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TMI Blog2021 (3) TMI 943X X X X Extracts X X X X X X X X Extracts X X X X ..... of Corporate Affairs, Mumbai and the Official Liquidator. No objector has come before the Tribunal to oppose the Scheme and nor any party has controverted any averments made in the Petition. 3. The Board of Directors of the Petitioner Companies in their respective board meetings held on 17th September 2019 approved the Scheme. On 3rd June 2020 the respective boards approved certain modifications thereto on the bases of which the present Petition is moved. The Appointed Date fixed under the Scheme is 1st April, 2019. 4. The First Petitioner Company is engaged in the business of investing in other companies. The Second Petitioner Company is engaged in the construction business as builders, contractors, erectors, constructors of buildings, houses, apartments, structures for residential, industrial, commercials, institutional or developments of Co-operative Housing societies etc. 5. The proposed Scheme of Merger will be beneficial to the Petitioner Companies and their respective shareholders, creditors, employees and other stakeholders with the following benefits: (a) The Transferor Company has been a loss-making entity. Its revenue for the year ending 31st March 2019 has been nil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esources as well as the managerial, technical, distribution and marketing resources of each other and it would be beneficial for the effective management and controlled supervision of the Transferee Company, thereby protecting the interest of the Transferor Company. (e) Further, as on date, there is no outstanding liability in the books of Transferor Company. Thus, its merger with the Transferee Company, would not have any adverse effect on the Transferee Company. (f) The merger under this Scheme will be beneficial to the Petitioner Companies, in the following manner: (i) facilities such as manpower, office space and other infrastructure could be better utilized by the Transferee Company and duplication of facilities could be avoided resulting in optimum use of facilities to the advantage of the Transferee Company; (ii) employees of the Transferor Company would be provided an opportunity to be gainfully employed by the Transferee Company; (iii) pursuant to the Scheme, the liabilities of the Transferor Company would be duly discharged by the Transferee Company; (iv) the unutilised assets of the Transferor Company could be put to better use by the Transferee Company; (v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idavit dated 11th November, 2020. The observations made by the Regional Director and the clarifications and undertakings given by the Petitioner Companies are summarized below: Sr. No. Para (IV) RD Report / Observation dated 31st August, 2020 Response of the Petitioner Companies (a) In compliance of AS-14 (IND AS-103), the Petitioner Companies shall pass such accounting entries which are necessary in connection with the scheme to comply with other applicable Accounting Standards such as AS-5(IND AS8) etc. As far as observations made in paragraph IV (a) of the Report of Regional Director is concerned, the Petitioner Companies through its Counsel undertake that it shall pass necessary accounting entries in connection with the Scheme as per AS -14 (IND AS-103) as well as comply with other applicable Accounting Standards such as AS-5 (IND AS-8), etc., to the extent applicable. (b) As per Definition of the Scheme, "Appointed Date" means April 1, 2019 or such other date as may be fixed or approved by the NCLT "Effective Date" means the date on which the certified or authenticated copies of the order(s) sanctioning the Scheme, passed by the NCLT is filed with the ROC. Any referenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of the section. As far as observations made in paragraph IV (d) of the Report of Regional Director is concerned, the Petitioner Companies through its Counsel undertake to comply with the provisions of Section 232(3)(i) of the Companies Act, 2013 as regards to Combination of the Authorised Share Capital. (e) The Hon'ble Tribunal may kindly seek the undertaking that this Scheme is approved by the requisite majority of members and creditors as per Section 230(6) of the Act in meetings duly held in terms of Section 230(1) read with subsection (3) to (5) of Section 230 of the Act and the Minutes thereof are duly placed before the Tribunal. As far as observations made in paragraph IV (e) of the Report of Regional Director is concerned, the Petitioner Companies through its Counsel state that by the order delivered on 14th July, 2020 in C.A. (CAA) 1017/MB/2020, scheme was approved by the majority of equity shareholders as per Section 230(6) of the Act in meetings duly held in terms of Section 230(1) read with sub section (3) to (5) of Section 230 of the Act and the meeting of preference shareholders of the Transferee Company was dispensed with on the basis of consent affid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per FEMA guidelines. Hence, valuer should certify that the price per share is as per FEMA guidelines. As far as observations made in paragraph IV (h) of the Report of Regional Director is concerned, the Transferee Company through its Counsel submits that it doesn't have any non-resident equity shareholders. Hence, FEMA guidelines are not applicable to the Transferee Company. (i) As the Transferor Company is listed with BSE, hence, the petitioner be directed to file an affidavit to the extent that it has complied with the standard directions issued by BSE vide letter No. DCS/AMAL/AJ/R37/1060/2017-18 dated 08.03.2018. As far as observations made in paragraph IV (i) of the Report of Regional Director is concerned, the First Petitioner Company which is a listed company through its Counsel submits that it has complied with the directions issued vide letter No. DCS/AMAL/JR/R37/1681/2019-20 dated 17.02.2020. In the RD report the circular reference number given is wrongly mentioned as DCS/AMAL/AJ/R37/1060/2017-18 dated 08.03.2018. (j) Hon'ble NCLT may kindly direct the petitioners to file an affidavit to the extent that the Scheme enclosed to Company Application & Company Pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing outstanding liability towards income tax pertaining to AY: 2007- 08 under notes to the accounts or contingent liabilities. Also the Auditor Report mainly CARO point on statutory dues is silent about this outstanding demand." Clarification given by the First Petitioner/Transferor Company. The Petitioners through their Counsel undertake to comply with all applicable provisions of the Income Tax Act and all issues arising out of the same will be met and answered in accordance with law and tax liabilities, if any, would be borne by the Transferee Company. The Income Tax Authorities are at liberty to examine tax implications. B. Para 7 of the Report Relevant Extract from the Chartered Accountant's Report: i. "As observed under Secretarial Auditor's Report of March 31, 2019, Company has not filed various E-forms as applicable under Companies Act, 2013 and under SEBI Regulation, 2015. The current status is awaited." Clarification given by the First Petitioner/Transferor Company. 1. The Petitioner Companies through their Counsel submit that the relevant extract of the Company's Secretarial Audit Report dated 3rd September, 2019 highlighting certain observations is as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in terms of the provision of Section 185 of the Act at the Annual General Meeting held on 29th September, 2018 respectively. iii. The non-compliance was with respect to the last quarter of financial year 2018-19. The NRC Committee was reconstituted subsequently and the First Petitioner Company is in compliance with the provisions of Section 178 of the Act. iv. There was a delay in submission of annual report under Regulation 34 of SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015. However, the same was submitted by the First Petitioner Company after paying necessary penalty to BSE for the same. v. Inadvertently, there was a delay in disclosure of information to the BSE. However, the requisite information was duly disseminated by the First Petitioner Company to BSE immediately when the default came to the notice of the First Petitioner Company. C. Sub-para 5 of Para 8.1 of the report. Relevant Extract from the Chartered Accountant's Report: i. "With due respect to the statutory auditors, we state that despite the fact that the Company has made losses in all the five years under examination, there is no remark (i) on 'the Going Concern Status' vide St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... First Petitioner Company. D. Sub-para (f) and (g) of Para 8.2.6 of the Report Relevant Extract from the Chartered Accountant's Report: i. "The exercise of valuation is generally undertaken by adopting Income Approach, Market Approach and Net Assets Approach. The Income Approach includes a number of models on valuation, namely, Discounted Cash-flow Basis (DCF), Maintainable Profits Basis and Dividend Discount Model. The captioned valuation of shares has been made on the Discounted Cash flow basis only. The rejection of other methods has not been clarified by the learned Valuers. ii. Valuation aspects: Terms of Preference Share redemption of Sheth Shelters Private Limited (SSPL) was not available for verification from MCA database. Forms related to issue of preference share by SSPL to PTIL were not available for verification." Clarification given by the First Petitioner/Transferor Company. 1. The Petitioners through their Counsel submit and clarify that para 8.2.6 of the Report is titled "Valuation of Shares of Transferor and Transferee Companies and Exchange Ratio". The exchange ratio is not within the scope of audit/review conducted by the CA. It has been reported as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed a valuation report dated 19.01.2019 on the fair value of its equity shares from R V Shah and Associates, Chartered Accountants as on 31.12.2018. Valuation is based on DCF method of valuation which seems reasonable. Said valuation report was issued for the purpose of capital reduction and considering this fact, investment in SDR1L has been valued at the same value i.e., Rs. 207.29, as provided in the above-referred valuation report. 2. Since the investment is of only 1 equity share in SSPL, the same is considered as immaterial and is valued at cost. 3. PTIL has invested in 4,38,400 6% Redeemable Non-Cumulative Non-Participating Preference shares of SSPL of Rs. 10 each and Rs. 190 premium. The same represents the recoverable amount of redemption. Accordingly, the value of the investment is considered as Rs. 200 per preference share." 3. With respect to availability of forms related to issue of preference shares by SSPL to First Petitioner Company on MCA database, the Petitioners submit that since the shares were issued in 2004, the data is not available in the MCA database and that the investment made in 2004 is also outside the scope of audit/review. The Petitioners underta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, Company's resources were invested in to an assets not generating regular revenue income. On the other hand Company continued to incur administrative expenditure which resulted in to losses in past five years". ii. Further in Point 2 of Para 9.11 of the report in arriving at the prima facie opinion that the affairs of the Company have been carried out in a manner prejudicial to the interest of the Company or its Member or public interest, the CA has considered as under: "The Board of Directors of the Company made an investment in preference shares and equity shares of the Company which have not given any revenue income in the entire span of five years." Clarification given by the First Petitioner/Transferor Company. 1. The Petitioners through their Counsel submit that as mentioned above, the First Petitioner Company is engaged in the activity of investing. Return on investment comprises not only of revenue return (like interest, dividend) but also capital appreciation in the value of investment. With respect to investment in preference shares of SSPL, though during the period under review (five years i.e. from April 2014 to March 2019) SSPL has not made substantial profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the resources of the Company in non performing Companies. And (ii) Prejudicial loan transactions with related parties We are prima facie of the view that the affairs of the Company have been carried out in a manner prejudicial to the Company or its Member or public interest." Clarification given by the First Petitioner/Transferor Company 1. With regard to the observations made in Para 9.2, 9.7, 9.10 and 9.11 of the Official Liquidator, the Petitioners through their Counsel submit and clarify that the CA in his report in Para 9.1 has mentioned that they have not found any serious allegations or complaints against the Company. In absence of any such allegations, a prima facie view that the affairs of the First Petitioner Company are carried out in a manner prejudicial to the interest of its members and public is misconceived and arbitrary. Further, as indicated by the CA the view is prima facie. A conclusion can only be arrived at after understanding the facts and the justifications from the company/management. Prima facie views deserve to be ignored. 2. The explanations to specific observations of the CA with respect to investment in preference shares of SSPL and loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociated risk of loss in value. In any case, as mentioned above, no provision of impairment has been made on investment in preference shares of SSPL. d. Therefore, the Petitioners submit that the observation on the merits of decision to invest in associated Companies ought to be examined is wrong and unjustified. The investment has yielded appreciation in the net worth by 29 times. It could not be questioned. II. Loans granted to related parties. i. The CA in his report in Para 9.7 with respect to loan granted to related party has stated as under: "Question as to why interest free loan was granted for a long period of five years requires to be examined to find out the deriving of undue benefit by the Directors or other vested interest, if any. In fact, the said loan is sans the authority of Company in so far as no resolution for the years 2014-15, 2015-16 and 2016- 17 had been passed. Resolution has been passed in the year 2017- 18. In fact, we are informed that such loan was granted as far back as in the year 2002-03." Clarifications given by the First Petitioner/Transferor Company a. In this respect, the Petitioners through its Counsel submit and clarify that the loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of misapplication, misappropriation and breach of trust on the part of the management of the Transferor company ought to be examined/investigated." It is clear that there is no misapplication, (all transactions are fully compliant and transparently disclosed), no misappropriation (loans have been repaid and there is no loss of value in any investment, rather there has been tremendous appreciation), and consequently there has been no question of breach of trust. No such examination/investigation as suggested is warranted. g. On the basis of the fact that fair value of the First Petitioner Company is much higher than its book net worth and the First Petitioner Company has in fact realized a huge amount of Rs. 143.90 crore, a question on the management's integrity towards their responsibility of protection and enhancement of the wealth of the shareholders is not justified. All creditors have been paid or are fully provided for. All shareholders were fully aware of and have appreciated and accepted all transactions of the Company. The Financial Statements have been unanimously approved by the Shareholders at each of Annual General Meetings. Therefore, the CA was totally unjustifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he approval of the Scheme is without prejudice to the liability, if any, of the First Petitioner/Transferor Company which upon amalgamation would stand transferred to the Transferee Company. 12. From the material on record, the Scheme appears to be fair and reasonable and does not violate any provisions of law and is not contrary to public policy or public interest. The clarifications provided by the Companies are justified and are accepted. 13. Since all the requisite statutory compliances have been fulfilled, C.P. (CAA) 1015/MB/2020 is made absolute in terms of prayer made in the Petition. Hence ordered. ORDER The Petition be and the same is allowed subject to the following. i. The Scheme, placed at Page Nos. 248 to 288 (Annexure - F) of the Company Petition with the Appointed Date fixed as 1st April, 2019 is hereby sanctioned. It shall be binding on the Petitioners and all concerned including their respective Shareholders, Secured Creditors and Unsecured Creditors/Trade Creditors and Employees. ii. The Transferor Company be dissolved without being wound up. iii. The Registrar of this Tribunal shall issue the certified copy of this order along with the Scheme forthwith. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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