TMI Blog2019 (8) TMI 974X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Any reading of the circulars in the manner stated by the petitioners shall be in violation of the Companies Act creating an anomalous situation whereby the buy-back of shares while the Company is on the Dissemination Board shall be contrary to the Companies Act which allows buy-back as a legitimate and legal corporate action. Having said that, this court proceeds to deal with the submissions of the counsel for the parties on the premise that the company can buy back shares. The exit circulars nowhere expressly state that all the public shareholders need to be given complete exit. The reliance was placed on the words number of outstanding public shareholders in clause (VII) of Annexure A of 2016 circular. The words have to be read in the context when exit offer is given an escrow account shall be opened in favour of the valuer / designated stock exchange wherein, deposit of the amount on the basis of exit price and number of outstanding public shareholders shall be made. This is keeping in view, all the public shareholders shall be given option to sell their share but it is not necessary all the public shareholders shall opt to sell their shares. It was rightly pointed out b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffer of buy-back at that rate. I note, respondent no.2 has justified share value by stating that under Section 68 (2)(c) of the Companies Act, 2013, a company can buy-back 25% of the Company s full paid up equity share capital and free reserves and as per the last unaudited stand alone financial statements for the year ending March, 2019, the aggregate paid up share capital and free reserves of the company amounted to ₹ 97,87,99,681/- and 25% of the amount would be ₹ 24.46 Crores and with each share valued at ₹ 11,229/-, the total number of shares that would be offered is 21,791/- equity shares. If that be so, there is some justification of the respondent no.2 to value the share @ ₹ 11,229/-. In any case, this court does not have necessary wherewithal to determine the share value and surely the determination shall be beyond the scope of judicial review. We agree with the submission made by Mr. Sethi that Prayer (2) of the writ petition challenging the Postal Ballot and Notice and PA of the respondent no.2, shall not be maintainable as their issuance is purely an action of the company incorporated under the Companies Act. It is not the case of the petition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 11 of the Securities and Exchange Board of India Act, 1992 and the circulars issued by respondent No.1 itself, and take appropriate actions accordingly; 5. pass any such other order or orders as this Hon ble Court may deem and appropriate, in the interest of justice, in favour of the petitioners. 2. In substance the grievance of the petitioners is that the respondent No.2 Bharat Nidhi Limited ( BNL in short) is proceeding to undertake buyback of shares at a grossly understated valuation in breach of the minimum public share holding requirement as specified in Rule 19(2) and Rule 19 (A) of the Securities Contracts (Regulations) Rule 1957 as well as various circulars issued by SEBI in respect of listed companies to be in compliance with the MPS norms and have reflected promoters and promoter group as part of the public shareholding to deny all the public shareholders a true and fair value of their rights. It is also the grievance of the petitioners that the process of buyback is being undertaken when investigation in respect of the promoters of respondent No.2 is pending. The challenge is also to the circular dated July 25, 2017 issuance of which resulted in amend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 016. In the October 10, 2016 circular SEBI provided clarification on raising of further capital and the process of exit of ELCs from the DB. It is the case of the petitioners that the circular provided that all ELCs shall be required to ensure compliance with the procedure for exit and the oversee and monitoring of such exit mechanism shall be carried out by the designated stock exchange, which is the National Stock Exchanges hosting the ELC on its DB. It is also the case of the petitioners that the 2016 SEBI circular further provides the following: (i) the ELCs on the DB which are yet to indicate their intention to comply with listing or to provide exit shall submit their plan of action of Designated Exchanges latest within three months from the date of the said circular to the satisfaction of the Designated Exchanges, failing which the Designated Exchange shall recommend the penal action as specified under Para 6 of the circular; (ii) the Designated Exchanges shall review the plan of action and ensure completion of the process within 6 months. 6. According to the petitioners SEBI circular also provided the following penal actions for failure to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses of ELCs which have submitted High Court Order related to scheme of arrangement or were under the process of scheme of arrangement on or before October 10, 2016 may be kept on hold till such process is completed. 8. As stated above, the BNL was transferred to DB of the National Stock Exchange. On March 20, 2019 a clarification was issued with respect to transfer of companies from CSE to DB of NSE in the following manner: (i) The Circulars / guidelines issued by SEBI from time to time for ELCs shall be applicable to companies transferred from CSE to the DB of NSE; (ii) Such Companies may be granted three months' time from the date of transfer to DB to submit the plan of action to NSE in terms of SEBI Circular dated October 10, 2016; and (iii) Once the company is transferred to DB of NSE, such company ceases to be listed on CSE. Hence, such company shall have the same listing status as applicable for other exclusively listed companies and all the necessary approvals to such companies shall be granted by NSE. 9. On June 13, 2019 BNL issued a postal ballot notice for seeking shareholders consent by way of special resolution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der their shares. The promoter shall open an escrow account in favour of independent valuer / designated stock exchange and deposit therein the total estimated amount of consideration on the basis of exit price and number of outstanding public shareholders. The escrow account shall consist of either cash deposited with a scheduled commercial bank or a bank guarantee, or a combination of both. The account in the escrow account shall not be released to the promoter unless all the payments made in respect of shares tendered for the aforesaid period of one year. (Emphasis supplied) (ii) Under the said impugned SEBI clarification, the number of shares that can be bought back by a company are governed by the provisions of Section 68 of the Companies Act, 2013 (hereinafter referred to as Companies Act ), which provides that a buy back offer can be made maximum for 10% or 25% of the paid up share capital and free reserves, thus, the spirit of the Exit Circulars so as to provide complete exit to all the public shareholders cannot be achieved; (iii) Even if the intent and spirit of the Exit Circulars is proposed to be followed by the SEBI impugne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2018. In the instance case, if the true disclosures would have been made regarding the promoters and promoter group, then such persons were obligated to give a full and fair exit to the public shareholders of the respondent No.2, under the Exit Circulars. He highlighted the relevant portion of the 2016 SEBI Circular, reproduced as below, which provided for penalties for failure to give exit by the promoters as per the provisions mentioned therein: 6. Action against companies remaining on the DB a. Any promoter or director whose company is on the DB and has failed to demonstrate adequacy of efforts for providing exit to their shareholders in conformity with the exit mechanism as provided in this circular shall be liable for the following actions: The company, its directors, its promoters and the companies which are promoted by any of them shall not directly or indirectly associate with the securities market or seek listing for any equity shares for a period of ten years from the exit from the DB. Freezing of shares of the promoters / directors. Last of the directors, promoters etc. of all noncompliant companies as available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility to vote, pending the investigation by the Respondent No1., would be bad in law. 17. He also submitted that the true value of the Respondent No.2 has not been taken into consideration in the Postal Ballot Notice and public announcement issued by the Respondent no.2 dated June 15, 2019 and the price offered is not the fair value, and amongst other factors, market value of investments made by the Respondent No.2 in the listed and unlisted investments have not been considered. The valuation report dated June 6, 2019 issued by Corporate Professionals Capital Private Limited does not reveal the fair value of the shares of the Respondent No.2 and in place admits lack of information and documents. The Valuation Report in spite of observing that the Respondent No.2 holds investments in certain operating companies as well as certain nonoperating companies besides holding investments in mutual funds, quoted shares, corporate deposits, has failed to demonstrate the fair value of the shares of the Respondent No.2. Even though the Respondent No.2 is the major shareholder of Bennett Coleman and Company Limited and Bennett Property Holdings Company Limited (hereinafter referred to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the general body of shareholders in view of judgments in LIC v. Escorts, (1986) 1 SCC 264 at para(s) 95, 100; Anil Kumar Boddar v. Reliance Industries Ltd., (2016) SCC Online Del 1855 at para(s) 5 to 7; Ganesh Chakkarwar v. VRG Healthare, dated September 26, 2018 in W.P. (C) 6154/2018. Consequently, prayer 2 at page 113 of the writ petition cannot be granted. 21. He also stated that the petitioners holds miniscule shareholding (0.0007%) in respondent No.2 and cannot stall the entire process which is for the benefit of all shareholders. He submitted that the process of buyback is approved under law by the shareholders of respondent No.2. Shareholders holding miniscule shareholding (0.0007%) ought not to be allowed to keep the process on hold. This would be in the teeth of the principle of corporate democracy. In this regard, he relied upon the judgment in LIC v. Escorts, (1986) 1 SCC 264 at para(s) 95 and 100. 22. He stated that there is no cause of action. The petitioners have not made any complaint with SEBI in relation to the grievances raised in the writ petition, inasmuch as it is an established principle of law that there cannot be any relief for ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferred to the Dissemination Board and had accordingly decided that nothing survived in the petition. In light of the above, there cannot be any argument that the respondent No.2 should be listed back on a nationwide stock exchange. By corollary, respondent No.2 must be allowed to exit through the Dissemination Board and the only possible mechanism of exit for a promoter-less company is buyback of shares. He also stated that this Court has previously held that the process before the Dissemination Board cannot be stalled inasmuch as in the order passed on December 21, 2018 in Manish Mittal and Ors. v. SEBI and Ors. this Court has categorically held that the process of exit before the Dissemination Board cannot be stalled. The petitioners seek to raise the same issues raised earlier in the Manish Mittal matter and conclusively held against the shareholders in that case. 25. Mr. Sethi stated that buyback is an offer to a shareholder without any attendant obligation on any shareholder to sell shares. In other words, a shareholder is also free to reject the buyback offer and continue to be a shareholder. According to Mr. Sethi, there is no link between a buyback exerci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matters pertaining to the Companies Act. Thus, in terms of the above, it is not appropriate for the petitioner to approach the writ court with such grievances. 28. He stated the valuation conducted is in accordance with law. In this regard, he stated that the following: a. In terms of the Circular dated October 10, 2016, the appointment of an independent valuer is to be done from the panel of expert valuers of the designated stock exchange. b. In accordance with the above, a SEBI Registered Category I Merchant Banker, empanelled with NSE, was appointed. c. SEBI Circular dated October 10, 2016 does not specify any methodology to be adopted for arriving at the fair valuation of the shares of the Company. The valuation methodology is in accordance with internationally accepted valuation standards and customary valuation practices in India. d. He also stated that it is an established principle of law that the valuation should be left to the wisdom of valuers (GL Sultaniav. SEBI (2007) 5 SCC 133, Paras 33 and 37: Hindustan Unilever Employees Union v. Hindustan Unilever Ltd. 91995) Supp. (1) SCC 499. 29. With regard to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsofar as the counsel for the SEBI is concerned, his only submission was that the investigation into be breach of MPS norms against respondent No.2 BNL is going on. CONCLUSION :- 34. Having heard the learned counsel for the parties, the first and foremost question that needs to be decided is whether the Circular dated July 25, 2017 issued by the SEBI is non-est in law. Vide the said circular SEBI permitted a Company to buy-back the shares so as to provide an exit to the public shareholders. At the outset, it must be stated that the circular has been challenged after two years of its coming into existence. Within these two years, it has been made operational / implemented. One such case i.e. noted during the course of arguments is that of T. Stanes and Company Limited as during the course of arguments reliance was placed by Mr. Sethi on the Judgment of Securities Appellate Tribunal, Mumbai, in Appeal No. 73/2019 wherein the challenge was with regard to an order passed by NSE removing the Company from Dissemination Board after it bought back the shares, which action was upheld by SAT by relying upon the Circular dated July 25, 2017. So, it is quite late in the da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic shareholders shall be made. This is keeping in view, all the public shareholders shall be given option to sell their share but it is not necessary all the public shareholders shall opt to sell their shares. It was rightly pointed out by Mr. Sethi that shareholder is also free to reject the buy-back offer and continues to be a shareholder. So, it follows the circulars do not contemplate the exit of all public shareholders. This I also say, in view of the stipulation in the impugned SEBI Circular investors who are willing to remain shareholders of a company and do not want to exit, should be allowed . I do not find any illegality in such a stipulation as it is not necessary for a shareholder to seek his exit. 37. The plea of Mr. Vashisht that the impugned circular does not give timelines and road map is concerned, the same is also without merit, inasmuch as the clarification dated March 20, 2019 issued by SEBI with respect to transfer of companies from CSE to DB of NSE clearly stipulates: (i) The circulars / guidelines issued by SEBI from time to time for ELCs shall be applicable to companies transferred from CSE to DB of NSE like the respondent no.2 Company he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obligation, there is no question of penalties. 41. It must be stated here that circular of 2016 stipulates action against a company, its director on their failure to provide exit to the shareholders, which includes the action stated therein. It is not the case of the petitioner that respondent no.2 company has failed to provide exit to its shareholders. So, it follows, the postal ballot dated July 13, 2019 is in that direction, which cannot be faulted. 42. One of the pleas of Mr. Vashisht was that the price offered for share is not the fair value, and amongst other factors, market value of investments made by the respondent No.2 have not been considered and even the valuation report dated June 6, 2019 issued by Corporate Professionals Capital Private Limited does not reveal the fair value of the shares of the Respondent No.2 and in fact admits lack of information and documents, is concerned, if the petitioners are not satisfied with the valuation, they are within their right not to accept the offer of buy-back at that rate. I note, respondent no.2 has justified share value by stating that under Section 68 (2)(c) of the Companies Act, 2013, a company can buy-back ..... X X X X Extracts X X X X X X X X Extracts X X X X
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