TMI Blog2011 (4) TMI 1021X X X X Extracts X X X X X X X X Extracts X X X X ..... olation of any law - in the absence of violation of substantial law, merely because certain rights of third party are going to be affected, cannot be a ground to permit third party to file objection to the scheme, once the scheme is as per statutory provisions of sections 391 to 394 of the Companies Act and approved by majority - objection of the petitioner with regard to the locus standi of M/s. Vodafone International, to file objection is therefore upheld, and it is held that M/s. Vodafone International B. V., has no locus standi to file objection, against the scheme of amalgamation - scheme of amalgamation being beneficial to both the transferor and transferee companies, its shareholders and its creditors, these company petitions are ordered - C.P. Nos. 340 & 341 of 2010, C.A. Nos. 310 to 314 of 2011 - - - Dated:- 21-4-2011 - Vinod K. Sharma, J. C.A. Sundaram and P.H. Arvind Pandian for the Petitioner. Jeyakumar for the Official Liquidator. B. Manoharan for the Regional Director, Ministry of Corporate Affairs, Chennai. JUDGMENT 1. M/s. Essar Telecommunication Holdings P. Ltd., the transferor company and M/s. India Securities Ltd., the transferee company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive compulsorily convertible preference shares of Rs. 2,000 each fully paid-up 40,00,00,000 Total 59,95,66,310 7. The board of directors of the transferor and transferee company in their meeting held on June 4, 2010, approved and adopted the scheme of amalgamation, proposing to amalgamate the transferor company with the transferee company subject to confirmation by this court. It was proposed that the entire undertaking of the transferor company would stand transferred to, and vested with the transferee company on and from the appointed date, i.e., April 1, 2010. The scheme of amalgamation has been annexed with the petition as annexure IV. 8. The object of amalgamation as stated by the transferee company to ensure better management of the company as a single unit. The benefit of amalgamation are stated as under : ( a ) According to the plan of business restructuring undertaken by the transferee company, it has been contemplated to diversify into infrastructure sector as stakeholder in leading telecom company in India. ( b ) The amalgamation aims at unlocking value and market assessment of the telecom assets of Essar group. ( c ) The amal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the appropriate fee and approval of the respective stock exchange(s), be listed and/or admitted to trading on the relevant stock exchanges in India, where the equity shares of the transferee company were listed and/or admitted to trading. The non-cumulative preference share of Rs. 2,000 each (NPS) and compulsorily convertible debenture of Rs. 100 each (CCD) issued in terms of clauses 14 and 15 respectively shall not be listed in any of the stock exchanges. The equity shares of the transferee company to be issued and allotted under the scheme or on conversion of CCDs shall be credited as fully paid up and shall in all respects, rank pari passu with the existing equity shares of the transferee company including listing on the stock exchanges and shall be entitled to any dividend declared by the transferee company in respect of any financial year but after the respective allotment dates. 14. It is the stand of the petitioner-companies that the scheme of amalgamation will be beneficial to both the companies and will result in better and more efficient operation of the company. It is also declared that the assets of both companies are more than sufficient to meet the liabilitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. 2. Nil Total (A) Nil Shareholders who attended through proxies S. No. Folio No./ Client ID Name and address of preference shareholder No. of preference shares held Ballot form S. No. 1. IN300167-10038238 Prime India Investment Fund Ltd., C/o. Blue Arrow (Mauritius) Fund Management Ltd., Suite 2005, Level 2, Alexander House, 35 Cybercity, Ebene, Mauritius. 1,00,000 2 2. IN300167-10037760 Passage to India Master Fund Ltd., C/o. Arcstone Capital LLC, Ebene House, 33 Cybercity, Ebene, Mauritius. 1,00,000 1 Total (B) 2,00,000 Total (C) = (A) + (B) 2,00,000 The under mentioned preference shareholders of the company voted against the proposed Scheme of Amalgamation being adopted and carried into effect. Shareholders who attended in person/proxy S. No. Folio No./ Client ID Name and address of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf of the Central Government for due consideration of this court. (2) I respectfully submit that the Regional Director, Southern Region, Ministry of Corporate Affairs, Chennai had been served with copy of the petitions pursuant to section 394A of the Companies Act, 1956, in C. P. Nos. 340 and 341 of 2010 and the same have been examined in detail. (3) I submit that the transferor company and the transferee company have their registered offices at Chennai within the jurisdiction of this court. (4) I further submit that a complaint has been received from an investor Shri S. Narayanasamy making allegations against M/s. India Securities Ltd., the transferee company as reported by the Registrar of Companies, Chennai. The gist of the complaint is as under : 'I have been trying to contact this company, for almost one decade, in their old address as well as at the Haddows Road, Chennai address, not received any annual reports, dividends, details about the working of the company, notice of annual general meeting, etc,, for over a 10 plus years and never get any communication from this company, no idea, whether this company has my folio, still with them, though, many original ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs Ltd., and Vodafone. ( b ) With regard to inadequances alleged in the valuation report, the valuation report does not contain any information about encumbrance of shares in Vodafone Essar Ltd. ( c ) With regard to sudden increase in share price of ISL, the Registrar of Companies has commented that it may be perhaps due to market conditions and that it comes under the purview of the Securities and Exchange Board of India. ( d ) Finally, on examination of annual returns of both transferor and transferee companies, it is found that 'Vodafone' is not a shareholder. In view of the above, 'Vodafone' has no locus standi as it was neither a shareholder nor a creditor in these companies. (7) I further submit that the transferor company vide letter dated February 8, 2011, has furnished copy of the petition filed by M/s. Vodafone International Holdings BV (complainant) impleading themselves as a party to the petition. As the complainant has filed a petition before the court raising the same allegations mentioned in the complaint, this court may taken cognizance of the complaint and pass such order. (8) I further submit that the Registrar of Companies, Chennai has receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt on January 27, 2011. (3) That as per the aforesaid orders of this court M/s. K. S. Jaganathan and Co., chartered accountants have completed their work and given their report to this office on January 31, 2011. (4) That the scrutiny by the chartered accountants was confined to the profit and loss account, balance-sheet, and other relevant books and statutory records maintained by the transferor company for the last 3 years from March 31, 2008, March 31, 2009 and March 31, 2010 and the minutes of the meetings of the members and the directors of the transferor company since the date of incorporation and the statutory books and registers, viz. : ( a ) Register of members. ( b ) Register of directors. ( c ) Register of directors shareholdings. ( d ) Register of contracts. ( e ) Register of share transfer. ( f ) Register of investments. ( g ) Minutes of the board and general body meetings. (5) That the chartered accountants have observed that the transferor company is maintaining proper books of account as per requirements of the Companies Act, 1956 and in accordance with normally accepted accounting principles. All entries have been made in the st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oposed to be converted into 16.77 crores equity shares of Re. 1 each, thus imputing a value of Rs. 21.47 to a equity share. ( b ) The share of Vodafone Essar Ltd., held by a subsidiary company of the transferor company have been valued at Rs. 5,229.32 crores as on March 31, 2010 (vide the audited balance-sheet of ETHL Communications Holdings Ltd., as at March 31, 2010). However the cost of the same is Rs. 1,260.59 crores. Note B(i)(b) of schedule 8 to the said accounts specifically mentions that these shares are held under "investments" in the category of 'available for sale financial assets' have been valued at their fair value. Further, it also adds that the put option held by this subsidiary company has been valued at its fair value of NIL based on its valuation from an independent valuer. ( c ) Vodafone had acquired 67 per cent. stake from Hutchison in the joint venture between Hutchison and Essar during 2007. At the time of its acquisition in February 2007, the enterprise (presently known as Vodafone Essar Ltd.) was valued at 19 billion USD (about Rs. 85,500 crores). One of the subsidiary companies of the transferor company (ETHL Communications Holdings Ltd.) holds 10.97 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for sale of finance division, such adjustment need not have been done since the company would have received money equivalent for sale of this division. ( ix ) In the same page in the SEBI pricing formula, no adjustment seems to have been made for the finance division, which is inconsistent with the valuation methodology adopted by the valuer. ( x ) In page 16, paragraph 3.5.2.2.1.9 of the valuation report, an arbitrary figure of 25 per cent. has been considered as dividend that may be payable and has been reduced from the valuation. This has no basis. Further the learned valuer has not mentioned whether this dividend in the hands of the shareholders has been considered for valuation of the equity shares. ( xi ) The value of shares in Vodafone Essar Ltd., held by the transferor company's subsidiary have been valued on the assumption that Essar would exercise its put option under its agreement with Vodafone, its joint venture partner in the said company. As per information from various recent news items impleading financial dailies Essar has two options, one is to exercise put option on its entire holdings, which is valued at USD 5 bin, the other situation being that if Es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t containing disclosure to the shareholders for merger through scheme of amalgamation under sections 391 to 394 of the Companies Act, 1956, as prescribed by the Securities and Exchange Board of India. This disclosure contains an item No. 20 any other details which deemed necessary for information to shareholders enabling them to make an informed decision about the proposed scheme including those required under section 393 of the Companies Act, 1956, to which the reply marked is nil. Non-disclosure of this material fact to the shareholders of the transferee company would have prevented its shareholders from taking an informed decision. ( xv ) As part of the scheme and as part of the consideration, persons holding optionally convertible debentures in the transferor company are being allotted compulsorily convertible debentures and such debentures would be converted into 4 equity shares in the transferee company within 18 months from the date of transfer. We are not aware whether this dilution in shareholding has been factored in the share valuation report. ( xvi ) There has been opposition to the merger from Vodafone and this has been reported in almost all leading dailies. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1, 2009. As far as India Securities Ltd., is concerned, unaudited financials published by the company on April 29, 2010, were subjected to limited review by the statutory auditors as per clause 41(1)(c), (i) of the listing agreement. It may also be noted that the statutory auditors of both the companies have not expressed any qualification or adverse remark on the accounts of the company. ( iii ) reply to query at point 3 of the letter as the auditor appointed under the second proviso to section 394(1) of the Companies Act, 1956, are not required to conduct a fair valuation of the assets of company, working papers were not submitted to the auditor. ( iv ) reply to query at point 4(a) of the letter as per the scheme, on appointed date preference shares of total nominal value of Rs. 360 crores in the books of the transferee company are proposed to be converted into 16.77 crores equity shares of Re. 1 each. The conversion price is determined in accordance with Chapter VII of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 and terms of issue. ( v ) reply to query at point 4(b) of the letter value of investments in sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insic value. ( xiii ) reply to query at point 10 of the letter an overall discount of 25 per cent. on value of investments has been considered instead of separately calculating tax on capital gains at the rate of 22.66 per cent. and dividend distribution tax at the rate of 16.99 per cent. ( xiv ) reply to query at point 12 of the letter as the amount borrowed by ETHL CHL by pledge of VEL shares is utilised for making investments, the said pledge has no impact on valuation. Further information of end use of funds was well within the public domain as it was part of information memorandum available on the website of stock exchange which was issued for said borrowings. ( xv ) reply to query at point 11 and 13 of the letter USD 5 billion is minimum assured value as per the underwritten put option agreement entered by the subsidiary of the company with Vodafone. Hence based on the principle of conservatism, it is considered for valuation of stake in Vodafone Essar Ltd. In the light of this minimum assured value, comparative values of other listed telecom companies doing similar business to that of Vodafone Essar Ltd., is immaterial for the purpose of valuation. ( xvi ) reply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atter is before the Madras High Court for consideration. (10) A copy of the letter of transferor company dated February 28, 2011, is enclosed with report as annexure B. (11) However, the official liquidator submits that the contention of the transferor company that the observations/remarks made by the chartered accountant in his report are not connected with the opinion on whether the affairs of transferor company were conducted in a manner prejudicial to the interest of their members, or their conditions or to the public, is acceptable. (12) That the official liquidator further submits that as per the report, the chartered accountants are of opinion that the affairs of the transferor company was not conducted in a manner which was prejudicial to the interest of their members, or their creditors, or to the public, nor were any transactions which would attract the provisions of section 542/543 of the Companies Act, 1956. (13) That on the scrutiny of the balance-sheet as on March 31, 2009, it is observed that the transferor company M/s. Essar Telecommunications Holdings India P. Ltd., does not have any secured loans ; and unsecured loans are the three series of optionally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sider the objection by the Income-tax Department, this application is ordered and delay of 71 days in filing the objection is condoned. The objection raised by the Revenue Department is that as per the assessment for the year 2008-09 completed on December 31, 2010, a demand of 487.46 crores is raised against M/s. Essar Telecommunication Holding Ltd. (ETHL). 28. It is also stated that the transferor company is wholly owned subsidiary company of M/s. Essar Teleholdings Ltd., and therefore because of the demand on M/s. Essar Teleholdings Ltd., for the assessment year 2008-09, the scheme be not approved. The objection is also raised that the scheme is being objected to by M/s. Vodafone International BV. 29. The reading of the objection only shows that there are certain claims against ETHL, the Assistant Commissioner of Income-tax Department has not disclosed that the demand has been stayed by the appellate authority nor it is disclosed as to how the demand on the holding company, can be a subsidiary company to adopt the scheme of amalgamation which otherwise satisfies the provisions of the Companies Act, 1956. It is not in dispute that there is no claim against the transferor o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any. The objector therefore holds majority indirect equity interest in Vodafone Essar Ltd., further that certain companies of M/s. Essar group including transferor company holds directly or indirectly approximately 33 per cent. equity interest in Vodafone Essar Ltd. The proposed amalgamation of the transferor and transferee companies therefore would result in transfer of 10.97 per cent. indirect equity interest in M/s. B. Vodafone Essar Ltd., which will have impact on the objector. 37. The objection is also raised that the valuation report adopted for the scheme is not in accordance with law and the settled principle applicable to valuation of shares specially when allotment/exchange ratio is not only for equity shares but also for non-cumulative preference shares. 38. It is pertinent to mention here that these very objections qua valuation have been dealt with in detail in the report of the official liquidator reproduced above. The other objection raised is that the scheme is misinterpreted to the public, as certain material facts were suppressed. 39. The objection has also been raised that the scheme to be void, under the SEBI Regulations and that the scheme is to inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipate in consideration of the proposed scheme of amalgamation. The intervenor is neither a shareholder nor the creditor of the transferor company. Thus understood, the intervenor cannot be heard to raise any objection with regard to the proposed scheme. Assuming that the intervenor has locus, having regard to the fact that it has executed supply agreement with the transferor company under which the transferor company is obliged to discharge its obligation specified therein. Even so, the question is whether the objection of the intervenor can be addressed at this stage of the proceedings. The objection essentially is in the nature of grievance about breach of or likelihood of breach of conditions of supply agreement operating between the intervenor and the transferor company. Counsel appearing for the transferor company has rightly pressed into service the decision of the Delhi High Court as well as of the Calcutta High Court to contend that the intervenor company as of now has no cause of action to resist the proposed scheme. The fact that on account of the scheme coming into force, there is likelihood of breach of some contractual terms between the intervenor company and the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the court for taking action under section 392. The reference to section 391 does not mean that all the limitations or restrictions on the right of an individual to move the court while proposing a scheme of compromise or arrangement have to be read, in sub-section (2) merely because section 391 is referred to therein. Unlike section 391, section 392 does not specify that a member or creditor or in the case of a company being wound up, its liquidator, can move the court under section 392. On the other hand, the Legislature uses the expression 'any person interested in the affairs of the company' which has wider denotation than a member or creditor or liquidator of a, company. In fact, the ambit of the power to act under section 392(2) can be gauged from the fact that the court can suo motu act to take action as contemplated by section 392(1) or it may act on an application of any person interested in the affairs of the company. In this context, the observations of the Gujarat High Court extracted hereunder in Mansukhlal v. M. V. Shah, Official Liquidator, Liquidator of Hathising Mfg. Co. Ltd. (in liquidation) [1976] 46 Comp Cas 279, can be referred to with advantage as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween the company and the creditors and members ; once the court approves it, it becomes a statutorily enforceable contract even on dissidents, with power in the court to modify, amend or correct or revise the contract the outer periphery or its limit on the power being that, after testing it on the anvil of probabilities, surrounding circumstances and the prevalent state of affairs, it can be done for the proper working of the compromise and arrangement, and, subject to this limit on the court's power, the power seems to be absolute and of the widest amplitude and it would be unwise to curtail it by process of interpretation.' If the court can suo motu act, it is immaterial as to who drew the attention of the court to a situation which necessitated court's intervention. Where the power is conferred on the court to take action on its own motion the information emanating from whatever source which calls for court's attention can as well be obtained from any person without questioning his credentials moving an application drawing attention of the court to a situation where it must act. Undoubtedly, the court may decline to act at the instance of a busybody but if the action proposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... promise or arrangement workable and that it can do so on its own motion or on the application of any person interested in the affairs of the company. If such be the power conferred on the court, it is difficult to entertain the submission that an application for directions or modification cannot be entertained except when made by a member or creditor. It would whittle down the power of the court in that it cannot do so on its own motion." 48. Mr. Arvind P. Dattar, senior counsel on the other hand vehemently contended, that the judgment of the hon'ble Bombay High Court does not lay down correct law, as it has not taken note of the Companies (Court) Rules, 1959. 49. As under rule 24, the petition is required to be advertised in the Official Gazette, and one issue of each English daily and regional language daily having circulation in the State. Whereas, rule 25 provides that the advertisement in Form No. 5. The reference was made to Form No. 5, to contend that any person desirous of supporting or opposing such petition, is allowed to send to the petitioner's counsel, notice of intention to object to the petition. Under rule 74, notice of meeting is required to be advertised i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here proxies are allowed, by proxy at the meeting, agree to any compromise or arrangement, the compromise/arrangement shall if sanctioned by the court will be binding on all creditors or the class of the members or the class as the case may be and also on the company or in the case of company, which is being wound up on the liquidator and contributory of the company. 57. The only restriction is that all the material facts relating to the company such as the latest financial position of the company, the latest auditor's report on the accounts of the company and the pendency of any investigation proceedings in relation to the company under sections 235 to 251 of the Companies Act are required to be disclosed and considered. It does not envisage the filing of objection by the third party whose rights may be affected by the scheme of arrangement. 58. The hon'ble Bombay High Court considered this aspect and rightly held that the remedy with regard to enforcement of rights by the third party is to be independently availed of, and cannot be a ground to object to the scheme of arrangement. 59. By way of the scheme of amalgamation, by merger, the liabilities are taken over by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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