purpose whereof would be to protract the hearing of the Petition for reasons best known to him. The fact that the hearing could be rescheduled to a short date, in my opinion, cannot be the basis to entertain the request of such Applicant. Taking overall view of the matter, I am more than convinced that adjournment of the hearing of the Petitions was not only avoidable but unwarranted. 19. I shall straightway deal with the two Applicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would, however, confine the inquiry to matters related to the present Scheme. 22. Insofar as the present Scheme is concerned, the grievance is that, the purpose of the Scheme is to transfer unknown, unidentified and unclear assets from the Demerged Company to the Resulting Company. The valuation of the assets is shown as Rs. 7,206 Crores. It is argued that it is not clear as to which parts of the Optic Fiber are lying with the Demerged Company and the one that was to be transferred to the Resulting Company. According to the Objectors, the disclosures made in the Scheme with respect to the value of the Optic Fiber Limited was vague and not transparent. Further, the Company has not disclosed the book value of the assets which are being transferred to the Resulting Company under the Scheme of Arrangement. This argument will have to be stated to be rejected. It clearly overlooks the figures of the value of Optic Fiber Undertaking reflected in the Books of Account and more so, in the valuation report. The summary of valuation of OFC network of the Demerged Company as on 1-4-2008 reveals the relevant information. By no standards, it can be said to be vague. The grievance that the valuat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and appointed as Valuation Consultants by Reliance Anil Dhirubhai Ambani Group (Reliance ADAG) company i.e. Reliance Communications Limited (RCOM) for Valuation of Specified Tangible Fixed Assets - Optical Fiber Network of Reliance Communications Ltd. (RCOM) as on 1-4-2008. 1.2 The purpose of the Valuation is determining the 'Market Value' of the Optical Fiber Network of RCOM for reorganization purposes. The material date of Valuation is 1-4-2008. 1.3 RCOM, and Reliance Infratel Ltd. (RITL) are part of Reliance Anil Dhirubhai Ambani Group; and are undergoing a major reorganization/ restructuring as per a Scheme of Arrangement proposed to be filed in the High Court of Mumbai. As per the said proposed scheme the Optical Fiber Network of RCOM shall vest with RITL with effect from 1-4-2008. 1.4 Generally, Depreciated Replacement Cost (DRC) is the Market Value of the Fixed Assets, subject to continued potential profitability of industry and enterprise, for assets that can be replicated in a short time duration/or which do not have any "entry barriers" associated with it. However, the Optical Fiber Network is a premium asset which would take a minimum time frame of 3 to 4 years to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; Grand Total(including CWIP) 57764189144 53221387499 76226777956 72063556081 *Includes the complete OFC network of RCIL transferred from RCIL to RCOM on 1-4-2008. 1.6 The total 'Market Value' of Specified Fixed Assets - Optical Fiber Network of Reliance Communications Limited (RCL) has been assessed in the range of Rs. 6,201.86 Crores. This amounts do not include the assets under the asset head Capital Work in Progress-CWIP, amounting to Rs. 1,004.49 Crores, which has not been valued and has been adopted at cost in the aforesaid tabulation. 1.7 This Valuation Certificate is privileged, and is intended for internal use of Reliance Communications and its group companies. We understand that this Valuation Certificate will be used by RCOM for the purposes mentioned herein above. 1.8 The Basis of Valuation, Limitations, Methodologies, Conclusions etc. of this Valuation exercise would be presented in detail in the final Detailed Valuation Report which shall follow this certificate." 25. There is no tangible material produced to question the abovesaid opinion of the valuer regarding the basis and methodology adopted. No contrary opinion is forthcoming. More so, in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r immovable, leasehold or freehold, tangible or intangible, including all capital work in progress, plant and machinery, equipment, trademarks, trade names, brands, investments and other IP rights, vehicles, furniture, fixtures, office equipment, computer installations, electrical appliances, accessories pertaining to the Optic Fiber Undertaking; 1.1.6.2 all liabilities present and future (including contingent liabilities pertaining to or relatable to the Optic Fiber Undertaking), as may be determined by the Board of the Demerged Company; 1.1.6.3 all rights and licenses, all assignments and grants thereof, all permits, registrations, rights (including rights under any agreement, contracts, applications, letters of intent etc.), approvals, regulatory approvals, entitlements, goodwill, cash balances, bank balances, bank accounts, receivables, loans and advances, privileges, all other claims, rights and benefits, powers and facilities of every kind, nature and description whatsoever, inventory, rights to use and avail of telephones, telexes, facsimile connections and installations, utilities, electricity, water and other services, provisions, funds, benefits of all agreements, contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uers shall assign values to each asset and liability of the Optic Fiber Undertaking which shall be aggregated to determine the consideration for the transfer. 27. As it is a Scheme for transfer of undertaking, non-mention of provision regarding the user charges by the Demerged Company for use of optic fiber, does not militate against the Scheme. That is an arrangement post demerger Scheme to be evolved and adopted by the Board of Directors of the two Companies, as may be suited to them. Obviously, the Board of Directors would act in the best interest of the stakeholders of the respective Companies. It would be a different matter if the Objectors were to substantiate that the valuation of the assets of the Undertaking is hopelessly undervalued. That is not the case forthcoming from the Objectors. As a matter of fact, the Objectors were at pains to point out that considering the earlier arrangements, it may appear that the assets worth Rs. 80 Crores purchased from Reliance Communication is resold to the Resulting Company for value of Rs. 7,206 Crores. If it is so, it is not a case of transfer of assets of the Demerged Company by suffering loss. The Demerged Company has been commensu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Lending Rate (BPLR) by banks for appropriate pricing of credit. Over time, however, the system of BPLR has evolved in such a manner that it has lost its relevance as a meaningful reference rate as bulk of loans is advanced below BPLR. Furthermore, this impedes the smooth transmission of monetary signals and makes the loan pricing system non-transparent. It has, therefore, become necessary to review the current procedures and processes of pricing of credit. Accordingly, it is proposed : to constitute a Working Group to review the present BPLR system and suggest changes to make credit pricing more transparent. The Working Group would consult all the stakeholders and submit its report by end- August 2009." 30. On the same lines, Press Statement of the Officials of the Reserve Bank of India have appeared in newspaper on 22-4-2009. In this backdrop, it was suggested that the Court may consider of specifying the rate of interest to be not less than 1 per cent over and above the Benchmark Primary Lending Rate or not less than 1 per cent over and above the Weighted average cost of debt of the Demerged Company, whichever is lower. In my opinion, it would be just and proper to accept thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... result in unfairness to the shareholders of the Demerged Company. In that, the Demerged Company will be suitably compensated by way of interest as provided in Clause 2.2.2 until the consideration is fully paid by the Resulting Company. Accordingly, the issue under consideration does not commend to me. 32. The next issue raised is about breach of accounting standard by the Demerged Company. This argument is made with reference to clause 2.3.3. Clause 2.3.3 of the Scheme reads thus :- "2.3.3 The difference between the consideration and net book value of the Optic Fiber Undertaking, shall unless otherwise determined by the Board of the Demerged Company be credited to the General Reserve Account of the Demerged Company. The General Reserve Account so credited shall constitute Free Reserves available to the Demerged Company for all purposes as it may consider proper including in particular for declaration of dividends. Such General Reserve shall be a reserve which arises pursuant to the Scheme and shall not be and shall not for any purpose be considered to be a reserve created by the Demerged Company." 33. The argument was that the accounting treatment proposed in the Scheme for acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in that case (incidentally Income-tax Department), was answered in the following manner :- "Mr. Chatterjee then shifted to another argument. He brought to the Court's notice a judgment of the Supreme Court (229 ITR 809) in the case of Marshall & Sons. Mr. Chatterjee submitted that, as per this decision, the merger takes effect from the Appointed Date since in this case the merger is with effect from 1-4-2003. All options of the Income-tax Department would be foreclosed as regards investigation into the fact that the books of account of the Petitioner do not record the liability towards Balli Klockner GmbH, the Creditor objecting to the proposed merger. Therefore, Mr. Chatterjee's last submission is that the Appointed Date be changed from April, 2004. I fail to appreciate the possibility of such a situation. As I understand, all the assets and liabilities of the Petitioner relating to the remaining business will be transferred to the transferee company i.e, Jindal Vijayanagar Steel Limited. Therefore, the Income-tax Department, if it desires, can carry out any investigation into the affairs of the transferee company even after the merger. The point that seems to be apparent is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which have been or are debited to profit and loss account of any year upto the year ending 31-3-2011 may as determined by the Board of Directors and to the extent the balances are available, be adjusted by a corresponding withdrawal from the General Reserves of the demerged company." 39. According to the Objectors, this provision is not relevant to the Scheme of demerger. Insofar as this provision in the Scheme is concerned, none of the Authorities have objected to the same. According to the Companies, it is imperative to make provision regarding loss on account of changes in exchange rates. The Company has relied on the Notification issued by the Ministry of Corporate Affairs dated 31-3-2009, which supports the case of the Companies. The same reads thus :- "MINISTRY OF CORPORATE AFFAIRS NOTIFICATION New Delhi, 31-3-2009 G.S.R. 225(E) - In exercise of the powers conferred by clause (a) of sub-section (1) of section 642 read with sub-section (1) of section 21A and sub-section (3C) of section 211 of the Companies Act, 1956 (1 of 1956), the Central Government in consultation with the National Advisory Committee on Accounting Standards, hereby makes the following rules to amend th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther cases by transfer to "Foreign Currency Monetary Item Translation Difference Account" in both cases, by debit or credit, as the case may be, to the general reserve. If the option stated in this paragraph is exercised, disclosure shall be made of the fact of such exercise of such option and of the amount remaining to be amortized in the financial statements of the period in which such option is exercised and in every subsequent period so long as any exchange difference remains unamortized." [F.NO. 17/33/2008/CL-V] JITESH KHOSLA, Jt. Secy. Note. - The principal notification was published in the Gazette of India, Extraordinary, Part II, section 3, sub-section (i) vide number GSR 739(E), dated 7-12-2006 and amended vide notification number GSR 212(E), dated 27-3-2008." 40. Even in the decision of the Apex Court which was pressed into service by the objectors, in the case of Woodward Governor India (P.) Ltd. (supra), in Paragraphs 32 and 33, the Court while considering the effect of amended section 43A of the Income-tax Act has observed thus : "32. One more aspect needs to be mentioned. Section 43(1) defines actual cost for the purpose of grant of depreciation etc. to mean "the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isition of asset in foreign currency. The section mandates that at any time there is change in the rate of exchange, the same may be given effect to by way of adjustment of the carrying cost of the fixed assets acquired in foreign currency. But for section 43A which corresponds to para 10 of AS-11 such adjustment in the carrying amount of the fixed assets was not possible, particularly in the light of section 43(1). The unamended section 43A nowhere required as condition precedent for making necessary adjustment in the carrying amount of the fixed asset that there should be actual payment of the increased/decreased liability as a consequence of the exchange variation. The words used in the unamended section 43A were 'for making payment' and not 'on payment' which is now brought in by amendment to section 43A vide Finance Act, 2002." [Emphasis supplied] A priori, the issue raised by the objectors regarding irrelevance of Clause 2.3-4 is without any substance. 41. That takes me to the objection taken by the Regional Director. The Regional Director in the first place has noted that the Scheme does not quantify the net consideration payable by the Resulting Company to the Demerged Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t may, as has been rightly contended by the Petitioners, the objection of this Creditor is not bona fide. This Creditor claims outstanding amount of around Rs. 75,00,000 (Rupees Seventy-five lakhs), which debt is almost over four years old. This Creditor has not resorted to any legal action for recovery of its outstanding dues for reasons best known to it. Besides, it was argued that this Applicant has made incorrect statement in affidavit on oath that he has not been served with the notice. Whereas, personal notice was dispatched to this Applicant in addition to the publication in terms of the direction given by the Court. In support of this submission, reliance is placed on the receipt issued by the Postal Authority. It is possible that the notice so dispatched has not reached the Applicant. Assuming that the Applicant has not been served, in my opinion, that alone cannot be the basis to set aside the order passed by this Court to dispense with convening of meeting of the unsecured creditors. 46. Moreover, it is seen that notice regarding hearing of the Petition was duly published in the specified newspapers as per the order of the Court. In that sense, the grievance of this App ..... X X X X Extracts X X X X X X X X Extracts X X X X
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