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TMI Blog2021 (6) TMI 784X X X X Extracts X X X X X X X X Extracts X X X X ..... ital and reorganisation of reserves of the Transferee Company and their respective Shareholders. 3. The Learned Counsel for the Petitioner further submits the Introduction and Rationale for the Scheme of Arrangement Primesec Investments Limited The Transferor Company 1 is inter alia engaged in the business activities that includes restructuring advisory services which includes refinancing of debt, advisory assignments relating to insolvencies under the IBC cases, etc. Prime Commodities Broking (India) Limited The Transferor Company 2 is engaged in the business of providing services auxiliary to financial intermediation, except insurance and pension funding. Prime Securities Limited The Transferee Company is a SEBI registered Category I Merchant banker that focuses on all SEBI regulated activities including primary issuances of debt and equity, managing buy-backs and open offers, QIPs, preferential offers, etc. Rationale of the Scheme: a) The Transferee Company owns the entire share capital in the Transferor Companies. b) Integration of the business of the Transferee Company and the Transferor Companies can provide benefits to the shareholders/stakeholders as under: i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tition have been filed in consonance with the order passed in Company Scheme Application Nos. 1058 of 2020 of National Company Law Tribunal, Mumbai Bench. 6. The Learned Counsel appearing on behalf of the Petitioner Companies states that the Petitioner Companies have complied with all requirements as per directions of the Hon'ble Tribunal and they have filed necessary affidavits of compliance with Hon'ble Tribunal. Moreover, Petitioner Companies undertake to comply with all statutory requirements, if any, as required under the Companies Act, 2013 and the relevant Rules made there under. The said undertaking is accepted. 7. The Regional Director (Western Region), Ministry of Corporate Affairs, Mumbai, has filed its report dated March 1, 2021 with the Hon'ble NCLT, inter alia stating therein the observations on the Scheme as stated in paragraph IV(a) to (q) of the report. In response to the observation made by the Regional Director, the Petitioner Companies, vide affidavit dated March 2, 2021, have given necessary clarifications and undertakings. Further, in response to the affidavit filed by Petitioner Companies, the Regional Director has filed its supplementary report ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 230(5) of the Companies Act, 2013 have to serve notices to concerned authorities which are likely to be affected by Amalgamation. Further, the approval of the scheme by this Hon'ble Tribunal may not deter such authorities to deal with any of the issues arising after giving effect to the scheme. The decision of such Authorities is binding on the Petitioner Company(s). f. Petitioner Company have to undertake to comply with section 232(3)(i) of Companies Act, 2013, where the transferor company is dissolved, the fee, if any, paid by the transferor company on its authorised capital shall be set-off against any fees payable by the transferee company on its authorised capital subsequent to the amalgamation and therefore, petitioners to affirm that they comply the provisions of the section. g. The Petitioner Company may be directed to submit undertaking that the petitioner company shall ensure compliance of the all provisions of the Income Tax Act, 1961 including provisions of section 2(1B) of the Income Tax Act. h. As per of Part 2 Clause 2.6(2.6.4) of the Scheme (Accounting Treatment), The surplus/deficit of the value of the assets over liabilities and reserves of the Tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Transferee Company. The amount credited to the Profit and Loss Account pursuant to Clause 3.2.2 above shall be reclassified as and constitute to be accumulated profits of the Transferee Company for the previous financial year, arrived at after providing for depreciation in accordance with the provisions of the Act and remaining undistributed in the manner provided in the Act and other applicable laws. The amount so reclassified in the Profit and Loss Account shall be available for distribution to the equity shareholders of the Transferee Company, from time to time, by the Board of Directors of the Transferee Company, at its sole discretion, in such manner, quantum and at such time as the Board of Directors may decide. In this regard it is submitted that this is against the provision of the Companies Act. Any amount once transferred to Reserve cannot be transferred back to Profit and Loss Account. As per Section 123(1) of the Companies Act, 2013 read with rule 3 of Companies (Declaration and Payment and Dividend) Rule, 2014 stipulate about drawing from the accumulated reserve for the purpose of Declaration of Dividend. Hence, the proposed transfer of amount to Profit and Loss A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in paragraph IV(b) of the Report is concerned, the Petitioner Companies submits that the Appointed Date would be April 1, 2020 as mentioned in Clause 1.1.3. of Part 1 - Definitions and Share Capital of the Scheme which is in compliance with Section 232(6) of the Companies Act, 2013 and the Scheme shall take effect from such Appointed Date. Further, the Petitioner Companies undertakes to comply with the requirements clarified vide circular No. F. No. 7/12/2019/CL-I dated 21.08.2019 issued by the Ministry of Corporate Affairs. c. In so far as observations made in paragraph IV(c) of the Report of Regional Director is concerned, the Petitioner Companies submits that in pursuance of the directions contained in Order delivered on 10th November, 2020 this Hon'ble Tribunal in the Company Scheme Application No. 1058 of 2020, and based on the Consent Affidavit from its Holding Company representing 100% shareholding in the First Petitioner Company and Second Petitioner Company, the First Petitioner Company and Second Petitioner Company were not required to hold the Equity Shareholder's meeting. There are no Secured Creditors in the First Petitioner Company and Second Petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Scheme enclosed to the Company Application and Company Petition are one and the same and there are no discrepancy/changes made. e. As far as the observation of the Regional Director, as stated in paragraph IV(e) of the Report is concerned, the Petitioner Companies submits that in accordance with Section 230(5) of the Companies Act, 2013 and Order delivered by the Tribunal on November 10, 2020, the Petitioner Companies have served notices to all such relevant regulatory authorities. Also, the Petitioners have filed Affidavit of Service with the Tribunal in this regard. Further, the Petitioner Companies also undertake that any issues arising out of the Scheme will be met and answered in accordance with law. f. In so far as observations made in paragraph IV(f) of the Report of Regional Director is concerned, the Petitioner Companies submits that the setting off of fees paid by the Transferor Company on its Authorised Share Capital shall be in accordance with provisions of section 232(3)(i) of the Companies Act, 2013. g. In so far as observations made in paragraph IV(g) of the Report of Regional Director is concerned, the Petitioner Companies submits that the Petitioner Companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of Companies Act, 2013 since there are no provisions under the Companies Act, 2013 that prohibit re-classification of general reserves to profit and loss account and therefore not in violation of section 123(1) of the Companies Act, 2013 read with Rule 3 of the Companies (Declaration and Payment of Dividend Rules, 2014). Further, reliance can be placed on similar Schemes which are approved by the Hon'ble NCLT, Hyderabad Bench, in CP No. 416 of 2016 in the case of International Paper APPM Ltd. and by Hon'ble NCLT, Mumbai Bench, in TCSP No. 151 of 2017 in the case of Hindustan Unilever Ltd. l. In so far as observations made in paragraph IV(I) of the Report of Regional Director is concerned, the Petitioner Companies states that the Scheme does not provide for issuance of shares to any shareholders and accordingly, compliance with section 55 of the Companies Act, 2013 and FEMA Regulations/RBI guidelines is not applicable. m. As far as the observation of the Regional Director, as stated in IV(m) above is concerned, the Petitioner Companies submits that the Transferor Company 1 and Transferor Company 2 are not required to be registered with RBI as non-banking financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of requirement of no accumulated losses in the books. As you would be aware, the Company had incurred losses in the period upto March 2013. Since then the management adopted a new business model that focused on fee based incomes that does not require deployment of capital. The new model has met with tremendous success, as the results for the last two years have shown. The Company also had liabilities to lenders who extended their support during difficult times. In the five years since 2013, the profits generated have been used to repay them. The Company is virtually debt free as of now. This trend of profitable operations should likely continue, hopefully resulting in the wiping out of accumulated losses. We are confident that based on financial performance, the Board will consider favourably your suggestion. Managing Director's Salary The resolution placed before the shareholders, noted by you, specifies the maximum limit for payment of remuneration to the Managing Director and was approved at the last AGM of the Company held on September 25, 2018. The resolution before the shareholders makes no change in this. The Board will decide the actual payment to be made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eholder. Thereafter, the Third Petitioner Company has not received any further query from the concerned shareholder, NSE or any other regulatory authorities. q. Paragraph IV(q) of the Report of Regional Director is in relation to the observations raised by RoC, Mumbai, mentioned at para 22 of the report, extract of which is as under: "As per ROC report para No. 25 regarding any other complaints bearing on the scheme are pending in ROC office and remain not closed. Yes. Complaint with SRN J00049545 is pending against the Transferee Company. There is a complaint from Shareholder about "the Company has last given a dividend in 2008. However, in the last 3 years, the Managing Director's Salary has increased from Rs. 133.18 lacs to Rs. 480.00 lacs (as proposed in the AGM notice) + Performance Bonus upto of Rs. 260 lacs." In relation to the above observation of RoC Mumbai, the Petitioner Companies submits that the above observation is the same as the observation made by the Regional Director at Paragraph IV(p) of his Report, which is already addressed by the Petitioner Companies. "As per the ROC report para No. 29 regarding Scheme includes any reduction in paid up Share Cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Regional Director and reply submitted by the Petitioner Company thereon, Hon'ble Tribunal may pass appropriate orders/orders as deem fit." 10. The Official Liquidator has filed his report dated March 3, 2021 with the Hon'ble NCLT. In paragraph 5(I) of the said report, the observation of the Official Liquidator on the proposed Scheme to be considered by the Hon'ble NCLT for First Petitioner Company are stated as under: 1) As per Independent Auditor's Report annexed with the Balance Sheet as at 31.03.2017, the Auditors has mentioned the Basis for Qualified Opinion and further provided Qualified Opinion which are reproduced as follows: Basis of Qualified Opinion a. As referred in Note 22(a) the Company has written back a secured loan of Rs. 4,052.11 lakhs, as in the opinion of the management the same was no longer payable. Accordingly, the profit for the year is higher, and the short-term borrowing is lower, by the said amount. b. As referred in Note 22(b) the Company has not provided for interest of Rs. 1357.25 lakhs on secured loan in respect of period up to March 31, 2016, as in the opinion of the management the same is under renegotiations with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se: The management was of the opinion that based on the discussion with the lender, and the settlement arrived at with them, the said secured loan was no longer payable and management felt it appropriate to write-back the same in the books of accounts. There is no outstanding in the current date. Official Liquidator's Comments In view of management response and since company has written back the amount in terms of settlement arrived with lender. The Management response appears to be satisfactory. b. In relation to observation of the Official Liquidator, as stated in paragraph 5(I)(1)(b): Management Response: The management was of the opinion that based on the discussion with the lender, and the settlement arrived at with them the said interest on the secured loan is no longer payable and hence no provision for the same was made in the books of accounts. There is no outstanding in the current date. Official Liquidator's Comments Since the amount has written back we agree with the explanation provided by the Management. c. In relation to observation of the Official Liquidator, as stated in paragraph 5(I)(1)(c): Management Response: The management was of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Report deals with the observation on the proposed Scheme to be considered by the Hon'ble NCLT for the Second Petitioner Company are stated as under: 1) From the copies of Balance Sheet at 31.03.2020, 31.03.2019, 31.03.2018, 31.03.2017 & 31.03.2016, it is found that the Company has taken a huge amount of inter corporate deposits from Prime Securities Limited which is Transferee Company in the proposed scheme. The Company has received Corporate deposits from Transferee Company continuously for more than 5 years 2) From the copies of Balance Sheet at 31.03.2020, 31.03.2019, 31.03.2018, 31.03.2017 and 31.03.2016, it is found that the Directors have not disclosed the DIN while signing the Balance Sheet as obligated vide provisions of Section 158 of the Companies Act, 2013. 13. In response to the above observations, the response submitted by the First Petitioner Company along with Official Liquidator's comments are as follows: a. In relation to observation of the Official Liquidator, as stated in paragraph 5(II)(1): Management Response: The inter corporate deposit received is from the Parent Company and the same has been almost repaid as on date. Official Liquidat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not adversely impact the rights of the Income Tax Department for any present or future proceedings. The Department should be at liberty to take appropriate action as per law in case of an event of any tax-avoidance or violation of Income Tax Law or any other similar issue. 6. Further, it is to mention that demand of Rs. 27,17,530/- for assessment year 2018-19 (Rs. 18,66,464/-) assessment year 2019-20 (Rs. 8,51,070) is outstanding against M/s. Primesec Investments Limited. 15. In response to the observations made by the Income Tax Department (Circle 8(2)(1), Mumbai), the Learned Counsel for Petitioner Companies has clarified as under: i) As far as observation of the Income Tax Department, as stated in paragraph 4 of the report is concerned, the Learned Counsel for the Petitioner Companies submits that as per Clause 2.3 of the Scheme, the pending proceedings of the Transferor Companies shall not abate or be discontinued or in any way be prejudicially affected by reason of the amalgamation and by anything contained in this scheme, but the said suit, appeal or other legal proceedings may be continued, prosecuted and enforced by or against the Transferee company in the same man ..... X X X X Extracts X X X X X X X X Extracts X X X X
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