TMI Blog2021 (6) TMI 319X X X X Extracts X X X X X X X X Extracts X X X X ..... B., Member (T) For Appearing Parties: P.H. Arvindh Pandian, Senior Advocate for Pawan Jhabakh, Advocate, M. Kannan, Joint Director and B. Palani, Authorized Representative ORDER Anil Kumar B., Member (T) 1. CP/129 - 133/CAA/2020 are Company Petitions filed by the Petitioner Companies above named for the purpose of the approval of the Composite Scheme of Arrangement and Amalgamation (hereinafter referred to as the 'SCHEME') as contemplated between the Petitioner Companies viz. M/s. Polyhose India Private Limited (hereinafter referred to as Transferee Company/Demerged Company ), M/s. Polyhose Automotive Private Limited (hereinafter referred to as Transferor Company - 1 ), M/s. Leeboy India Construction Equipment Private Limited (hereinafter referred to as Transferor Company - 2 ), M/s. Mega Rubber Products Private Limited (hereinafter referred to as Transferor Company - 3 ) and M/s. Polyhose Properties Private Limited (hereinafter referred to as Resulting Company ) under Section 230 to 232 and other applicable provisions of the Companies Act, 2013 (hereinafter referred to as 'the Act') read with Companies (Compromises, Arrangements and Amalgamat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Transferee Company with that of the Transferor Companies will help the Transferee Company to produce improved products for its customers and derive better collaborative benefits. d. Resources of the Transferor Companies and Transferee Company in the form of managerial and technical expertise can be combined for optimum utilisation and to increase operational efficiency. e. Combining the technology capabilities of each of the entities and utilising the same in providing end-to-end portfolio of solutions to the customers. f. Enable forward integration of product and technology and pooling of resources of the Transferor Companies with the resources of the Transferee Company to their advantage, resulting in more productive utilization of said resources and operational efficiency which would be beneficial to all stakeholders. 5. In the second motion application filed by the Petitioner Companies, this Tribunal vide order dated 27.02.2020 has directed the Petitioner Companies to issue notice to the Statutory/Regulatory Authorities viz. (i) Regional Director (Southern Region), (ii) RoC, Chennai, (iii) the Income Tax Department, (iv) Official Liquidator, (v) Reserve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain observations in respect of the appointed date for the purpose of reduction of capital and scheme of amalgamation dealt with in Part B and Part C of the Scheme being 01.04.2017 which is ante dated by more than two years from the date of proposal of the scheme by the Board and also about the appointed date being prior to the acquisition date in respect of the Transferor Company - 2. To this the companies have clarified through their affidavit of undertaking in para 6 and 7 which is enclosed as Annexure to this affidavit. This Hon'ble Tribunal is requested to direct the transferee company to make necessary disclosures in its first financial statement filed after giving effect to the approved scheme that the previous year figures in the financial statements as well the figures mentioned in the financial statement already filed for the years 2017-18 and 2018-18 are not comparable since the scheme was given effect to with effect from 01.04.2017. 9. It is submitted that in Part B of the Scheme the Company has proposed to reduce the capital of the 2nd transferor company before amalgamating the company with the transferee/demerged company. Accordingly, the paid up equity shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this Hon'ble Tribunal. 11. It is submitted that Clause 17 of Part C of the Scheme has stated that the authorized capital of the Transferor Companies will be merged with the authorized capital of the Transferee Company. The Transferee Company may be directed to file the amended MOA and AOA with the RoC, Chennai for its records. In the said clause of the Scheme the companies have stated that the transferee Company will adjust the fees paid by the transferor companies as against the fees to be paid by the transferee company on combination of the authorized capital and pay the differential fees, in the light of the above, the transferee company may be directed to comply with the provisions of Section 232(3)(i) of the Act and rules framed thereunder. 12. It is submitted that in Part D para 31 of the Scheme has proposed to merge part of the Authorized capital of the demerged company at ₹ 62,73,00,000/- divided into 6,27,30,000 equity shares of ₹ 10/- each with the Authorized capital of the Resulting Company. The provisions of Section 61 and Section 230-232 of the Act does not provide for such division of the Authorized capital of the demerged company and merg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the Regional Director, the Director of the Transferee/Demerged Company has filed an Affidavit of Undertaking by addressing the issues as raised by the Regional Director in its Report. 7.1.4. In so far as the observation made in para 8 of the Report of the RD is concerned, it is stated in the Affidavit that the MCA vide General Circular No. 9 of 2019, dated 21.08.2019 has stated that if the 'appointed date' is significantly ante-dated beyond a year from the date of filing, the justification of the same would have to be specifically brought out in the Scheme and it should not be against the public interest. Further, it is stated in the Affidavit that the significance of having the Appointed Date for the purpose of Amalgamation as 01.04.2017 being ante date is for the following reasons; a. The Transferor Company is engaged in the manufacture of Construction Equipment such as Motor Grader of various capacities and sales are affected through dealer network and in some cases direct sales. The product is also exported to various countries. As the products manufactured and sold are large equipments with enduring life, they carry warranties both fixed and elongated. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year 2017 - 18 and 2018 - 2019. 7.1.6. In so far as the observation made in para 9 of the Report of the RD is concerned, the same seems to relate only to the factual aspects. 7.1.7. In so far as the observation made in para 10 of the Report of the RD is concerned, it is stated in the Affidavit of Undertaking that on Amalgamation of Transferor Company - 1, 2 and 3 with the Transferee Company, the Transferee Company, in addition to Clause 9 of the Composite Scheme, shall adopt the following accounting treatment in its book of accounts for giving effect to Amalgamation; a) Upon the Scheme becoming effective and from the Appointed Date, the amalgamation of the Transferor Companies into PIPL shall be accounted, as per Appendix C on 'Business Combination of entities under common control' to the India Accounting Standard (IND AS) 103 on Business Combination prescribed under Section 133 of the Companies Act, 2013 as notified under the Companies (India Accounting Standard) Rules, 2015 and generally accepted accounting principles as may be amended from time to time. b) The difference between the value of assets and liabilities recorded pursuant to the clause (a) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be deemed to be also the order under Section 66(3) of the Act for the purpose of confirming the reduction. 7.1.9. Further, the Accounting Treatment in the books of the Resulting Company shall be as follows; a) Upon the Scheme becoming effective and with effect from the Appointed Date, subject to the compliance with the provisions of Section 2(19AA) of the IT Act and the provisions of this Scheme, the Resulting Company shall account for demerger of PIPL Demerged Undertaking in its books of accounts in accordance with Appendix C on 'Business Combination of entities under common control' to the India Accounting Standard (IND AS) 103 on Business Combination prescribed under Section 133 of the Companies Act, 2013 as notified under the Companies (India Accounting Standard) Rules, 2015 and generally accepted accounting principles as may be amended from time to time. b) The Resulting Company shall, record the assets and liabilities of the PIPL Demerged Undertaking vested in it pursuant to this Scheme at their respective carrying amounts appearing in the books of the Demerged Company as at the Appointed Date c) The Resulting Company shall credit to its share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wherein a part of the authorized share capital represents the authorized share capital of the demerged undertaking and hence, should be allowed to be combined with the authorized share capital of the Resulting Company. Further, it is stated in the Affidavit that pursuant to the approval of the Scheme by this Tribunal, both the Demerged and the Resulting Company agree to file the amended MOA and AOA with the RoC, Chennai for its records and also the Resulting Company agrees to make and application with the RoC for the payment of the balance fees, as applicable, for the enhanced authorized capital subsequent to the demerger as contemplated in Clause 31 of the Scheme, after setting off the fees paid by the Demerged Company. 7.1.13. In so far as the observations made in para 13 of the Report of the RD, it is stated in the Affidavit that the Petitioner Companies have provided the list of assets and liabilities along with the book values as per their Affidavit of Undertaking enclosed with the Report of the Regional Director and the concerned Petition Companies at the time of filing certified copy of the present order shall also file the list of assets and liabilities as an Annexure to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment/reservation/qualification by the statutory Auditors on the price at which materials are purchased from its related parties. This is required under Section 188 of the Companies Act, 2013. Hence, the Chartered Accountants are not able to give any opinion. The 2nd Transferor Company had entered into an arrangement, initially during the year 2015, with Foreign Holding Company and obtained External Commercial Borrowings (ECB) and later in the year 2017 - 18, the Company has converted the entire ECB into equity shares. The 2nd Transferor Company has been regular in importing materials from its Holding Company and also paying interest on ECB to its Holding Company until the date of conversion of ECB into equity shares. The Company has also paid royalty to its Foreign Holding Company . The above transactions are required to be reported under Transfer pricing Regulations under Income Tax Act, 1961, as to whether these transactions were carried out at ARMS LENGTH PRICE between the related parties. In the report issued by the Transfer Pricing Auditor, it was certified that the price at which the related party transactions with international related entities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by external Chartered Accountants appointed for this purpose for the 1st Transferor Company and the valuation has been done based on the weighted average of Book Value Approach and Income Approach by adopting the book value of assets as per the financial statements available as on 31.12.2018 and actual income for the F.Y. 2016 - 17, 2017 - 18 and projected income for the F.Y. 2018 - 19 to 2020 - 21. 1 Equity share of Transferee Company of ₹ 100 each fully paid will be allotted for every 20 Equity Shares of 1st Transferor Company of ₹ 10 each fully paid. Since the 2nd Transferor Company after capital reduction as envisaged in the Composite Scheme of Arrangements, become the wholly owned subsidiary of Transferee Company, hence share valuation has not been done and the question of issuing shares to the Transferor Company does not arise. Since the 3rd Transferor Company is a wholly owned subsidiary of the Transferee Company, share valuation has not been done and the question of issuing shares to the 3rd Transferor Company does not arise. The Chartered Accountants have not come across any discrepancy while carrying out the inspection of retur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere was neither any representation nor any report filed by them and in the said circumstances; this Tribunal presumes that the said Department does not have any objection to the sanction of the Scheme. 8. Valuation Report 8.1. The Learned Senior Counsel for the Petitioner Companies invited the attention of this Tribunal to the Valuation Report obtained from one CA Dasaraty V, Chartered Accountant dated 28.06.2019 (for Demerger) and dated 30.01.2019 (for Amalgamation). 8.2. In so far as arriving at a fair equity exchange ratio for the purpose of Amalgamation of Transferor Company-1, 2 and 3 with the Transferee Company, it has been arrived as 1 (One) Equity Share of PIPL of ₹ 100/- each fully paid for every 20 (Twenty) equity shares of PAPL of ₹ 10/- each fully paid up . 8.3. In so far as arriving at Demerger Share Entitlement Ratio, for the purpose of Demerger, it has been arrived as 6,27,30,000 (Six Crore Twenty Seven Lakhs Thirty Thousand Only) equity shares of the PPPL of ₹ 10/- each fully paid up for acquiring the real estate business of PIPL 9. Accounting Treatment 9.1. The Learned Counsel for the Petitioner Companies have stated that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This Tribunal Do Further Order: (i) That the fully paid up equity share capital of the Transferor Company - 2 shall stand reduced from ₹ 277,61,40,780 divided into 27,58,95,952 Class A equity shares of ₹ 10/- each and 17,18,126 Class B equity shares of ₹ 10/- each to ₹ 114,65,32,740/- being 11,46,53,274 Class A equity shares of ₹ 10/- each and 16,12,42,678 by cancellation of 16,12,42,678 Class A equity shares of ₹ 10/- each and 17,18,126 Class B equity shares of ₹ 10/- each. (ii) That the total share capital reduced of Transferor Company - 2 being ₹ 162,96,08,040/- shall be adjusted against the accumulated losses of ₹ 162,96,08,040/-. (iii) That the sanction of the scheme resulting in the reduction of the share capital of the Transferor Company - 2 as above shall be in accordance with the provisions of Section 230 of the Companies Act, 2013 without any further application, act or deed required by the Transferor Company - 2 or its shareholders. (iv) That all properties, right and interest of the Transferor Company - 1, 2 and 3 shall pursuant to section 232(3) of the Companies Act, 2013 without further act or d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) is 23rd May 2019. as specified in the Scheme itself in terms of Section 232(6) of the Companies Act, 2013. (xiii) That the Transferee Company shall not issue or allot any share to the Shareholders of the Transferor Company - 2 and 3 as the entire share capital of the Transferor Company - 2 and Transferor Company 3 is held by the Transferee Company and in consequence thereof the shares of the Transferor Company - 2 and 3 held by the Transferee Company shall stand cancelled. (xiv) That the Transferee Company do without further application allot to such members of the Transferor Company - 1, as have not given such notice of dissent, as is required by Clause 8.2 of Part-C of the SCHEME in the following proportion; 1 (One) Equity Shares of ₹ 100/- each, to the equity shareholders of PAPL as on the Record Date for every 20 (Twenty) equity shares of ₹ 10/- each held by the equity shareholders of PAPL, in consideration for the amalgamation. ; (xv) That upon the Scheme coming into effect, the Resulting Company shall, as per Clause 20.1 of Part-D of the Scheme, without any further application or deed, issue and allot 1,230 (One thousand two hundred and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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