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Securities & Exchange Board of India, Mumbai Versus Ikisan Limited and Kakinada Fertilizers Limited

2015 (9) TMI 1194 - BOMBAY HIGH COURT

Application for recall of the Scheme of Arrangement and Amalgamation - scheme was approved / sanctioned by the court vide order dated 17-6-2011 - SEBI has alleged that the Petitioners have suppressed from this Court, inter alia, the facts to achieve their objective of increasing their shareholding - SEBI also received a complaint that the consideration offered is detrimental for the interest of the equity shareholders. - whether the parties have as alleged by SEBI not disclosed the relevant fact .....

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on 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.

This Cou .....

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h” 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 GT Report and the letter of GT dated 22nd July 2013 make it clear that GT had reviewed the data provided by the Management for reasonableness and consistency and that GT did not accept the projections at face value.

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fact, as regards the Resultant Company No. 1 (Originally KFL and now renamed NFCL), BSE and NSE granted in principle approval for listing on 8th December, 2011 and 13th January, 2012, respectively.

In the circumstances, the question of granting any reliefs as prayed for or otherwise to SEBI does not arise and the above Applications are dismissed with costs. - COMPANY APPLICATION NO. 124, 125 OF 2013 IN COMPANY SCHEME PETITION NO. 234, 235 OF 2011, CONNECTED WITH COMPANY SUMMONS FOR D .....

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or The Regional Director : Mr. J.P. Sen, Senior Advocate, for the Official Liquidator. Mr. C.J. Joy JUDGMENT: 1. The above Company Applications are filed on 21st February, 2013, by the Applicant - Securities and Exchange Board of India ( SEBI ), inter alia, for the following relief: (a) That this Hon ble Court be pleased to recall/review and/or set aside the order dated 17th June 2011 (sanctioning the Scheme of Arrangement and Amalgamation) and order dated 22nd July 2011 (sanctioning amendments .....

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5 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 deme .....

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oil business merged and NFCL dissolved without winding up pursuant to the Composite Scheme. 4. The composite scheme has been made effective and shares have been allotted to the respective shareholders. Subsequent to the composite scheme, dividends have been declared and paid. The shares of the demerged entity viz. NORL have been listed on 23rd March, 2012, and are being traded on the Bombay Stock Exchange ( BSE ) and National Stock Exchange ( NSE ). Even as regards the Resultant Company No. 1 ( .....

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ication, SEBI for the first time had an opportunity to peruse some of the details of the financials of Ikisan Limited for the years 2009-2010 and 2010-2011, which inter alia revealed that the gross fixed assets of Ikisan had increased from nil in financial year 2009, to ₹ 54.61 crores and ₹ 75.70 crores in financial years 2010 and 2011 respectively. From the schedule of fixed assets of Ikisan Ltd., it was observed that there were two items - Trademarks and Customer Contracts Valuatio .....

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2009, SEBI claims to have realised that the amounts stated for the two items - trademarks and customer contracts valuation - in the financials of Ikisan Limited in 2009-2010 did not seem to be justified 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 &a .....

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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 ; (iii) that though accounting standard 26 requires the existence of control of an enterprise over cus .....

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n of Trademarks is based on discounted earnings of royalty taken at the rate of 10% applied to projected turnover. If the same is taken at the rate of 2.5%, the discounted value of royalty would come down by 3/4th approximately; (vi) the manner in which the assets and liabilities of Ikisan Ltd. have been cast post its merger with City Pulse Properties Ltd., is patently inconsistent with the requirements under AS 10 and AS 14; (vii) SEBI should also consider the possibility of recasting the accou .....

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ng, i.e. on March 28, 2012 was ₹ 6.95. Multiplying the same by the total number of equity shares (428181821), the total market capitalization was ₹ 297.58 crores. (c ) Deducting the market capitalization of NFCL from NORL, the approximate market capitalization of KFL was ₹ 877.77 crores. Excluding the shares allotted to the Promoters of Ikisan Ltd. (127064742 shares), the total number of equity shares of KFL was 471000261. Price per share of KFL calculated by dividing the marke .....

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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 sharehol .....

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shares of ₹ 10/- each, aggregating to a share capital of ₹ 5 lakhs. (b) The provisional balance sheet of KFL reveals that the said Company had no business income whatsoever inasmuch as there was no business conducted by KFL, and in fact it did not have any fixed assets nor any investments either. The accounts further reveal that as against the share capital of ₹ 5 lakhs, being the only funds available with the Company, the preliminary and pre-operational expenses of the company .....

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der the garb of synergy, etc. (d) Under the said scheme of arrangement and amalgamation, the shareholders of NFCL were allotted 11 equity shares of ₹ 1/- each fully paid up in KFL for every 10 equity shares of ₹ 10/- each held by the equity shareholders of NFCL. This, in effect, means that in so far as the shareholders of NFCL (a Listed Company) were concerned, for the aggregate face value of ₹ 100/- in the Listed company, they were to be issued shares which would be of an aggr .....

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by no stretch of imagination be called either fair or reasonable and is also against public policy. (f ) Ikisan Ltd. was incorporated originally on 11th April 2007 under Registration No. 169889 as City Pulse Properties Pvt. Ltd. The said City Pulse Properties Pvt. Ltd. was later renamed as City Pulse Properties Ltd. The said City Pulse Properties 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 Ce .....

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) 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 .....

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ares in exchange for the transfer, and thereby increase their shareholding in NFCL. (j) Under the said scheme of arrangement and amalgamation, for every 10 equity shares of ₹ 10/- each fully paid up, held by the shareholders of Ikisan Ltd. (which had no income whatsoever), they were to be issued 43 equity shares of ₹ 1/- each fully paid up in the transferee KFL. 9. SEBI has also stated in paragraph 17 of the Application that during the pendency of the exemption application filed by t .....

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and the representation filed before the authorities of Bombay Stock Exchange and also the Competition of India on the matters specified (of the Composite Scheme of Arrangement and Amalgamation-Nagarjuna Fertilizers) highlighting the loss being caused to the investors of the Company and the resultant problems faced by the investing public. The copies of the relevant letters together with the enclosures are sent herewith for your kind perusal and scrutiny. Now a stage has reached that he investing .....

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uity 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 t .....

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view of the Orders dated 17th June 2011 (sanctioning the Scheme of Arrangement and Amalgamation) and Order dated 22nd July 2011 (sanctioning amendments to the scheme), passed by this Court in Company Scheme Petition No. 235 of 2011. 11. It is pertinent to note that the above Company Application was preceded by an earlier Company Application (L) No. 45 of 2013 filed on 24th January 2013 seeking review of the Orders dated 17th June, 2011, and 22nd July, 2011, in which no allegations of fraud were .....

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cation for review, that SEBI was aware of the Valuation Report submitted by Grant Thornton relied upon by the Petitioner in support of the composite scheme of 2011, SEBI has in the Petition not impugned the GT Report dated 6th January 2011 or the fairness opinion expressed by Keynote Corporate Services Ltd. It is only in its Affidavit- in- Rejoinder dated 22nd July, 2013, that SEBI for the first time challenged the said Reports and also criticized/challenged the Discounted Cash Flow (DCF) method .....

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11 and 22nd July, 2011 be recalled. During oral submissions, the following two solutions are suggested by SEBI which also form part of their written submissions: SOLUTION - 1 A. Business of Ikisan Ltd. (100% subsidiary of Nagarjuna Corporation Ltd. one of the Promoters of the original NFCL) to be demerged from the new NFCL (Kakinada Fertilizers Ltd.). B. 12,70,64,742 number of shares of Re. 1/- each in the new NFCL which were allotted to Nagarjuna Corporation Ltd. (as Shareholder of Ikisan Ltd.) .....

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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 .....

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d scheme and the correct number of shares that should have been allotted (computed as above) to be cancelled. D. Sanctioned scheme to be modified as above by issue of directions under Section 392 of the Companies Act, 1956. 14. The Learned Senior Advocate appearing for the original Petitioner has made the following submissions: 14.1 SEBI does not have locus to intervene in a Scheme Petition under Sections 391-394 of the Companies Act, 1956. The judgement in the case of Sahara India Real Estate C .....

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nreported decision of this Court dated 2nd September, 2004 in Company Application No. 123 of 2004 hold that SEBI does not have locus to intervene in a scheme matter under Sections 391-394 of the Companies Act, 1956. In fact SEBI s own case as recorded in the judgement in MCX Stock Exchange Ltd. vs. SEBI (2012) Vol. 114 (2) Bombay Law Reporter 1002, was that SEBI does not have locus in a scheme under Sections 391-394 of the Companies Act, 1956; 14.2 The present Review Petition is barred by limita .....

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e; 14.6 The Financial data and projections 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 touch .....

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idator, 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, particularly when the shareholders have after due consideration approved the valuation and the swap ratio; 14.10 There has been no violation of the Accounting Standards. On the contrary, the valuation and the accounting entries under the 2010 Scheme are in accordance with th .....

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urt in Hindalco Industries Ltd. (2009) 93 CLA 58 (Bom) and Reliance Communication Ltd. vs. Reliance Infratel Limited 2009 Vol. III (8) Bom. LR 3340. 14.11 The Regional Director and the Official Liquidator, after having perused all relevant papers, have filed their reports with the Andhra Pradesh High Court and the Bombay High Court, stating that the Composite Scheme is not prejudicial to the interest of the shareholders. 14.12 The withdrawn Review Petition, the present Review Petition and the Af .....

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raud; 14.14 The solutions sought to be suggested by SEBI cannot be implemented inter alia on account of the same being beyond the scope of Section 392, and in any event amounting to a new commercial bargain to which the shareholders and other stakeholders have not consented. 15. The Learned Senior Advocate appearing for SEBI has taken me through the pleadings of SEBI wherein the submissions made by the Petitioner are denied and disputed. The Learned Senior Advocate appearing for the Official Liq .....

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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 .....

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the Division Bench held that the Appeal filed by the Central Government was maintainable as an Appeal under Section 391 (7) of the Act. The relevant observations of the Appeal Court are reproduced hereunder: First, we will take up the issue of maintainability of the appeal by the SEBI. The Companies Act does not provide for any notice being issued to the SEBI prior to any order being passed under Section 391 or Section 394 of the Companies Act. Even the Securities & Exchange Board of India A .....

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le to appreciate how SEBI would get right of statutory appeal under Section 391 (7) of the Companies Act. Mr. Dada, however, submitted that by virtue of the provisions contained in Section 55A of the Companies Act, SEBI has been empowered to administer the provisions of the sections specified in Section 55A including Sections 77 and 77A. Under Section 621 of the Companies Act SEBI is the appropriate authority to take steps for prosecution of any offences in regard to matters in respect of which .....

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e investors/ shareholders the court has discretion to grant leave to SEBI to file the appeal. 9. We are afraid we cannot accede to the submission of Mr. Dada. Under Section 55A. SEBI has been empowered 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 .....

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le 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. A more liberal approach is required to be adopted in the background of objective of the legislature in .....

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the scheme of arrangement would adversely affect the interest of the investing public at large the Central Government can be said to be aggrieved person to safe guard the interest of the investing public and can maintain an appeal under Section 391 (7). 18. A Special Leave Petition was filed by SEBI challenging the above order of the Division Bench of this Court, holding that SEBI had no right to notice or to appear in proceedings under Sections 391 and 394A of the Act. SEBI urged before the Ho .....

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he SEBI to raise these submissions in an appropriate case before the appropriate forum and it will be open to the forum to consider these questions in the light of the legal provisions which are sought to be relied upon on behalf of the SEBI. We make it clear that we have not gone into the merits of the issue involved in these Appeals . In my view, while it was left open to SEBI to assert its locus in proceedings under Section 391 to 394 in an appropriate case before an appropriate forum , the H .....

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ew 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 obj .....

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ed requirements for the Stock Exchanges and listed Companies under the said revised terms. Under the said revised terms, listed Companies desirous of undertaking a Scheme of Arrangement under Chapter V of the Companies Act, 1956 are required to file the Draft Scheme with the Stock Exchanges in terms of Clause 24 (f ) of the Listing Agreement. Along with the same, the Listed Companies are also required to submit various documents. These documents are mentioned in para 2 of Part A of Annexure 1 to .....

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the draft scheme to SEBI. It is further provided in the Circular that SEBI shall upon receipt of the objection/no objection letter from the Stock Exchanges provide its comments on the draft scheme to the Stock Exchanges. It is also provided in the circular that approval of the shareholders to the Scheme shall also be obtained through postal ballot and e-voting. 19. Again admittedly SEBI had prior to the approval and sanction of the composite scheme by this Court received a complaint dated 5th A .....

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bother to take any action on the complaint and forwarded the same to the BSE to look into it. SEBI has in its plethora of pleadings nowhere mentioned as to whether it thereafter followed up with the BSE or at least sought the say of the BSE on the said complaint. In fact, it appears that not having any explanation for its callous conduct, SEBI has preferred to make an incorrect statement in para 17 of the above Application for review viz. that the Complaint was received by SEBI only after SEBI .....

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or 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 ev .....

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e the Supreme Court has observed that SEBI has very wide powers to take any action/step necessary for investor protection and for the development and regulation of the Securities Market, the observations in the Sahara Judgment cannot be construed to have overruled the categorical finding of the Division Bench of this Court in the Sterlite case that SEBI cannot, as a matter of right, be heard in all scheme petitions coming up before the Court under Section 391 of the Act. Therefore the decision o .....

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m not in agreement with the submission advanced on behalf of SEBI. Section 392 of the Companies Act expressly provides that a modification to a Scheme can only be made for the proper working of a scheme and that such modifications cannot alter the basic fabric of the Scheme. The said position has been expressly clarified by the Hon ble Supreme Court in the case of S.P. Gupta vs. K.P. Jain [1979 (3) SCC 54] which judgment has been followed/confirmed by the Hon ble Supreme Court in the case of Rel .....

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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 Compan .....

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on 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/recall of the order sanctioning the scheme. Again as set out hereinabove, SEBI having failed to look into the complaint of the Shareholder, which was received prior to this Court having sanctioned the composite scheme by its Order dated 17th June, 2011, can hardly be heard to claim that it is an aggrieved party. 24. The original Petiti .....

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only after SEBI received an application dated 13th December, 2011 from the BSE for exempting NFCL from the applicability of Rule 19 (2) (b) of the SCRA, as more particularly set out in paragraph (j) above. SEBI received the report from Bansi Mehta dated 25th September, 2012 but filed the review petition only on 21st February, 2013 which is well beyond the statutory period of 30 days. 25. Despite all these factors being against SEBI, however, only since SEBI has contended that there is a fraud pe .....

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es have as alleged by SEBI not disclosed the relevant facts but have suppressed the same from their shareholders or from the BSE/NSE or from the Regional Director or the Official Liquidator or this Court, thereby committing a fraud as alleged, the relevant material disclosures made prior to obtaining the orders in respect of the 2010 Scheme and the 2011 composite scheme need to be considered. A. DISCLOSURES MADE PERTAINING TO THE 2010 SCHEME. 27. As stated hereinabove, under the 2010 Scheme, the .....

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, 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 2 .....

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Ikisan for the year ended 31st March, 2010, trademarks and customer contracts were shown at their fair value of ₹ 36.4 crores and ₹ 18.2 crores respectively. 27.4 On 25th June, 2010, the erstwhile Ikisan also filed Company Summons for Direction No. 464 of 2010 before this Court. Along with the said Company Summons for Direction, the erstwhile Ikisan submitted the following documents: (i) 2010 Scheme of Amalgamation; (ii) Board Resolution dated 24 February, 2010; (iii) Consent letter .....

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s Court, documents such as audited and unaudited accounts of the concerned companies are required to be filed only along with the Company Summons for Direction of the Transferee Company (i.e. City Pulse in the instant case). 27.6 On 2nd July, 2010, this Court passed orders in Company Summons for Direction No. 464 of 2010 and Company Summons for Direction No. 465 of 2010 dispensing with holding meetings of equity shareholders, secured creditors and unsecured creditors. 27.7 On 2nd July, 2010, Cit .....

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dated 23 February 2010; (vii) Order dated 02 July 2010. The provisional 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, respectiv .....

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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 the Companies Act, 1956; (ii) served on the concerned Registrar of Companies; (iii) served by R.P.A.D. upon all its Unsecured Creditors; and (iv) published in the Free Press Journal in English and the Maharashtra Times in Marathi, both circulated in Mumba .....

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oncerned Registrar of Companies; (iii) served on the Official Liquidator, High Court, Bombay pursuant to section 394 (1) of the Companies Act,1956; and (iv) published in the Free Press Journal in English and the Maharashtra Times in Marathi, both circulated in Mumbai. 27.11 In Compliance with the Order dated 9th July, 2010, City Pulse and erstwhile Ikisan submitted a copy of Company Scheme Petition Nos. 392 and 393 of 2010 along with all annexures thereto to the Regional Director, Western Region .....

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of shareholders along with shareholding of Ikisan and City Pulse, list of directors of Ikisan and City Pulse, Company Summons for Direction Nos. 464 and 465 of 2010 and affidavits of service of Ikisan and City Pulse to the Regional Director; (ii) a copy of Company Scheme Petition Nos. 392 and 393 of 2010 along with all annexures thereto to the Registrar of Companies; (iii) a copy of Company Scheme Petition Nos. 392 and 393 of 2010 along with all annexures thereto to the Official Liquidator; (iv .....

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iven 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 statin .....

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e Regional Director i.e. the Ministry of Law and Justice, the Official Liquidator, and this Court. It is pertinent to note that the unaudited accounts for the year ended March 31, 2010 of erstwhile Ikisan were placed before all concerned including this Court which, inter alia, clearly reflects that whereas in 2009 the value of the trademarks and customer contracts of erstwhile Ikisan (pre 2010 Scheme) were shown as Nil, in the provisional unaudited accounts of Ikisan for the year ended 31st Marc .....

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, which report was called for by SEBI from the original Petitioner and a copy whereof was forwarded to SEBI prior to SEBI filing the Review Application, SEBI has in the Review Application chosen not to seek recall/review of the order sanctioning the 2010 Scheme. B. DISCLOSURES MADE UNDER THE 2011 COMPOSITE SCHEME. 29. As stated hereinabove, the 2011 Composite Scheme of Arrangement was between the erstwhile Nagarjuna Fertilizers & Chemicals Ltd. ( erstwhile NFCL ), Nagarjuna Oil Refineries L .....

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tors passed a resolution approving the 2011 Composite Scheme after considering the valuation Report of Grant Thornton dated 06 January 2011 (Second GT Report) 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 pe .....

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ort 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 Composite Scheme as required under clause 35 of the Listing Agreement; (ix) Shareholding pattern of erstwhile NFCL and Ikisan pre the 2011 Composite Scheme as required u .....

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h/22nd February, 2011, NSE and BSE granted approval under Clause 24 (f ) to the 2011 Composite Scheme. 29.5 On 24th February, 2011, erstwhile NFCL filed Company Application No. 178 of 2011 before the Andhra Pradesh High Court enclosing therewith the following documents : (i) Memorandum of Association and Articles of Association of KFL, Ikisan, erstwhile NFCL and NORL; (ii) 2011 Composite Scheme duly approved by the Board, NSE and BSE; (iii) Board resolution dated 10 January 2011; (iv) Audited ac .....

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e and stating that copies of the said arrangement and explanatory statement under Section 393 of the Companies Act, 1956 can be obtained at the registered office of the company or at the office of its advocate, shall be issued in English in Hindu and in Telugu in Eenadu ; (iii) At least 21 days before the day of the court convened meeting a notice convening the meeting together with an explanatory statement under Section 393 of the Companies Act, 1956 shall be sent by prepaid letter post under c .....

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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 unsec .....

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the effect of the 2011 Composite Scheme vis-à-vis the financial position and the rights and interests of the creditors and the shareholders; (d) salient features of the 2011 Composite Scheme; (e) the pre-2011 Composite Scheme shareholding pattern of the erstwhile NFCL; (f ) the pre-2011 Composite Scheme shareholding pattern of Ikisan; (g) the pre and post- 2011 Composite Scheme shareholding pattern of NORL; (h) the pre and post- 2011 Composite Scheme shareholding pattern of KFL; (i) direc .....

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Court; (ii) 2011 Composite Scheme; (iii) Memorandum of Association and Articles of Association of erstwhile NFCL, KFL, Ikisan (which included a copy of the entire 2010 Scheme) and NORL; (iv) audited financial statements of erstwhile NFCL and KFL as on 31 March 2010, 2009 and 2008; (v) audited financial statements of Ikisan as on 31 March 2010 and 2009; (vi) unaudited financial statements of the erstwhile NFCL, KFL, Ikisan and NORL as on 31 December 2010; (vii) No-objection certificates of NSE an .....

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rs. (ii) Public notice issued by the Chairman of the court convened meeting in Hindu (English) and Eenadu (regional language) informing that the court convened meeting will be 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 Hig .....

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f 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 KFL, Ikisan , erstwhile NFCL and NORL; (iii) Annual Report for 2009-2010 of KFL, Ikisan and erstwhile NFCL; (iv) Unaudited balance sheet of NORL a .....

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hearing was filed with the Regional Director, Southern Region, Chennai. (iii) Copy of the petition along with relevant information (as required by the Official Liquidator including Valuation Report) was filed with the Official Liquidator, High Court of Andhra Pradesh. (iv) Erstwhile NFCL issued public notice in Hindu and Eenadu giving notice of the final hearing of the Petition and stating that a copy of Company Petition No. 72 of 2011 can be obtained and that any person desirous of opposing th .....

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order dated 26 June 2011 of the Andhra Pradesh High Court sanctioning the 2011 Composite Scheme which states as follows: The Official Liquidator placed on record his report on Company Petition No. 72 of 2011. It is stated in the report that the affairs of NFCL appears to have not been conducted in a manner prejudicial to the interests of the members or to the public interest. … The only objection taken by the Registrar of companies is that NOC has not been obtained from the secured credit .....

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ot 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 encl .....

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posite Scheme; (vi) Board resolution dated 10 January 2011; (vii) List of equity shareholders; (viii) Consent letters of the equity shareholders (according their approval to the 2011 Composite Scheme). 30.3 On 17th February, 2011 Ikisan filed Company Summons for Direction No. 125 of 2011 before the Bombay High Court enclosing therewith the following documents : (i) 2011 Composite Scheme; (ii) Board Resolution dated 10 January 2011; (iii) List of equity shareholders; (iv) Consent letters of equit .....

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o. 235 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; (ii) Audited accounts as on 31 March 2010 of KFL, erstwhile NFCL and Ikisan; (iii) Unaudited accounts as on 31 December 2010 of KFL, Ikisan and NORL; (iv) 2011 Composite Scheme; (v) Board resolution dated 10 January 2011; (vi) Order dated 25 February 2011; (vii) Form of Minutes. 30.6 On 7th March, 2011, Ikisan filed Comp .....

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ved 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; 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 f .....

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lish 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.e copy of petition filed with Registrar of Companies), Valuation Report, certified audited accounts along with directors and audit .....

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rar of Companies; (iii) Submitted a copy of Company Scheme Petition Nos. 234 and 235 of 2011 along with all annexures thereto to the Official Liquidator; A copy of the audited financial accounts for the period 11 April 2007 to 31 March 20010 of Ikisan were also forwarded to the OL; (iv) Submitted a copy of Company Scheme Petition Nos. 234 and 235 of 2011 to the Ministry of Law and Justice; (v) KFL and Ikisan issued a public notice in Free Press Journal (English) and Maharashtra Times (regional l .....

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aring of the Petition and stating that a copy of Company Scheme Petition No. 234 of 2011 can be obtained from the petitioner s advocates and that any person desirous of opposing the sanction of the 2011 Composite Scheme should send a notice of his intention to oppose not later than 2 days before the date fixed for hearing of the petition. 30.10 On 17th June, 2011, this Court sanctioned the 2011 Composite Scheme (after taking into account the clearance/no objection given by the Regional Director .....

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d 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, .....

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FL. 30.14 On 30th July, 2011, the 2011 Composite Scheme was made effective. Erstwhile NFCL filed e-form 21 with the ROC. 30.15 On 30th July, 2011, BSE and NSE were informed that the 2011 Composite Scheme was made effective from 30 July 2011. 31. It is therefore submitted on behalf of the Petitioner that the aforestated facts belies the allegation of suppression made by SEBI. 32. SEBI has submitted that at the time of seeking approval for the 2011 Composite Scheme of arrangement and merger of NFC .....

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nt Thornton Valuation Reports (GT Reports) were suppressed from this Court; (vi) Even if the checklist did not require the petitioner to submit the valuation report, it does not exonerate the Petitioner from its duty of candour and good faith. Disclosure of valuation report to the Stock Exchanges cannot relieve the Petitioner of the burden of disclosing all material facts to this Court. (vii) The response of NFCL to the query raised by the Official Liquidator was misleading and incorrect. 32.1 H .....

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Agreement. The Petitioners are correct in their submission that if there was an intent to suppress the valuation report as alleged, the Respondent would have never submitted the valuation report to the Stock Exchanges. 32.3 As set out hereinabove, clause 24 (f ) of the Listing Agreement 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, howe .....

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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 accounting principles .....

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ion by the Stock Exchanges also shows that the question of suppression of valuation report or any relevant facts does not arise. SEBI has submitted that the grant of approval under Clause 24 (f ) of Listing Agreement pertains to listing and does not pertain to the jurisdiction of this Court under Sections 391 - 394 of the Companies Act, 1956. This submission is disingenuous. The complaint received from a shareholder of NFCL prior to the sanction of the scheme alleged that the proposed implementa .....

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24 (f ) of the Listing Agreement and not with the scheme propounded under the provisions of Sections 391-394 of the Act, as alleged by SEBI, SEBI ought to have investigated the complaint at its own end instead of forwarding the same to the Stock Exchanges and thereafter completely forgetting about the same and allowing NFCL and KFL to obtain sanction of the Courts to the proposed Scheme of Arrangement and Amalgamation. The stand now taken by SEBI is an opportunistic one motivated only by its fa .....

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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 acc .....

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Second GT Report) was suppressed from this Court. In its written submissions, SEBI has now sought to allege that the 2010 GT Report has been suppressed from this Court. In any event it is well settled that in considering schemes under the provisions of Sections 391 and 394 of the Companies Act, 1956, the Company court does not in ordinary course look into aspects of consideration and valuation. The standard procedures prescribed by this Court do not require the Valuation Report to be submitted b .....

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of this Court which have been followed in every Scheme Petition have been disclosed by NFCL. The GT Report had been made available to all stakeholders who were entitled to be heard before the Scheme was sanctioned by this Court. None of these stakeholders raised any grievance which this Court was then called upon to address regarding either the valuation or the swap ratio that was determined on the basis of such valuation. 34. SEBI has in support of its case of suppression also sought to place .....

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misguide the shareholders, creditors, etc. shows the deliberate misreading of the questions posed by the Official Liquidator and the response thereto by the Auditors appointed by the Official Liquidator. It needs to be noted that the questionnaire was not responded to by NFCL but by the Auditors appointed by the Official Liquidator. Again, the query being specific whether there has been any declaration of dividend by Ikisan on account of revaluation of the assets has been correctly answered in t .....

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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 ch .....

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36. In preparing the transferee company s financial statements, the assets and liabilities of the transferor company should be incorporated at their existing carrying amounts or, alternatively, the consideration should be allocated to individual identifiable assets and liabilities on the basis of their fair values at the date of amalgamation. The reserves (whether capital or revenue or arising on revaluation) of the transferor company, other than the statutory reserves, should not be included i .....

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the Annexure to the Notification. Para 36 of AS-14 is required to be read in the context of the general instructions contained in para 12 of AS-14. The same is reproduced hereunder: 12. Under the purchase method, the transferee company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair values at .....

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at existing 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 Appoint .....

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t, 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 Court or any other appropriate authority sanctioning this Scheme and without further act, instrument or deed, but subject to the existing charges affecting the same as on the Effective Date be transferred and/or deemed to be transferred to and vested in the Transferee Company so as to become the properties .....

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AS-14 and not in violation of any Accounting Standard. (iii) that the Report dated 25th September 2012 of Bansi S. Mehta & Co. (Exhibit-F, page 184) places reliance on both AS-10 and AS-14 and states, inter alia as under:- 3.3…As stated earlier, it is the consideration that is to be apportioned based on the estimate of the experts of fair values of such assets and liabilities and not fair values of assets and liabilities per se. … 5.1 The manner in which the assets and liabili .....

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pretation of the relevant clause so as to be empowering the Board to relieve itself of any responsibility to ensure compliance with mandatory Accounting Standards. Presumably, similar treatment would have been followed even by K in recording the assets and liabilities of IKN which would be in the same manner non-compliant with the Accounting Standards. (iv) that the interpretation given by M/s. Bansi Mehta to AS-14, is unreasonable and would lead to erroneous results. NFCL has specifically dealt .....

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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 Aff .....

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2nd September 2013 seeks to do is to once again rely upon AS-10 in support of its interpretation of AS-14 to suggest that the fair value of the consideration not being over ₹ 86,910/-, the assets in the books of the transferee company post merger could only have been recognized to that extent. (v) that M/s. Bansi Mehta have in their letter dated 2nd September 2013 (page 1874) once again relied upon AS-10, AS-14 and AS - 26. The said letter after quoting paragraphs 12, 17, 36 and 39 of AS- .....

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shares issued upon merger. However, the assets and liabilities seem to be recorded at their fair values without considering the treatment required under AS 14, which would have restricted the recording of the assets and liabilities to the fair value of the consideration paid. M/s. Bansi Mehta & Co. have additionally relied upon paragraph 35 of AS-10 to support the above conclusion. (vi) that the above contention of Bansi Mehta & Co. has been dealt with by the Petitioners in paragraph 7 , .....

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nce to the capitalization of borrowing costs and to assets acquired in an amalgamation or merger. These subjects require more extensive consideration than 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 .....

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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 the amalgamation is an amalgamation in the nature of purchase , the identity of the reserves, other than the statutory reserves dealt with in paragraph 18, is not preserved. The .....

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ver the value of the net assets of the transferor company acquired by the transferee company should be recognized in the transferee company s financial statements as goodwill arising on amalgamation. If the amount of the consideration is lower than the value of the net assets acquired, the difference should be treated as Capital Reserve. (i) The interpretation adopted by M/s Bansi Mehta & Co. would render paragraphs 17 and 37 of AS-14 irrelevant and redundant (see page 1901); (j) In view of .....

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unts at page 407) as reserves being the difference between the net value of assets and the consideration in terms of paragraph 17 of AS-14. 38. In response SEBI has submitted that Accounting Standards 14 clearly stands violated by the treatment given to the valuation of Ikisan s assets upon its merger with City Pulse. Relying on paragraphs 36 and 47 of AS-14, SEBI has submitted that it is clear that: (i) the assets/liabilities of the transferor must be incorporated either at their book value ( e .....

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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 th .....

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that the consideration is to be allocated to individual assets and liabilities on the basis of their fair values subject to a maximum ceiling of the consideration. Such an interpretation placed by SEBI in paragraph 26(i) is contrary to SEBI s own submissions in clause (iii), wherein it has been contended that the consideration under the scheme is to be compared with the book value and if the consideration is lower than the book value, the difference is to be treated as capital reserve on the lia .....

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interpretation is contrary to the provisions of clauses 36 and 37 of AS-14 and cannot be accepted. It is further submitted that the mere non-compliance of the Accounting Standards (though not true in the present case) cannot be a ground for objection to or recall or review of a court sanctioned scheme especially when due process of law has been complied with. The important premise is that accounting takes place after the completion of the transaction; accounting only records the transaction and .....

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pages 3363 to 3365. 40. I am in agreement with the submissions advanced on behalf of the Petitioner. Apart from the fact that it does not appear that the 2010 Report of Grant Thornton violates the accounting standards as alleged, in any event, as correctly submitted by the Petitioner, 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 wit .....

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BI 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 amendments to the .....

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set out and dealt with hereunder: 42. (i) At the time of the sanction of the 2011 composite Scheme the balance sheet of Ikisan contained certain fictitious assets which were grossly overvalued. 42.1 According to SEBI, at the time of the sanction of the 2011 composite scheme the balance sheet of Ikisan contained certain fictitious assets which were grossly overvalued. The Original Ikisan Ltd. was incorporated on 21st March, 2000 and City Pulse was incorporated on 11th April, 2007. In spite of bot .....

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ame period shows sales of ₹ 17.34 lakhs, income from services of ₹ 2.98 crores, other income of ₹ 8.10 lakhs and a profit before tax of ₹ 1.71 crores. 42.2 In response the Petitioner has pointed out that SEBI has for the first time sought to allege in the oral submissions made in rejoinder that the Trade Marks and Customers Contracts were fictitious assets . However, the case pleaded in the Review Petition (Para 11 (b) page 10 of the Petition) is that gross fixed assets h .....

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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 a .....

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hown as nil in the balance sheet is fair valued at ₹ 54 crores. SEBI is now attempting to improve its case by alleging that the Trade Marks and Customer Contracts were fictitious assets . For SEBI, to now call these assets fictitious only to buttress its case of fraud would amount to SEBI attempting to plead a new case that too in the form of Written Submissions, without any such case having been pleaded on oath and without any particulars of the alleged fraud and without an opportunity be .....

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r year or years does not necessarily mean that the business is incapable of making profits in the future. Equally, the fact that the business is conducted without any tangible fixed assets but with the help of intangibles also does not mean that the business is incapable of making profits and that the business and it s intangibles have no value. Besides, from the Second GT Report, it is clear that Ikisan was engaged in 2 businesses, viz. agri-informatics and micro-irrigation. It is an admitted p .....

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nder the 2010 Scheme, the assets and liabilities of the Transferor Company being Ikisan Limited (pre-merger) were to be fair valued (Clause 4.1 and 6.1 @ Pages 163 and 166 of the Company Scheme Petition No. 393 of 2010). The GT Valuation Report dated 24th June, 2010 (which provided for fair valuation of the intangibles, viz. Trademarks and Customer Contracts) clearly states that the valuation analysis of 2010 is based on various sources of information which are listed in paragraph 4.3 of the rep .....

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Y10, 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 contende .....

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the future performance of their company. The vision and targets are set by the management of the company and the performance of the company is guided by this business plan drawn by the management. Since the financial forecasts or projections are future oriented, one can take due care by checking for reasonableness of the strategy/ future plan on the company, which has already been done as part of the valuation exercise. However, as clarified in the Valuation Report, the management would continu .....

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ation provided has material mis-statement or would not afford reasonable grounds upon which to base the report. These additional clarifications, inter alia, provide the basis on which the Valuation Report has been prepared, which the Rejoinder seems to have overlooked. As mentioned in the Valuation Report, iKisan Limited has two businesses; Agri Portal business which has been an existing business and Micro Irrigation business which is a start-up business in its nascent stage. We would like to su .....

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rying 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 .....

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hecked data given by external agencies with the projections provided by the company to test for reasonability. Based on the above, the contention that information provided by management was accepted at face value by Grant Thornton is incorrect. 43. Therefore, in my view, the allegation that the intangible assets of Ikisan were fictitious which means non-existent, is without any justification or basis. Equally unjustified is the allegation with regard to overvaluation and its effect which is disc .....

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cussions with Ikisan s management Grant Thornton has taken the useful life of Ikisan s trademarks to be indefinite. (b) Grant Thornton states that : a trademark generates future economic benefits for its owner in two ways; it may increase sales volumes and it may enable its owner to charge premium prices in comparison to similar unbranded products and services. Control over these potential future benefits is customarily achieved by legal registration of the trademark. We have considered the trad .....

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ed 31st March, 2010 was ₹ 3.23 crore. This is a multiple of about 23 times income in 2009 and 12 times the 2010 income. (c) There was a huge difference between the forecasted revenue base used by Grant Thornton for the purposes of the valuation and the actual revenue generated by Ikisan. The forecasted revenue base for the year 2011 used by Grant Thornton for the valuation exercise is ₹ 12.6 crores. Grant Thornton has noted that these financial projections were provided to it by the .....

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refore 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 .....

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by SEBI to the effect that the valuation is unrealistic, perverse and incredibly high on account of the fact that GT has taken the useful life of Ikisan s trademarks to be indefinite cannot be accepted since the same appears to suggest that an intangible asset/trademark would not have any growth or revenue generation potential. It is not even SEBI s case, either in the pleadings or in the submissions made before this Court, that the trademarks of Ikisan could be used only for a limited number of .....

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e income earned by Ikisan in 2010) also cannot be taken cognizance of. Whilst it is true that GT has stated that the valuation of trademarks would be substantially dependent on revenues, what SEBI has overlooked is the fact that GT has at the same time taken into account the income generating capacity of the business of Ikisan, viz. sales income, based on the future earning potential upto the year 2015 and a terminal value based on revenue and by applying a discounting factor arrived at the valu .....

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ion particularly in the case of a start-up or a nascent 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 fi .....

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he 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 required to be conducted at a particular point of time is to be carried out on the basis of the projections made of the revenues in future as on the date of valuation, which has to be based on the valuer s own fair judgment. The exercise of valuation mu .....

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fact that the GT Report and the letter of GT dated 22nd July 2013 make it clear that GT had reviewed the data provided by the Management for reasonableness and consistency and that GT did not accept the projections at face value. 44.8 In fact, in a very instructive passage from Damodaran on Valuation by Aswath Damodaran, Second Edition, it has been stated as under: Classifying Discounted Cash Flow Models There are three distinct ways in which we can categorize DCF models. In the first, we diffe .....

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e of the expected cash flows on that asset. Extending this proposition to valuing a business, it can be argued that the value of the business is the sum of the values of the individual assets owned by the business. While this may be technically correct, there is a key difference between valuing a collection of assets and a business. A business or a company is an ongoing entity with assets that it already owns and assets it expects to invest in in the future. This can be best seen when we look at .....

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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 valu .....

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ssets characteristics, and the state of the economy. 44.9 Though SEBI has for the first time challenged the Second GT Report dated 6th January, 2011 only in its rejoinder dated 5th July, 2013, SEBI has in the said rejoinder not challenged the first GT Report. In fact the First GT Report does not in any manner affect the swap ratio of the Composite Scheme. Admittedly, SEBI has relied upon the Report of M/s Bansi Mehta & Co. which questioned the Accounting Treatment of intangibles in the books .....

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llenging Grant Thornton s 2010 valuation report which case is not pleaded by SEBI. In any event, for the reasons set out hereinabove, SEBI s contention that the GT Report of 2010 is unrealistic, perverse and incredibly high cannot be accepted. 45. (iii) Petitioner has refused to disclose information relating to the projections, historical, factual and other data provided by its management to Grant Thornton. 45.1. SEBI has alleged that the Petitioner has refused to disclose information relating t .....

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f the Court for a Scheme under Sections 391 or 394. Therefore, NFCL cannot be faulted for not having submitted the valuation report or the projections, historical, factual and other data provided to a 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 .....

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sequent 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 additional capital was infused into Ikisan so that the promoters would get additional shares of NFCL upon the subse .....

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Composite Scheme is on the basis of the projected cash flows in accordance with the DCF Method. SEBI has overlooked the fact that Ikisan was engaged in two businesses viz. the agri portal business and the micro irrigation business. The Valuation Report of GT takes into account the projected cash flows for the two businesses. Merely because a promoter has invested ₹ 30 crores by way of additional capital, does not ipso facto mean that the valuation of the enterprise in which the investment .....

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e a value of ₹ 240 crores to the shares allotted to the promoters. This is obviously a hindsight view to take. If the contention of SEBI that the 2011 Composite Scheme is a fraud on the shareholders is to be accepted, the value of the shares of NFCL would have come down and the argument of SEBI with respect to the purported gain made by the promoters would not have survived. 47. (v) Swap ratio in the 2011 Composite Scheme-unjustified. 47.1 SEBI has next contended that in spite of the extre .....

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ly 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 bee .....

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swap ratio in case of merger of two or more entities, a relative valuation exercise is carried out where a consistent and suitable approach is applied to value all the entities in the merger. Accordingly, consistent approach was applied to value residual business of NFCL as well as Micro Irrigation and Agri-Portal Business of iKisan Limited. Further, we had considered three approaches for valuation of these businesses; viz. Asset Based Approach (Net Assets Value Method) Market Approach (Market P .....

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ethod is typically used as the minimum break-up value for any business and largely used where the going concern premise is affected. In the current exercise, such was not the case and hence this method was not considered. The Valuation Report further explains that the Market Approach was also not possible due to lack of stock market price data as well as availability of data on closely comparable listed companies. Hence, we had used the DCF method for valuation of these entities on a relative ba .....

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of expected future cash flows that the business generates. The risk related to the business is adjusted in the discount rate used to derive net present value of future cash flows. The future cash flows are projected based on the detailed business plan of the company considering the current business opportunities and future 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 c .....

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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 historical revenues- INR 2.8 Cr & I .....

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5 billion. 4. Flipkart In FY 10 the revenue was INR 11.6Cr, In FY11 revenue was about INR 50 Crore. As per industry estimates, in 2012, Flipkart raised about INR 825 Crore at current forex value (US# 150 million) which implies a total value of about INR 4,675 crore (US$ 850 million) from its existing investors Accel Partners and Tiger Global Management in the fourth round of funding. 5. Regeneron Pharmaceuti cals (REGN) For 9 out of 10 years in the past, REGN has been consistently making losses. .....

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and being a niche initiative by the company, was at the growth stage, the Micro Irrigation business was in its nascent stage. Considering this nature of business, the historical financials of the company did not reflect the future potential of the business. Hence, valuing iKisan Limited based on the past performance of the company would not have been appropriate and would not reflect the true worth of the company. DCF method being the only valuation method which takes into account the future ca .....

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n 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 explanatio .....

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deration while arriving at the swap ratio. Further SEBI has also failed to appreciate that the figures provided in paragraph 31 (A) of SEBI s submissions are of NFCL (premerger), inclusive of the oil division business which was demerged pursuant to the 2011 Composite Scheme. SEBI has at no point in time contended that NFCL has been undervalued. The entire basis of SEBI s contention with regard to swap ratio has been that Ikisan has been overvalued. Again, SEBI has sought to compare NFCL with Iki .....

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sed on the projected cash flow of the merged Ikisan and the residual businesses of the erstwhile NFCL. Since, GT s Valuation Report and Keynote s Fairness Opinion were available for inspection (as required under Section 393 of the Companies Act, 1956) by the shareholders, who alone are concerned with the exchange or the swap ratio, the shareholders are deemed to have considered all relevant aspects of valuation. It is well settled that while exercising jurisdiction under Sections 391 to 394, the .....

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or is maintainable in the interest of investors . The Regional Director, having perused all relevant papers, had filed an Affidavit 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. ( .....

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mpany, 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, but contended that Grant Thornton had independently verified the reasonableness and consistency of the data supplied by the management. This contention is misleading and an attempt to sup .....

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n review of data and its verification. SEBI has further submitted that the assertion made in the arguments that the share exchange ratio in respect of the 2011 composite scheme was not worked out on the basis of the net asset value of Ikisan and that the value of Trademarks and Customer Contracts of Ikisan as reflected in its balance sheet would have no impact on the determination of the exchange ratio for the promoters shareholding in Ikisan, is not correct and an analysis of the GT Report I an .....

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with NFCL. 48.2 The above submissions of SEBI are denied and disputed by the Petitioner. 48.3 As submitted by the Petitioner, in the case of DCF Method of Valuation, the value is derived based on cash flow projected to be generated by the company in future years. It does not consider non-cash items of income or expense such as depreciation/amortization except to derive tax expense whenever such non-cash expenses are tax deductible. In the valuation of the Agri Portal Business of Ikisan using DCF .....

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ffect 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 .....

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Even the argument that in the case of Ikisan, the Trade Marks and Customer Contracts are relevant in order to ascertain the value of the business of Ikisan, as submitted by the Petitioner, does not advance the case of SEBI because firstly these are intangible assets. Secondly, these assets being in the nature of brands/goodwill can only be valued on the basis of future projections of income which these brands/goodwill will generate in the future. Therefore of necessity these assets cannot be va .....

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aluation being an exercise required to be conducted at a particular point of time has of necessity to be carried out on the basis of whatever information is available on the date of the valuation and a projection of future revenue that the valuer may fairly make on the basis of such information. Even Bansi S. Mehta, the valuer appointed by SEBI, has itself confirmed this to be the correct basis ( para 4.1 page 193 of the Review Petition). 48.7 The Hon ble Supreme Court in the matter of G.L. Sult .....

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only a question of fact, but also raised technical and complex issues which may be appropriately left to the wisdom of the experts, having regard to the many imponderables which enter the process of valuation of shares. If the valuer adopts the method of valuation prescribed, or in the 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 mis .....

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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 regards the submission .....

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ate that these factors were taken into account by GT, as correctly submitted by the Petitioner, SEBI s contention is largely semantic. Whereas SEBI has sought to rely upon the distinction between review and verify, the question which needs to be addressed is whether GT has blindly accepted the data provided by the management as sought to be contended by SEBI. SEBI has overlooked what GT has confirmed in its subsequent letter dated 22nd July, 2013 at page 1862 of the Affidavit in Sur-Rejoinder in .....

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can take due care by checking for reasonableness, of the strategy/future plan of the company which has already been done as part of the valuation exercise…that the data received by Grant Thornton has been reviewed for consistency and reasonableness. It also mentions that nothing has come to our attention to indicate that the information provided has material misstatement or would not afford reasonable grounds upon which to base the report….Based on the above, the contention that in .....

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port 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 n .....

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ame intangibles but to the bricks and mortar micro-irrigation business for which Ikisan had established a manufacturing facility in Gujarat in December 2010 which commenced its commercial production only from 1 February 2011 i.e. for 60 days or so in the financial year 2010-2011 and for which Ikisan had incurred capital expenditure of ₹ 21.17 crores and had sales of ₹ 0.05 crores [Ikisan Financial statement for year ended 31 March 2011, Note 6, Vol. IV Page 1278 and 1286-1288]. By an .....

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onal approach of a bricks and mortar value in favour of a modern the sky is the limit approach to valuation . The only example which SEBI has attempted to deal with is of Facebook in answer to which SEBI has adopted a dismissive approach by alleging that Ikisan is no Facebook which argument, however overlooks the fact that by making such an argument SEBI itself is accepting Facebook as an instance of a non bricks or mortar business enjoying a high valuation. SEBI has not even attempted to deal w .....

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ean that a start-up web-portal will not have any value whatsoever and any value ascribed to such a business in the books of the company will be termed by SEBI as a fictitious asset and the value of the company will be equivalent to the value of its assets. SEBI has inter alia in paragraph 45(iii) sought to contend that the micro irrigation business of Ikisan is valued at ₹ 200 Crores. This submission is premised on the basis that the intangible assets of Ikisan were valued at ₹ 54 Cr .....

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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 .....

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his Court on 17th June, 2011 sanctioning the scheme of arrangement and amalgamation (2011 Composite Scheme), SEBI had received a complaint from a shareholder of NFCL alleging that the consideration offered under the Scheme to the shareholders of NFCL is detrimental to the interest of the equity shareholders of NFCL and will result in a total loss of ₹ 862.66 crores to the equity shareholders of NFCL. SEBI did not take any steps upon receipt of the said complaint but forwarded the same to t .....

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the erstwhile NFCL i.e. much more than the statutory majority required under the Companies Act, 1956. The shareholder who had sent his complaint to SEBI qua the Composite Scheme not only did not attend the shareholders meeting when the Composite Scheme was passed but has also not appeared before this Court when the said Scheme was sanctioned. As already held hereinabove, in my view, no fraud has been perpetrated by the promoters of NFCL/KFL on the shareholders, Regional Director, BSE/NSE, the O .....

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