TMI Blog2015 (9) TMI 1194X X X X Extracts X X X X X X X X Extracts X X X X ..... gional Director has, with the exception of certain objections which have been complied with, informed the Court that the Scheme is in the interest of the shareholders of the Company. The question therefore of setting aside the orders sanctioning the Scheme of Arrangement and Amalgamation or sanctioning amendments to the Scheme on the ground of alleged suppression thereby perpetrating a fraud on this Court does not arise. This Court has hereinabove already recorded its finding that SEBI has failed to establish any fraud played by NFCL/KFL by way of suppression of facts and is therefore not entitled to the reliefs as prayed for in the above Applications. However, SEBI has in support of its case also alleged that NFCL/KFL has perpetrated a fraud on the shareholders of NFCL in view of several other grounds. The contention raised by SEBI to the effect that the valuation is “unrealistic, perverse and incredibly high” on account of the fact that GT had used arbitrary growth rates to project the revenue for the year beyond 2012 and has not provided any rationale for arriving at the growth rates also cannot be accepted in view of what is stated hereinabove as well as the fact that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perties Limited (Unlisted Transferee Company). The Scheme was made effective on and from 8th September, 2010. Pursuant to the Scheme, City Pulse Properties Limited was renamed as Ikisan Limited. 3. However, the orders sought to be recalled/reviewed by SEBI are the orders passed by this Court in Company Scheme Petition Nos. 234 of 2011 and 235 of 2011, by which this Court was pleased to sanction a composite scheme between Kakinada Fertilizers Limited [ (KFL) Transferee Company Original Petitioner ], erstwhile Nagarjuna Fertilizers and Chemicals Limited [ (erstwhile NFCL) Transferor Company No. 1 Demerged Company], Ikisan Limited [ (Ikisan) Transferor Company No.2); and Nagarjuna Oil Refinery Limited [ (NORL) Transferee Company No. 2/Resulting Company], under which composite scheme, the oil business of the erstwhile NFCL was demerged into NORL and the erstwhile NFCL together with its residual business and Ikisan were merged into the Petitioner. After the merger, KFL was renamed as NFCL. A schematic diagram of the Ikisan Merger 2010 and a schematic diagram of the composite scheme 2011 are reproduced hereunder: SCHEMATIC DIAGRAM OF THE IKISAN MERGER (2010) Merger ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and prima facie it appeared that the Promoters of KFL stood to benefit significantly from the scheme of arrangement. SEBI therefore thought it fit that further examination ought to be conducted before granting permission for the listing of shares. Accordingly SEBI appointed M/s. Bansi S. Mehta Co., as an independent Valuer to examine the matter, seek relevant documents from the Company and independently value the assets of Ikisan Ltd. Bansi S. Mehta Co. have thereafter submitted their Valuation Report dated 27th September, 2012. The Report submitted by Bansi S. Mehta Co. shows: (i) that the accounting methods adopted for incorporating the assets and liabilities of Ikisan Limited are not consistent with the mandatory Accounting Standards ( AS ) and the accounts prepared consequently are not in accordance with law; (ii) that though accounting standard 14 requires that excess consideration over the net assets should be debited to Goodwill, which in normal cases is required to be amortized over a period of 5 years, in the case of Ikisan Ltd., such excess value over the net assets has not been ascribed to Goodwill but to Trademarks and Customer Contract Valuation ; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 236.8 crores. 7. Without prejudice to the above, SEBI has submitted that even if it is assumed that the Valuation Report submitted by Grant Thornton (Chartered Accountants) relied upon by the Company is true and fair, the Promoters of Ikisan Ltd. have been allotted approximately 3 times more equity shares than the worth of the assets brought in by them through Ikisan Ltd. in KFL. According to SEBI, by the said scheme, the shareholding of the Promoters in NFCL or KFL (which subsequent to the merger was renamed back as NFCL) has increased from 38.25 per cent to 51.37 per cent. This is an approximate increase of 13 per cent in the stake of the Promoters in NFCL. According to SEBI, the value of a 13 per cent shareholding according to the market price, prevailing on the Bombay Stock Exchange, of NFCL during the relevant period was to the tune of approx. 175 crores. 8. SEBI has in paragraph 23 of the Application alleged that the Petitioners have suppressed from this Court, inter alia, the following facts to achieve their objective of increasing their shareholding: (a) KFL which is a 100% subsidiary of NFCL was incorporated on 7th June 2006 with an issued, paid up and subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Pvt. Ltd. was incorporated with an aggregate paid up and subscribed share capital of 10,000 equity shares of ₹ 10/- each. (g ) Similarly, by a Certificate of Incorporation dated 21st March 2000, a distinct and separate Company by the name of Ikisan Limited was incorporated. (h) By an Order dated 27th August, 2010, passed by this Court in Company Petition No. 392 of 2010 connected with Company Summons for Directions No. 464 of 2010, the said Ikisan Ltd. was merged into City Pulse Properties Limited. Upon such merger, the name of the said City Pulse Properties Limited was changed back to Ikisan Ltd. (the name of the Transferor Company). (i) The said Ikisan Ltd. originally had an issued, paid up and subscribed share capital of 10,000 equity shares of ₹ 10/- each as on 31st March 2009. The same was thereafter increased to 50,000 shares of ₹ 10/- each aggregating to a sum of ₹ 5,00,000/- towards share capital as on 31st March 2010. Between 31st March 2010 and the date on which the composite scheme of arrangement and amalgamation was filed before this Court, the issued, subscribed and paid up share capital of Ikisan Ltd. was increased from ₹ 5 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me being detrimental and will result in a total loss of ₹ 862.66 crores to the equity shareholders of NFCL. Since the company is reported to have earned net profits for the next three quarters after March 2010, amounting to ₹ 88.87 crores (33.37 + 28.36 + 27.14) the erosion in net worth of the equity shareholders is ₹ 950.53 crores (862.66 + 88.87). To this amount, the profit to be earned for the last quarter of the current year-March 2011 also will have to be added. (An extract of the Company s quarterly results is enclosed for your kind reference). In view of the above mentioned facts submitted in the letters furnished to the Bombay Stock Exchange, it is very much evident that the consideration offered is detrimental for the interest of the equity shareholders. I shall be very much obliged if an appropriate remedial action could be taken from your side, by your intervention in this regard safeguarding the interest of the small public investors. 10. According to SEBI, it is in these circumstances that SEBI filed the above Company Application seeking review of the Orders dated 17th June 2011 (sanctioning the Scheme of Arrangement and Amalgamation) and Or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Ikisan Ltd.), be cancelled. C. The balance number of shares i.e. 18,01,64,988 held by the Promoters in new NFCL, which have been attributed to the residual NFCL business (merged into the new NFCL) will remain. D. The result of the above will be that the effect of the fraud on this Hon ble Court and on the body of investors of the old NFCL and the new NFCL (other than the Promoters) will be nullified. E. Since Ikisan Ltd. was merged into the new NFCL (Kakinada Fertilizers Ltd.) at completely inflated values, the demerger of its business will have no adverse impact on the non-promoter investors of the new NFCL. On the other hand, the disproportionately high number of shares allotted to the Promoters (Nagarjuna Corporation Ltd.) for the Ikisan Ltd. business shall stand cancelled. F. Sanctioned scheme to be modified by directions under Section 392 of the Companies Act,1956. SOLUTION-2 A. Valuation of Ikisan Ltd. as on March 31, 2010 and March 31, 2011 to be done by an independent Chartered Accountant appointed by the Court ( C.A. ). B. Share Exchange ratio of shares to be allotted to the Promoters in lieu of the Ikisan Ltd. business to be reworked by such C.A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions furnished by the Management was reviewed for reasonableness and consistency by the Independent Experts in the course of the valuation. The allegation of SEBI that Grant Thornton has accepted the projections provided by the management at face value is unfounded and contrary to the GT Report as well as GT s letter dated 22nd July 2013; 14.7 The valuation exercise was conducted in accordance with well known principles of valuation. Tested against the touchstone of the law laid down by the Supreme Court in the case of G.L.Sultania Anr. Vs SEBI (2007) 5 Supreme Court Cases 133, the Valuation reports are not liable to be set aside or ignored; 14.8 There has been no suppression of material facts as alleged by SEBI. All necessary disclosures in relation to the 2010 Scheme were made to the concerned authorities / court. All necessary disclosures in relation to the 2011 Composite Scheme were made to the shareholders, Stock Exchanges, Official Liquidator, Regional Director and the concerned authorities / court; 14.9 The issues relating to valuation and the alleged unfair advantage / gain made by the Promoters, cannot be gone into by this Court at the instance of SEBI, particu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontention of SEBI that a fraud has been perpetrated by the Petitioner on this Court through misrepresentation and/or suppression of relevant facts/documents. 16. I have considered the pleadings filed by the parties, the oral and written submissions made by them and the case law relied upon by them in support of their submissions. 17. The first submission which needs to be dealt with is the submission advanced on behalf of the Petitioner that SEBI does not have locus to intervene in a scheme petition under Sections 391 and 394 of the Companies Act, 1956 ( the Act ). In support of this submission, the Petitioner has relied on the decision of the Division Bench of this court in Sterlite. In this case, SEBI as well as the Central Government had challenged the Order of the Learned Single Judge on the ground that the Court had no power to sanction the scheme under Section 391 of the Act and that the Company was required to follow the procedure prescribed by Section 77A of the Act. The scheme was also challenged on the ground that it was unconscionable and unfair to the shareholders and violated the provisions of various laws including the Companies Act. The Division Bench held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to administer the provisions of sections specified in Section 55A in so far as they relate to issue of securities, transfer of securities and non-payment of dividend. Merely because the SEBI has been empowered to administer the provisions of Section 77 and 77A, it does not give SEBI any locus in a petition under Section 391 or Section 394. The right to notice under Section 391 proceedings remains with the Central Government under Section 394A The SEBI has not right of notice nor does it have any right to appear in the proceedings under Section 391 and 394A of the Act. 11. In so far as the appeal filed by the Central Government is concerned, we feel that the case of the Central Government stands on a different footing. Section 394A was inserted in the Companies Act with the object to enable the Central Government to study the proposal and raise such objections as it thinks fit in the light of the facts and information available with it and also place the court in possession of certain facts which might not have been disclosed by those who appear before it so that the interest of the investing public at large may be fully taken into account by the court before passing its order. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te continues to be binding on this Court. It is pertinent to note that the decision of the Hon ble Supreme Court is dated 22nd February, 2006. Thereafter in the last nine years, SEBI has, prior to the present Review Application, not raised the submissions with regard to which liberty was granted by the Hon ble Supreme Court to SEBI to so raise. Instead, immediately after the Sterlite Judgment, SEBI, vide its Circular dated 8th May, 2003 bearing No. SEBI/SMD/Policy/List/Cir- 17/2003, introduced Clause 24 (f ) in the Listing Agreement thereby authorizing the relevant Stock Exchanges with whom the shares of the Company are listed i.e. the BSE and NSE in the present case, to grant approval, by issuing no objection certificates to schemes under Sections 391-394 of the Companies Act,1956. In fact, as recorded in paragraph 34 (xvii) of the judgment of the Division Bench of this Court in MCX Stock Exchange Ltd. (supra) dated 14th March, 2012, SEBI made a submission that a scheme under Section 391 binds the creditors and shareholders and cannot bind SEBI which does not in any event have locus in a Section 391 Petition. By Circular dated 4th February, 2013 bearing No. CIR/CFD/DIL/5/2013 SEBI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atement in para 17 of the above Application for review viz. that the Complaint was received by SEBI only after SEBI had already started investigations in the matter i.e. after 13th December, 2011, though SEBI had received the same much prior to this Court granting sanction to the Composite Scheme of 2011. 20. To overcome the above difficulties, SEBI has relied on paragraphs 66, 67, 78, 141, 296 and 303 of the decision of the Hon ble Supreme Court in the case of Sahara (supra) wherein the Hon ble Supreme Court has inter alia observed that SEBI has very wide powers to take any actions/steps necessary for investor protection and for the development and regulation of the securities market and that SEBI s powers are not fettered by any other law including the Companies Act. SEBI has submitted that since the Division Bench in Sterlite (supra) did not consider the powers conferred under the SEBI Act, particularly Sections 11, 11A and 11B and was concerned only with the provisions of Section 55A of the Act, Sterlite is no longer good law after the decision in Sahara India (supra). SEBI has submitted that even if the Division Bench judgment were to be still treated as good law, it is res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusion that the Scheme has become unworkable in its entirety or in a portion thereof . In my view, the two alternative solutions suggested by SEBI amount to imposing a new commercial bargain on the shareholders and other stakeholders which has not been consented to by them and do not fall within the scope of S.392 of the Companies Act. 23. It is further contended by SEBI that by virtue of Rule 6 of the Companies (Court) Rules, 1959, the provisions of the Code of Civil Procedure, 1908 apply to proceedings under the Companies Act, 1956. It is therefore submitted that pursuant to the provisions of Sections 114 and 151 of the Code of Civil Procedure, 1908 and order 47 of the CPC, this Court has the power to review/recall its orders. As correctly submitted on behalf of the original Petitioner, assuming that the provisions of the Code of Civil Procedure, 1908 with regard to the filing of Review Petitions do apply, it is only a person aggrieved by an order who can file a review petition. SEBI cannot claim to be a person aggrieved. If SEBI has no locus to appear in a Scheme Petition, SEBI can hardly be a person aggrieved who would be entitled to file a Petition seeking a review/re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany) was merged into City Pulse Properties Limited (unlisted transferee company). 27.1 On 23rd February, 2010 and 24th February, 2010, the Board of Directors of City Pulse and the Board of Directors of erstwhile Ikisan respectively passed a resolution approving the 2010 Scheme. 27.2 On 25th June,2010, City Pulse filed Company Summons for Direction No. 465 of 2010 before this Court. In compliance with Rules 67 to 87 of the Companies (Court) Rules, 1959, and in compliance with the specific requirements prescribed in a checklist of the Company Registrar of this Court, along with the said Company Summons for Direction, the following documents were submitted: (i) Memorandum of Association and Articles of Association of City Pulse and erstwhile Ikisan; (ii) Audited accounts as on 31 March 2009 of City Pulse and erstwhile Ikisan; (iii) Unaudited accounts as on 31 March 2010 of City Pulse; (iv) Unaudited (provisional) accounts as on 31 March 2010 of erstwhile Ikisan; (v) 2010 Scheme of Amalgamation; (vi) Board resolution dated 23 February 2010; and (vii) Consent letters of the equity shareholders (according their approval to the 2010 Scheme). 27.3 The 2010 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isional unaudited accounts for the year ended March 31, 2010 of erstwhile Ikisan therefore clearly reflects that in 2009 the value of the trademarks and customer contracts of erstwhile Ikisan (pre the 2010 Scheme) were Nil, whereas in the provisional unaudited accounts of Ikisan for the year ended 31 March 2010, trademarks and customer contracts were shown at their fair value at ₹ 36.4 crores and ₹ 18.2 crores, respectively. 27.8 On 2nd July, 2010, the erstwhile Ikisan also filed Company Scheme Petition No. 392 of 2010 before this Court. Along with the said Company Scheme Petition, the following documents were submitted: (i) 2010 Scheme; (ii) Board Resolution dated 24 February 2010; and (iii) Order dated 02 July 2010. 27.9 On 9th July, 2010, this Court in Company Scheme Petition No. 393 of 2010 (filed by Citypulse) passed an order admitting the Petition and fixing 13th August, 2010 as the date for final hearing of the petition, and inter alia directing that notice for hearing of Company Scheme Petition No. 393 of 2010 be: (i) served on the Regional Director, Western Region, Ministry of Corporate Affairs Mumbai, Maharashtra pursuant to Section 394A of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kisan were also forwarded to the Official Liquidator; and (v) a copy of Company Scheme Petition Nos. 392 and 393 of 2010 to the Ministry of Law and Justice; Further, public notices were issued giving notice of the final hearing of the Petition. 27.12 On 27th August, 2010, this Court sanctioned the 2010 Scheme. The 2010 Scheme was sanctioned after taking into account the clearance/no objection given by the Regional Director and the Official Liquidator. The clearance/no-objection given by the Regional Director and the Official Liquidator is recorded in the order dated 27 August 2010 of this Court sanctioning the 2010 Scheme which states as follows: 5. Save and except as stated in para 6(a) 6(b) it appears that the scheme is not prejudicial to the interest of the shareholders and public. 7. The Official Liquidator has filed a report in Company Scheme Petition No. 392 of 2010 stating therein that the affairs of the Transferor Company has been conducted in a proper manner and that the Transferor Company may be ordered to be dissolved. 27.13 On 8th September, 2010, the Scheme was made effective. City Pulse and erstwhile Ikisan filed e-form 21 with the Registr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the fairness opinion of Keynote in respect of the share exchange ratio dated 07 January 2011. Board of directors of erstwhile NFCL informed BSE and NSE of such board s approval. 29.3 On 27th January, 2011, erstwhile NFCL applied to BSE and NSE under Clause 24(f ) of the Listing Agreement for approval to the 2011 Composite Scheme. As per BSE and NSE requirements, inter alia the following details/documents (as specified in the checklist available on the BSE and NSE websites at the relevant time) were provided along with the clause 24(f ) application: (i) Board Resolution dated 10 January 2011; (ii) Draft 2011 Composite Scheme approved by the Board; (iii) Rationale of the 2011 Composite Scheme; (iv) Brief details of Ikisan, erstwhile NFCL, KFL and NORL (in the format prescribed by BSE and NSE); (v) Grant Thornton s Valuation Report setting out the share exchange ratio dated 06 January 2011; (vi) Keynote s fairness opinion setting out the share exchange ratio dated 07 January 2011; (vii) Auditor s Certificate under Clause 24(i) of the Listing Agreement certifying the accounting treatment; (viii) Shareholding pattern of KFL and NORL pre and post the 2011 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to file, within 30 days, the form of advertisement, the notice along with the explanatory statement and that the same shall be settled by the Registrar of the Andhra Pradesh High Court; (v) Chairman of the court convened meeting shall issue advertisement and send out the notices; (vi) Quorum for the meeting shall be 25 members present in the meeting, either in person or through proxies; (vii) Value of each member shall be in accordance with the books of erstwhile NFCL and where the entries are disputed the Chairman shall determine the value for the purpose of the meeting; (viii) The Chairman s report to be filed on or before 20 April 2011 as per Rule 78 of the Company (Court) Rules, 1959; (ix) Dispensation from holding meeting of the secured creditors of the company; (x) Dispensation from holding meeting of the unsecured creditors. 29.7 In compliance with the order dated 04 March 2011: (i) Notice (of the Court convened meeting of the members of the erstwhile NFCL) along with explanatory statement under Section 393 of the Companies Act, 1956 was issued to all shareholders which disclosed/ provided the following: (a) background of erstwhile NFCL, KFL, NORL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held on 15 April 2011 and stating that copies of the 2011 Composite Scheme and the explanatory statement will be made available . (iii) The copies of the public notices were forwarded to BSE and NSE on 28 March 2011. (iv) Court convened meeting chaired by Mr. B. Satya Sivaji, an Advocate appointed by the Andhra Pradesh High Court, was held on 15th April 2011, when members of erstwhile NFCL considered and approved the 2011 Composite Scheme with 99.83% in number and 89.45% in value. Quorum was 583 (338 in person and 245 by proxy), i.e. more than the quorum of 25 prescribed by the Court. (v) Erstwhile NFCL informed BSE and NSE that the 2011 Composite Scheme was approved by requisite majority of the members at the Court convened meeting. (vi) Chairman prepared his Report (Ex P12 @ pg. 479 of Company Petition No. 72 of 2011) and filed the same with the Andhra Pradesh High Court. 29.8 On 19th April, 2011, erstwhile NFCL filed Company Petition No. 72 of 2011 before the Andhra Pradesh High Court enclosing therewith the following documents : (i) 2011 Composite Scheme duly approved by the Board, NSE and BSE; (ii) Memorandum of Association and Articles of Association of K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive of any provisions of law and is not contrary to the public policy. Having considered the report of the Registrar of Companies and Official Liquidator and there being no opposition from any quarter for the proposed scheme and as all the statutory compliances have been fulfilled, I do not see any impediment in granting sanction to the composite scheme of arrangement and amalgamation as proposed by the petitioners. B-2. Disclosures in 2011 Scheme filed by Kakinada Fertilizers Ltd. (KFL) and Ikisan Limited before this Court. 30.1 On 10th January, 2011, the Board of Directors of KFL and the Board of Directors of IKISAN passed Resolutions approving the 2011 Composite Scheme. 30.2 On 17th February, 2011, KFL filed Company Summons for Direction No. 126 of 2011 before this Court enclosing therewith the following documents : (i) Memorandum of Association and Articles of Association of KFL, erstwhile NFCL, Ikisan and NORL (the order dated 27th August, 2010 approving the 2010 Scheme was appended to the Memorandum andArticles of Association of Ikisan). (ii) Audited accounts as on 31 March 2010 of KFL, erstwhile NFCL and Ikisan; (iii) Unaudited accounts as on 31 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies; and (iii) published in the Free Press Journal in English and Maharashtra Times in Marathi, both circulated in Mumbai. 30.8 Again, on the same day i.e. 15th April, 2011, this Court also passed an order in Company Scheme Petition No. 234 of 2011 admitting the Petition and fixing 10th June 2011 for final hearing of the Petition and inter alia directing that notice of hearing of the Company Scheme Petition No. 234 of 2011 be : (i) served on the Regional Director, Western Region, Ministry of Corporate Affairs Mumbai, Maharashtra pursuant to Section 394A of the Companies Act, 1956; (ii) served on the concerned Registrar of Companies; (iii) served on the Official Liquidator, High Court, Bombay pursuant to Section 394 (1) of the Companies Act,1956; (iv) published in the Free Press Journal in English and Maharashtra Times in Marathi, both circulated in Mumbai; and (v) served by R.P.A.D. upon all its secured and unsecured creditors. 30.9 In Compliance with the order dated 15th April, 2011, KFL and Ikisan: (i) Submitted a copy of Company Scheme Petition Nos. 234 and 235 of 2011 along with all annexures thereto to the Regional Director. A copy of e-form 61 (i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gional Director has filed an affidavit stating therein that save and except as stated in paragraphs 6(a), 6(b) and 6 of the said Affidavit, it appears that the Scheme is not prejudicial to the interest of shareholders. 8. The Official Liquidator has filed his report in Company Scheme Petition No.234 of 2011 stating therein that the affairs of the Second Transferor Company have been conducted in a proper manner and that the Transferor Company may be ordered to be dissolved. 30.11 On 22nd July, 2011, Erstwhile NFCL informed BSE and NSE that the 2011 Composite Scheme was approved by the Bombay High Court on 17 June 2011 and the Andhra Pradesh High Court on 27 June 2011. Copies of the certified orders were also forwarded. 30.12 On 27th July, 2011, BSE and NSE were informed that the Board of Directors of erstwhile NFCL at its meeting held on 27 July 2011, have fixed 01 September 2011 as the Record Date for the purpose of determining the shareholders eligible to receive shares in NORL and KFL, subject to confirmation from the stock exchanges. 30.13 On 28th July, 2011, erstwhile NFCL forwarded applications to BSE and NSE for fixing 1st September 2011 as the Record Date f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt was introduced only after the judgment in SEBI vs. Sterlite Industries India Ltd. (supra) was passed by the Division Bench of this Court holding that SEBI had no right of notice in a scheme matter and that, however, the Central Government would be entitled to notice under Section 394A, the reason being that the Central Government acting through the Regional Director, Department of Company Affairs, submits a report on the scheme of arrangement to the Company Court. Hence, it appears that it was in this background that Clause 24(f ) was introduced. 32.4 A perusal of the 8th May, 2003 Circular whereby the Listing Agreement was amended would show that the objective behind insertion of Clause 24(f ) was to enable the Stock Exchanges to be able to peruse the schemes so as to be able to check the schemes for violation of securities laws. As submitted by the Petitioner, in the course of granting the Clause 24(f ) approval, the Stock Exchanges had: (a) in compliance with Clause 24(i), accepted the certificate of the Statutory Auditors of the erstwhile NFCL, recording that the accounting treatment mentioned in the 2011 Composite Scheme is in compliance with the generally accepted accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merger of Ikisan and City Pulse was made. The 2011 Scheme Petition not only mentions the fact that the name of City Pulse Properties was changed to Ikisan Limited, but also provides the Memorandum of Association and Articles of Association of Ikisan Limited which contains the order of this Court dated 27th August 2010 approving the 2010 scheme. Again the allegation made by SEBI to the effect that the notes to accounts of Ikisan (post merger) do not make any disclosure with regard to the methodology adopted to value the intangibles is not to be found in the pleadings before this Court. In any event, the audited accounts of Ikisan, which have been submitted with Company Scheme Petition No. 285 of 2011, clearly reflects that in 2009 the value of trademarks and customer contracts (pre 2010 scheme) were nil and that the trademarks and customer contracts in the audited accounts for the year ended 31st March 2010 are recorded at ₹ 36.4 crores and ₹ 18.2 crores at their respective fair values. The allegation of SEBI during the course of oral submissions before this Court was that the 2011 GT Report (Second GT Report) was suppressed from this Court. In its written submissions, S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts has been correctly answered in the negative inasmuch as since there had in fact been no revaluation of Ikisan, the question of dividend being declared on account of revaluation obviously would not arise. 35. It is therefore clear that there was no suppression of any relevant and/or material fact whilst obtaining orders on either the 2010 Scheme or the 2011 Scheme. The question therefore of any fraud committed by the Companies which have approached the Court seeking orders on the said Schemes by suppression of facts as alleged does not arise and in fact the Regional Director has, with the exception of certain objections which have been complied with, informed the Court that the Scheme is in the interest of the shareholders of the Company. The question therefore of setting aside the orders sanctioning the Scheme of Arrangement and Amalgamation or sanctioning amendments to the Scheme on the ground of alleged suppression thereby perpetrating a fraud on this Court does not arise. 36. SEBI has in its Review Petition not challenged the first G.T. Report but has emphatically submitted that the valuation of intangible assets (trademarks and customer contracts) in the books of Ikisa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng carrying amounts or by allocating the consideration to the individual identifiable assets and liabilities at their fair values (c) since in the instant case the intangible assets did not have any existing carrying values, their fair values were required to be determined and their consideration had to be allocated accordingly; (d) Besides in para 4.1 read with para 6.1 of the 2010 Scheme itself, it was provided as under: 4.1. With effect from the opening of business as on the Appointed Date, the entire business and whole of the undertaking of the Transferor Company including all its properties and assets (whether movable or immovable, tangible or intangible, whether recorded or not in the books of accounts) of whatsoever nature such as licenses, permits, quotas, approvals, lease, tenancy rights, permissions, incentives, know how, software, databases, user base, customer lists, trademarks, trade names, developed technologies, etc. if any, and all other rights, title, interest, contracts, consent, approvals or powers of every kind nature and descriptions whatsoever shall under the provisions of Sections 391 to 394 of the Act and pursuant to the Orders of the High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aphs 9(p) (v) (page 267) which is reproduced hereunder: (v) If the principles as suggested by BSM are applied, it will give erroneous results because in that scenario, effectively in case of amalgamation, the consideration is always net consideration after taking into account the liabilities that will be transferred pursuant to amalgamation. Further, assuming that it is only the consideration that has to be allocated to the assets and not the fair values of respective assets, then there would be no situation in which goodwill/capital reserve arise pursuant to merger. Further, if the allocation of fair value of the assets and liabilities is restricted to the consideration, then the resultant values of the assets and liabilities would neither be at fair value / acquisition cost or book value as per the financial statements of the transferor companies. Significantly, the same has not been dealt with in the Affidavit in Rejoinder filed by SEBI. Though an attempt to deal with the same is made by M/s. Bansi Mehta Co. in their letter dated 2nd September 2013 (Page 1874), however, it is significant to note that save and except for reiterating the stand already taken by Bansi Me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han can be given within this Standard. ; (d) It is AS-14 which deals with accounting for amalgamation and provides for the manner in which assets and liabilities are required to be recorded pursuant to an amalgamation; (e) The two accounting standards, viz. AS-10 and AS-14 deal with 2 different subject matters and one accounting standard cannot be applied to interpret another accounting standard; (f ) This would also be clear from paragraphs 2, 17 and 37 of AS-14. Paragraph 2 of AS-14 reads as under: This standard does not deal with cases of acquisitions which arise when there is a purchase by one company (referred to as the acquiring company) of the whole or part of the shares, or the whole or part of the assets, of another company (referred to as the acquired company) in consideration for payment in cash or by issue of shares or other securities in the acquiring company or partly in one form and partly in the other. The distinguishing feature of an acquisition is that the acquired company is not dissolved and its separate entity continues to exist. (g) Paragraph 17 of AS-14 deals with the subject of reserves on amalgamation and reads as under: 17. If t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration is to be allocated, the values to be allocated are subject to a maximum ceiling, namely, the consideration; (ii) Clause 37 does not in any manner disturb the above. If the consideration exceeds the value of the asset of the transferor acquired by the transferee that difference must be shown as goodwill arising on amalgamation i.e. on the assets side of the transferee company s balance sheet this does not arise in the present case; (iii) if however the amount of consideration is lower than the value of the net assets acquired the difference has to be treated as Capital Reserve. Capital Reserve is a reserve shown on the liabilities side of the balance sheet. In other words if consideration is lower than book value only the book value can be shown as the value of assets on the assets side and the difference is shown on the liabilities side hence the value of assets shown in the balance sheet of the transferee still cannot exceed the total amount of consideration i.e. in the present case could not have exceeded ₹ 86,910/-. 39. It is submitted on behalf of the Petitioner that the above contentions raised by SEBI are wholly misconceived and in fact contrar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the mere noncompliance of the Accounting Standards (though not true in the present case) cannot be a ground for recall or review of a court sanctioned scheme especially when due process of law has been complied with. As the Petitioner has rightly contended, accounting takes place after the completion of the transaction; accounting only records the transaction and does not change the character or the value; and alleged noncompliance in respect of accounting cannot and will not change the transaction or the treatment of the transaction. The ultimate test that is required to be seen is whether the transaction has been fair to all concerned, and that test has been satisfied. Again though it is too late for SEBI to contend (in the year 2013) that the 2010 Report of Grant Thornton violates accounting standards, it is also pertinent to note that SEBI has in the Review Petitions chosen not to seek any reliefs qua the GT Report of 2010 or seek recall/review of the order sanctioning the 2010 Scheme. In view thereof, the question of setting aside or recalling the order dated 17th June, 2011, sanctioning the Scheme of Arrangement and Amalgamation and order dated 22nd July, 2011 sanctioning ame ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he existence of the assets but has only sought to allege an increase in the valuation thereof. 42.3 It is further submitted on behalf of the Petitioner that SEBI s case that the intangible assets of Ikisan were valued with the ulterior motive of artificially placing a highly inflated/exaggerated value on intangible assets of Ikisan (viz. ₹ 54 crores) and within a short time thereafter utilizing the said highly inflated assets in the 2011 Composite Scheme is misconceived. It is submitted on behalf of the Petitioner that firstly this case has never been pleaded by SEBI. Secondly, the fact that any asset(s) or intangible asset(s) may not have been valued for 10 years, i.e. pre the 2010 Scheme (since the accounting principles which apply to a going concern do not provide for recording valuations for self-generated intangible assets) does not ipso facto mean that the assets are not worth nothing. It also does not mean that because the same may not have been fair valued and therefore reflected in the Balance Sheet as nil, would ipso facto mean that valuation is ex facie inflated/exaggerated merely because what was shown as nil in the balance sheet is fair valued at ₹ 54 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rces of information which are listed in paragraph 4.3 of the report. The same is reproduced hereunder: 4.3 Sources of information The valuation analysis is based on a review of historical and projected financial information relating to Ikisan as provided by the Management of Ikisan. The sources of information include: Business Plan of Ikisan dated 16 December 2009 as provided by the Management of Ikisan; Audited Historical Financial Statements of Ikisan from FY06 to FY09 as provided by the Management of Ikisan; Provisional financial Statement of Ikisan for FY10, provided by the Management of Ikisan; Financial projections of Ikisan for five years provided by the Management of Ikisan; Paper published in world congress on information and communication technologies for development 2009, Beijing (WCID 2009); Discussions with the Management of Ikisan; NSE and BSE websites In addition to the above, we have also obtained such other information and explanations which were considered relevant for the purpose of our analysis. 42.5 SEBI has inter alia contended that GT accepted the information/projections provided by the Management at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orders on hand with Agri Portal at the time of carrying out valuation exercise. 3. Had discussions with the management to understand future plans and contracts being discussed with potential customers. 4. Obtained information about the popularity of the Portal and the number of hits received by the Portal on a daily basis showing potential user interest in the portal. 5. Considered competitors in the business and obtained information about the company s edge over the competitors. For the Micro Irrigation Business we 1. Reviewed documents for setting up of the production facility. 2. Studied and analysed performance of other players in the micro irrigation business, considered analyst reports highlighting growth potential for the business. 3. Reviewed orders received and letter of intent from potential customers to acquire products of iKisan Ltd. 4. Studied data on the business opportunity prepared by NMMI, Market Intelligence department of Government of India as well as analyst reports capturing Micro Irrigation business. 5. Cross checked data given by external agencies with the projections provided by the company to test for reasona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons were provided to it by the management. The actual revenue of Ikisan for the year 2011 was only ₹ 6.76 crores, which is significantly lower than the projections used by Grant Thornton. (d) Grant Thornton has used arbitrary growth rates to project the revenue for the years beyond 2012 and has not provided any rationale for arriving at the growth rates. 44.2 In response, NFCL has submitted that SEBI has not submitted earlier that the GT Report dated 24th June 2010 is unrealistic, perverse and incredibly high. It is therefore another attempt to make a new case in the written submissions. The GT Report of 2010 has not been put into issue in the Review Petition. Only compliance of accounting standards was questioned. The challenge to the GT Report of 2010 has been made for the first time in the form of Written Submissions. In the Review Petition, SEBI has not dealt with GT s Valuation Report dated 24 June 2010. SEBI has only questioned the manner in which the assets and liabilities of Ikisan have been cast post its merger with City Pulse as being patently inconsistent with the requirements under AS-10 and AS-14 by relying on M/s. Bansi Mehta Co. s Report dated 25 Septem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t business. For instance, in the case of a start-up or nascent business which may have earned only ₹ 100 in the first year and which is likely to earn ₹ 1000 in the second ₹ 3000 in the third and ₹ 5000 in the fifth year; according to SEBI, such increase in income is impossible to achieve because on a year on year basis the income has gone up 10 times in the second year 30 times in the third year and 50 times in the fifth year. In fact even between the years 2009 and 2010, on account of a rise in income from ₹ 1.62 crores to ₹ 3.23 crores (doubling or 100% growth in income) on a year on year basis, the multiple itself has come down from 23 times income in 2009 to 12 times 2010 income. 44.6 The contention raised by SEBI that the valuation is unrealistic, perverse and incredibly high on account of the fact that whereas the revenues of Ikisan for the year 2011 were projected at ₹ 12.6 crores, the actual revenue was only ₹ 6.76 crores, is nothing but an attempt on the part of SEBI to challenge the valuation which is inherently based on future projections by applying what is essentially a hindsight view. Valuation being an exercise requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investments that have already been made are categorized as assets in place, but investments that we expect the business to make in the future are growth assets. A financial balance sheet provides a good framework to draw out the differences between valuing a business as a going concern and valuing it as a collection of assets. In a going concern valuation, we have to make our best judgements not only on existing investments but also on expected future investments and their profitability. While this may seem to be foolhardy, a large proportion of the marked value of growth companies comes from their growth assets. In an asset-based valuation, we focus primarily on the assets in place and estimate the value of each asset separately. Adding the asset values together yields the value of the business. For companies with the lucrative growth opportunities, asset-based valuations will yield lower values than going concern valuations. One special case of asset-based valuation if liquidation valuation, where we value assets based on the presumption that they have to be sold now. In theory, this should be equal to the value obtained from DCF valuations of individual assets, but th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valuer for the purposes of valuation before this Court along with the Company Summons for Direction and Company Scheme Petition. The projections given by the management are always regarded as confidential in nature being price sensitive , which, as a matter of practice, has never been made part of the record of the Court unless the Court desires to examine them. In any event, admittedly, the Second Valuation Report of GT was forwarded to the BSE as well as NSE prior to the sanction of the Scheme and inspection of the valuation report was also offered to the shareholders of NFCL. 46. (iv) Additional share capital of ₹ 29.50 crores was infused in Ikisan between 31st March 2010 and 31st December 2010 by the promoters so that the promoter would get additional shares of NFCL upon the subsequent merger of Ikisan with NFCL and KFL. 46.1 SEBI has submitted that between 31 March 2010 and 31 December 2010 the promoters of the Nagarjuna group infused approximately ₹ 29.50 crores of additional share capital into Ikisan. Ikisan appears to have utilized part of this fresh capital to purchase fixed assets in the form of land and buildings. SEBI has submitted that this additi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny with no operations: (i) 11 equity shares of KFL of face value of ₹ 1 per share fully paid up for every 10 equity shares of NFCL of ₹ 10 each fully paid up; (ii) 1 preference share of ₹ 90 each fully paid up of KFL for every 1 preference share of ₹ 100 each fully paid up, held by the preference shareholders of NFCL; and (iii) 43 equity shares of KFL of face value ₹ 1 each for 10 equity shares of Ikisan of ₹ 10 each fully paid up.[Company Application 125 of 2014 - Affidavit in Reply - Vol. I page 293]. 47.2 SEBI has therefore sought to contend that NFCL, which had a huge asset base has been given a lower valuation and Ikisan, which did not have sufficient assets has been given a higher valuation. 47.3 NFCL has contended that the contention of SEBI to the effect that the past performance of Ikisan did not justify the swap ratio in the 2011 Scheme is devoid of any merit, inasmuch as GT has in the 2011 Report as well as in the letter dated 22nd July 2013 justified the reasons for adopting the DCF method of valuation. In the letter dated 22nd July 2013, GT has stated as under: With respect to the use of valuation method please ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... potential as envisaged as at the valuation date. Hence we do not agree to the statement that the Discounted Cash Flow method uses a mere ipse Dixit to arrive at future free cash flows for the equity holders, discounted by the firm s cost of equity. In case of a share exchange ratio in a scheme to be sanctioned by the court there are no methods prescribed under the statutes. In view of several judgements over the years, it is clear that the method to be followed for the valuation have been left to the expertise and wisdom of the valuers. Several decisions of the court where this aspect has been reiterated and some other aspects of valuation are set out in Schedule 1 hereto. This reasoning is also evident from various empirical data from transactions where such businesses have been acquired at a significant premium to the historical financial performance. In some cases, in fact, companies having zero revenues and negative margins have been acquired or are being traded on stock exchanges at a significant valuation. A few of such cases have been highlighted below- 1. Piramal Life Sciences Limited (PLSL) Very low his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s used for the valuation exercise. Further, the value conclusion of DCF method of ₹ 245 Crores is not imaginary and is based on expected future cash flows, the reasonability of which was assessed after taking into account various factors as highlighted in point 1 above and the risk of achieving those cash flows being factored in the discount rate. It is hereby submitted that the share exchange ratio was derived as a result of consistent application of valuation methods for NFCL as well as business of iKisan Limited after taking into consideration the underlying potential of each of the companies. We would like to further mention that share exchange ratio stated by us was an outcome of application of consistent and appropriate method of valuation by thorough review of available data, both external as well as internal, analysis and application of reasonability test on the projected financial data. 47.4 NFCL has given a plausible explanation that what SEBI has failed to take into account is the fact that on 31st March 2010 NFCL was a Company operating in a Government controlled regulated Industry and further was undergoing a Corporate Debt Restructuring with a liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vit stating that the Composite Scheme was not prejudicial to the interest of the shareholders except for the objections raised in paragraphs 6(a) to 6(c) of the said Affidavit. These objections were duly addressed in the Order dated 17th June, 2011. 47.5. In view of the above SEBI has failed to make out any case of fraud in GT arriving at the above exchange ratio. 48. (vi) Considerations relevant for valuation of assets by DCF method are ignored by Grant Thornton. 48.1 SEBI has submitted that the value of the Company s assets are relevant for the purpose of determining value based on the DCF method given that depreciation and amortizations are relevant considerations. It is submitted that in a case such as that of Ikisan where the value of assets include customer contracts and trademarks which have a direct correlation with the revenue earning capacity of a company, the asset value of the Company is bound to be relevant in determining the future projected earnings of a Company. The Petitioner wrongly refused to disclose these financial projections that had been provided by the management to GT on the basis that they were confidential in nature being price sensitive, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is low which leads to a lower value for the company. In case a higher depreciation / amortization were considered, the tax expense would have reduced which would have resulted in increasing cash flows leading to a higher value for the company. 48.4 The contention of SEBI inter alia to the effect that GT Report II does not indicate the factors which have been taken into account by GT does not appear to be correct. GT Report II at pages 289 to 291 of Ex.1, Vol-I sets out the factors which have been considered by GT in arriving at the valuation of Ikisan. 48.5 Neither has the Keynote fairness opinion expressed any opinion on the value of Ikisan s trademarks and customer contracts nor has NFCL relied upon the Keynote fairness opinion for the purpose of substantiating the valuation of trademarks and customer contracts under the 2010 Scheme. The contention raised by SEBI that Keynote has considered the value of trademarks and customer contracts at ₹ 54 crores for the purpose of providing it s fairness opinion is erroneous in as much as the fairness opinion of Keynote is based on the valuation arrived at by GT as per the DCF method for the 2011 Composite Scheme. The fairn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... absence of any prescribed method, adopts any recognized method of valuation, his valuation cannot be assailed unless it is shown that the valuation was made on a fundamentally erroneous basis, or that a patent mistake had been committed, or the valuer adopted a demonstrably wrong approach or a fundamental error going to the root of the matter. Where a method of valuation is prescribed the valuation must be made by adopting scrupulously the method prescribed, taking into account all relevant factors which may be enumerated as relevant for arriving at the valuation. The test laid down above by the Hon ble Supreme Court as to when a court may interefere with the findings of a valuer is not satisfied in the present case in as much as it is not SEBI s case that a recognized method of valuation was not adopted, or that the valuation was made on a fundamentally erroneous basis, or that a patent mistake had been committed, or that the valuer adopted a demonstrably wrong approach, or that there was a fundamental error going to the root of the matter. In any event, SEBI has failed to make out any such manifest error in the approach adopted by the valuer in the present case. 48.8 As r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or going to the root of the matter. This is clearly an afterthought. 49. (vii) The reasoning of the Petitioner in support of the gigantic leaps in valuation is unjustified. 49.1. SEBI has submitted that the justification given by the Petitioner for these gigantic leaps in valuations is that one s mindset has to be radically modernized to eschew the traditional approach of a bricks and mortar value in favour of a modern the sky is the limit approach to valuation. Such a contention is only to be stated to be rejected. It is submitted that even modern valuation techniques are grounded in solid principles and do not permit fantastic projections to be made the basis of valuations. Referring to the example of Facebook given by the Petitioner, it is submitted that since the GT Report I had valued Ikisan s intangible assets (Trademarks and Customer Contracts) at ₹ 54.16 crores as on 31 March 2010, the sky-rocketing valuation of Ikisan, 9 months later, on 6 January 2011 by the same valuer (GT Report II) at ₹ 245 crores must logically be attributable not to a dramatic rise in the valuation of the same intangibles but to the bricks and mortar micro-irrigation busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets of Ikisan were valued at ₹ 54 Crores and therefore the residuary value is attributable to the micro irrigation business. This contention of SEBI cannot be accepted inasmuch as the 2010 GT Report did not value the business of Ikisan but valued two of its intangible assets. The valuation under the 2011 Composite Scheme is the enterprise valuation of the merged Ikisan and not a valuation based on individual assets of Ikisan or KFL. The Petitioner s contentions in this behalf appear to be justified. The comparison between the 2010 GT Report which valued two of the intangible assets of Ikisan and the 2011 Report which had as its purpose the valuation of Ikisan s business by the DCF method is inappropriate. 50. In view of the above, it is clear that the 2010 Scheme was sanctioned by this Court by its order dated 27th August, 2010 whereunder the erstwhile Ikisan Ltd. (unlisted Transferor Company) was merged into City Pulse Properties Limited (Unlisted Transferee Company). As set out hereinabove, it is established that City Pulse Properties Ltd. and/or Ikisan have not suppressed any document containing any relevant fact from its shareholders, the Registrar of Companies, the R ..... X X X X Extracts X X X X X X X X Extracts X X X X
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