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2016 (4) TMI 965 - BOMBAY HIGH COURT

2016 (4) TMI 965 - BOMBAY HIGH COURT - TMI - Scheme of amalgamation - only opposition to the Scheme is by Securities and Exchange Board of India (“SEBI”) - Held that:- there is no merit in SEBI's contention that the Scheme violates the provisions of ICDR or the public policy behind ICDR or the related regulatory machinery. There is, as noted above, no bad faith vis-a-vis any stakeholder. On the whole, the scheme is not such as a prudent man of business would not accept as just, fair or reasonabl .....

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Company amalgamtion allowed. The Petitioner Companies to file a copy of this order and the Scheme duly authenticated by the Company Registrar, High Court (O.S.), Bombay, with the concerned Superintendent of Stamps, for the purpose of adjudication of stamp duty payable, if any, on the same within 60 days from the date of the Order.

The Petitioners are directed to file a certified copy of the order along with a copy of the Scheme of Amalgamation with the concerned Registrar of Companies .....

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S. Ramakantha, Official Liquidator. P.C. : This petition, filed under Sections 391 to 394 of the Companies Act, 1956, seeks sanction of the Court to a scheme of amalgamation ( Scheme ) between Arss Engineering Ltd. ( transferor company ) and Trio Mercantile & Trading Ltd. ( transferee company ). 2. The Scheme broadly envisages transfer of the entire undertaking of the transferor company including all its assets and liabilities as on the appointed date, i.e. 1 April 2014, to the transferee co .....

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ties and Exchange Board of India ( SEBI ). The objections of SEBI are two-fold. It is firstly submitted that the Scheme is aimed at evading the provisions of the Securities and Exchange Board of India Regulations ( SEBI Regulations ) and the Issue of Capital and Disclosure Requirements, Regulations, 2009 ( ICDR ) inasmuch as what is sought to be achieved through the expedient of the proposed amalgamation is conversion of shareholding in an unlisted company (the transferor company) into sharehold .....

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f the transferor company at the cost of the shareholders of the transferee company, many of whom are members of the public. 4. The factual basis of these two objections may be broadly outlined as follows : (i) Though the transferor company was incorporated as early as in the year 2008, it did negligible business in the years following its incorporation, FY 2010-11 and 2011-12 merely recording turnovers of ₹ 2500 and ₹ 3500, respectively; (ii) On 5 March 2013 and 25 March 2013, the tr .....

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ny's shares on the stock exchanges, this swap ratio implies that the shareholders of the transferor company would receive an approximate value of ₹ 17.64 crores on an investment of ₹ 10.05 crores, thus making a profit of about 75% in a matter of a few months. Based on these facts, the thrust of SEBI's submissions is that this effectively means a kind of a preferential allotment of shares of a listed company, i.e. the transferee company, (the initial allotment of shares at  .....

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s make provisions for initial public offer ('I.P.O.') of a company's to be listed shares, whilst ICDR provide for making of a preferential allotment by an already listed company. He submits that the matter can be viewed from two angles. What the Scheme achieves is getting round the SEBI Regulations for I.P.O., since effectively the shareholders of the transferor company have their shares listed in the process as a matter of initial allotment. Alternatively, it envisages preferential .....

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d to a preferential allotment, if we were to treat the Scheme as a strategy originally devised to see that allotment of listed shares is made to certain entities, who were initially asked to invest in the shares of an unlisted company only to get the listed shares by way of the Scheme through a share swap ratio later. Accordingly, in the following discussion, I have considered the effect of the ICDR qua the Scheme and not the aspect of listing requirements under the SEBI Regulations for an I.P.O .....

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cheme is proposed only with a view to get over the ICDR. 7. The ICDR sets out the following requirements as conditions for preferential issue of shares by a listed company: (a) A special resolution of shareholders; (b) Shares to be held by the proposed allottees in de-materialised form; (c) Compliance with conditions of continuous listing of equity shares as specified in the listing agreement with the recognised stock exchange; and (d) Permanent Account number of the proposed allottees to be obt .....

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ants of an issuer, but failed to exercise the warrants. The ICDR requires certain disclosures to be made in terms of Regulation 73. These include disclosure of various particulars mentioned therein in the explanatory statement to the notice of the general meeting proposed for passing of the special resolution for preferential allotment. These particulars include objects of the preferential issue, the proposal of promoters, directors or key management personnel, etc., to subscribe to the offer, s .....

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puted price. Regulation 73 also requires a certificate of statutory auditor of the issuer to be placed before the general meeting of shareholders certifying that preferential issue of capital was being made in accordance with the requirements of the ICDR. A special resolution to be passed in terms of these requirements is required to specify the relevant date on the basis of which price of the equity shares to be allotted on conversion or exchange of convertible securities shall be calculated. T .....

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average of the weekly high and low of the closing prices of the related equity shares quoted on the recognised stock exchange during the twenty six weeks preceding the relevant date; or (b) The average of the weekly high and low of the closing prices of the related equity shares quoted on the stock exchange during the two weeks preceding the relevant date. The relevant date in the case of preferential issue of equity shares is defined to mean a date thirty days prior to the date on which the mee .....

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e disclosures to be made to the general meeting proposed for passing of the special resolution, which are specified in Regulation 73 of ICDR, are required to be broadly captured in the explanatory statement to the notice of the general meeting. Many of these particulars actually form part of the scheme petition and relevant disclosures to be made to the general meeting. A certificate of statutory auditors in this behalf is also to be placed before the general meeting. As required by the SEBI cir .....

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Scheme of Arrangement, the valuation report from an independent Chartered Accountant, a report from the Audit committee recommending the draft scheme taking into consideration such valuation report, fairness opinion of an approved merchant banker, pre and post amalgamation shareholding pattern of the unlisted company, audited financials of the unlisted company, compliance with listing agreement, complaints report, etc. The stock exchanges also process the draft scheme and forward their objectio .....

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the shareholders, creditors, department of company affairs, stock exchanges / SEBI, etc.) 9. A comparison of the two sets of provisions and the gamut of regulatory provisions which the Scheme in the present case has gone through, show that there is no ducking of the regulatory scrutiny such as the one contemplated in the case of preferential allotment of listed shares under the ICDR in the Scheme herein. The whole substance of the regulatory requirements of the ICDR is clearly captured in the s .....

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rovisions, lock-in of securities, re-computation of price, etc. is shown by SEBI in this case. 10. That leaves us with the merits of the Scheme. The only objection of SEBI in this behalf is that an illegal or, at any rate, undue benefit is given to the shareholders of the transferor company and that has been at the cost of the shareholders of the transferee company, many of whom are members of public. The contentions of Mr.Rustomjee in this behalf are based on an analysis of the Chartered Accoun .....

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to these, the valuation was based on the following facts. The valuers, for calculating NAV, took into account the financials of the transferor and transferee companies for the year ended 31 March 2013. PECV was considered only for the transferee company based on P/E ratio recognized by market sources, but not for the transferor company since that company was formed only in the year 2008 and there had been no significant business activity in the company since, 2012-13 being the first year the com .....

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.94 and ₹ 24.71. On a composite valuation, the weighted average of all three methods gave the valuation of ₹ 18 per share of ₹ 10 each. The NAV of the transferor company was worked out at ₹ 10.06. Other methods of valuation being inapplicable, as explained above, the composite valuation was worked out at ₹ 10.06 per share of ₹ 10. Based on the respective weighted averages of the two companies, the share swap ratio of three equity shares of ₹ 10 of the tr .....

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nsferee company) chosen as 28 June 2013 was appropriate and fair. Indeed, these were the only points urged by Mr.Rustomjee for SEBI in support of his case that the share swap ratio determined by the valuer was not fair. 13. There is no exception taken by Mr.Rustomjee to the methods employed by the valuers per se. The objection was about there being an unequal comparison of the two shares. Whereas all three methods were employed to arrive at the valuation of the shares of the transferee company, .....

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mpany, whilst the weighted average in mathematical terms for the shares of the transferor company would work out to ₹ 10.06, the values considered for the individual method values themselves being correct. It is of course debatable whether in the facts of the case, considering that the PECV and MV of the transferor company would be nil, only the NAVs of the two companies ought to have been considered and not the valuations by the other two methods. But then there are approaches and schools .....

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ion a scheme of arrangement, (which, as I have noted above, is merely to see that laws and commercial morality are not breached and no unfair treatment is given to any of the stakeholders) is whether the exercise is bona fide and legitimate, and yields a result, which is not perverse. An expert valuer has carried out the exercise in the present case; the valuation is not questioned by any of the stakeholders; and it is backed by an opinion on fairness by a SEBI approved Merchant Banker. It emplo .....

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al claim to being an appropriate candidate for choice of the relevant date for considering the MV of the shares. Mr.Rustomjee suggests that ICDR requires the date of 30 days prior to the meeting of shareholders to consider the Scheme as the relevant date. By its vary nature, it is impossible to set that date as the relevant date for any scheme of arrangement. The board of directors of a company prepares a scheme; whilst preparing it, the board takes into account MV as reckoned with reference to .....

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deration for the scheme on that basis. Alternatively, Mr.Rustomjee suggests that the preferential allotment of shares, in the first place, to the allottees of the transferor company was made on 5 March 2013 and 25 March 2013 and that these dates should be reckoned as relevant dates for determining the value of the shares of the transferee company and thereby, an appropriate share swap ratio. Learned Counsel for the Petitioner has demonstrated from the record that even if we take these dates as r .....

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ws that the matter of determining an appropriate share swap ratio here is more of a 'matter of commerce', than a 'matter of commercial morality'. The shareholders of the transferee company are expected to take a decision on the consideration fixed under the scheme based on their commercial wisdom. They have indeed taken such a decision. In not one but two duly convened meetings of shareholders, the share swap ratio has been approved by the shareholders. Even the shareholders, who .....

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been two meetings of shareholders including one convened by Court. The outcome of the meetings is a matter of record. There has been no complaint from any quarter so far, even at the stage of final hearing of the Scheme Petition before this Court. If that is so, it is not for SEBI to raise a red flag to the Scheme on the ground of want of appropriateness of consideration. 16. Mr.Rustomjee submits that SEBI must intervene in a matter like this to ensure market integrity and investor protection. .....

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the hallmark of Securities Law. Section 12A read with Regulations 3 and 4 of the Regulations 2003 essentially intended to preserve market integrity and to prevent Market abuse . The object of the SEBI Act is to protect the interest of investors in securities and to promote the development and to regulate the securities market, so as to promote orderly, healthy growth of securities market and to promote investors' protection. Securities market is based on free and open access to information, .....

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n, who deals in securities, takes advantage of the impact of an action, may be manipulative, on the anticipated impact on the market resulting in the creation of artificiality . The same can be achieved by inflating the company s revenue, profits, security deposits and receivables, resulting in price rice of scrip of the company. Investors are then lured to make their investment decisions on those manipulated inflated results, using the above devices which will amount to market abuse. The Suprem .....

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ect not only country s economic growth, but also slow the inflow of foreign investment by genuine investors and also casts a slur on India s securities market. Message should go that our country will not tolerate market abuse and that we are governed by the rule of law . Fraud, deceit, artificiality, SEBI should ensure, have no place in the securities market of this country and market security is our motto. People with power and money and in management of the companies, unfortunately often comma .....

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SEBI's role in the security market, the Supreme Court observed as follows : On a reading of the above statutory provisions, we find under Section 11(1) of the SEBI Act, 1992, a duty has been cast on the SEBI to protect the interest of investors in securities and also to promote the development of the securities market as well as for regulating the same by taking such measures as it thinks fit. The paramount purpose has been shown as protection of interest of investors on the one hand and als .....

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ories, participants of securities including foreign institutional investors in particular to ensure that fraudulent and unfair trade practices relating to securities markets are prohibited and also prohibiting insider trading in securities. 17. It is difficult to see how there is any element of 'market abuse' in the Scheme or the consideration proposed therein or how any 'creation of artificiality' results therefrom. There is no fraud or deceit. There is no unfair trade practice. .....

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be different from the real purpose. He relies upon the rationale of the scheme mentioned in Clause 2 of the scheme. The rationale mentioned in the scheme was that the merger of the two companies was envisaged for the following objectives: 2.1 Consolidation of business, synergize operational advantages and achieve economies of scale of operations; 2.2 Optimum and efficient utilization of capital, resources, assets and facilities; 2.3 Removal of intercompany transfers, removing taxation at multip .....

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s of preferential shares had been by and large invested in equity shares and short term loans and advances, there is hardly any consolidation of business, synergizing of operational advantages or achieving of economies of scale to be achieved by amalgamating the two companies. Whilst this may be so, the purpose of efficient optimum utilization of capital, resources, assets, etc,. so also of removal of inter-company transfers, and better management and focus on growing businesses may well be an o .....

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d in the case of Miheer H. Mafatlal vs. Mafatlal Industries Ltd (1997) 1 SCC 579, the jurisdiction of the company court under Sections 391 to 394 of the Act is a limited jurisdiction. The Supreme Court explained the contours of that jurisdiction in the following words : 29. However further question remains whether the Court has jurisdiction like an appellate authority to minutely scrutinize the scheme and to arrive at an independent conclusion whether the scheme should be permitted to go through .....

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the Court. The Court certainly would not act as a court of appeal and sit in judgment over the informed view of the parties concerned to the compromise as the same would be in the realm of corporate and commercial wisdom of the parties concerned. The Court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the Scheme by the requisite majority. Consequently the Company Court's jurisdi .....

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ee, first that the provisions of the statute have been complied with, second, that the class was fairly represented by those who attended the meeting and that statutory majority are acting bona fide and are not coercing the minority in order to promote interest adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve. The .....

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following as such broad contours: 1. The sanctioning court has to see to it that all the requisite statutory procedure for supporting such a scheme has been complied with and that the requisite meetings as contemplated by Section 391(1)(a) have been held. 2. That the scheme put up for sanction of the Court is backed up by the requisite majority vote as required by Section 391 Sub-Section (2). 3. That the meetings concerned of the creditors or members or any class of them had the relevant materi .....

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section (2) of Section 391 of the Act is placed before the Court by the concerned applicant seeking sanction for such a scheme and the Court gets satisfied about the same. 6. That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the Scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose unde .....

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rudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant. 9. Once the aforesaid broad parameters about the requirements of a scheme for getting sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the Court there would .....

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d as follows : We may straightaway notice that this Court did not have occasion to consider whether any additional tests have to be satisfied when the Company concerned is in liquidation and a compromise or arrangement in respect of it is proposed. Therefore, it cannot be said that this would be the final word on any Scheme put forward under Section 391 of the Act, whatever be the position of the company concerned. Even then, this decision lays down the need to conform to the statutory formaliti .....

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provision of law or contravene any public policy; (b) Whether the scheme displays any bad faith vis-a-vis any of the stakeholders including the minority shareholders or creditors who have not voted on the scheme; (c) Whether the scheme is, on the whole, just, fair and reasonable; and (d) Whether the scheme prejudicially affects public interest in any way. 21. The Scheme does not falter on any of the above touchstones. As I have observed above, there is no merit in SEBI's contention that the .....

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