TMI Blog2022 (11) TMI 807X X X X Extracts X X X X X X X X Extracts X X X X ..... h class of cases or such matters pertaining to such class of cases, then such a Bench would be considered competent to hear such cases. We also note that the Single Member (Judicial) Bench constituted at NCLT, Chennai by the order of the Hon ble President, NCLT on 27.11.2017 in exercise of powers under section 419 of the Companies Act, 2013, whose copy is attached with the report of the Learned Amicus Curiae, the Single Judicial Member, Bench was entrusted with powers to dispose of cases relating to Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016 - the Single Judicial Member Bench that heard the Company Petition bearing No. CA/212/66(1)/CB/2017 and passed order dated 18.9.2019 was a validly constituted bench to hear cases under the Companies Act, 2013 by Hon ble President, NCLT and was fully empowered and competent to hear and dispose of the said company petition. Whether the Special Resolution passed under section 100-104 of the erstwhile Companies Act, 1956, the buy-back of non-promoters shares is a valid modality for providing exit to the shareholders? - HELD THAT:- A perusal of section 100 provides for the Special Resolution for reduction of shares capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t case)? - HELD THAT:- It is clear from the procedure outlined to provide exit to investors in Annexure A of the Exit Circular dated 10.10.2016 that the promoters of the company shall acquire shares of such companies from public shareholders by paying them such value determined by the valuer - two facts are clear from these Exit Circulars. viz (i) that the Exit Circulars have been issued in exercise of powers conferred under the Securities and Exchange Board of India Act, 1992 by SEBI to provide exit option to public shareholders of ELCs of a de-recognised Regional Stock Exchange, and (ii) the promoters of the ELCs shall be responsible for making payment of consideration to the exiting public shareholders. In the present case, where the company has used its Securities Premium Account to make payment to the exiting public shareholders, the procedure adopted is not in accordance with the procedure stipulated for providing exit to public shareholders by SEBI consequent to de-recognition of an exclusively listed company after de-recognition of a Madras Stock Exchange. The Respondent No. 1 company has not provided voluntary exit option to its public shareholders but resorted to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en filed under Section 421 of the Companies Act, 2013 by Mahendra G. Wadhwani, a public shareholder of M/s. Reed Relays Electronics India Limited (Respondent No. 1, in short Reed Relays ) against the order dated 18.9.2019 passed by the National Company Law Tribunal, Chennai in CA/21/66(1)/CB/2017 (hereinafter called Impugned Order). 2. The Appellant is aggrieved by the Impugned Order mainly on the ground that it has been passed in a mechanical manner by only reiterating the observations made by the Division Bench of NCLT, Chennai in its earlier order dated 4.10.2017, without paying attention to the fact that the Respondent Company Reed Relays did not follow the guidelines/procedure laid down in the Exit Circulars and Delisting Regulations of Securities and Exchange Board of India (in short SEBI ). 3. It is recalled that an order was passed by the NCLT, Chennai in CP/21/66(1)/CB/2017 on 4.10.2017 regarding the petition of M/s. Mahendra G. Wadhwani, which was assailed by him in appeal bearing CA(AT)/337/2017 before the National Company Law Appellate Tribunal (in short NCLAT ) which, by order dated 17.4.2018, set aside the order of NCLT, Chennai stating as follows:- 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingle Member (Judicial) Bench. Moreover, since the order dated 4.10.2017 was set aside by NCLT, it was required that the NCLAT should have taken into consideration the contents of the affidavit dated 18.9.2017 filed by the RD, and a fresh order should have been passed since the earlier order dated 4.10.2017 no longer existed in law. The NCLT has not passed a fresh order, but has simply said that after careful study of the relevant material, this Tribunal is of the opinion that the earlier order passed on 4.10.2017 does not warrant any modification, and thus it has effectively maintained the earlier order dated 4.10.2017. (ii) The Impugned Order has been passed in an application made under section 66 of the Companies Act, 2013, which is regarding reduction of share capital, whereas the buy-back of shares was done under section 100 of the Companies Act, 1956. Since, the Special Resolution was passed under section 52 of the Companies Act, 2013, which provides for use of Security Premium Account for Buy-Back of shares, the intention was always to Buy-Back of shares and therefore, the application under section 66 was not maintainable. (iii) The voting in the EGM dated 12.12.2016 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with the Exit Circular dated 10.10.2016. (x) The 4th Exit circular dated 17.4.2015 gave 18 months time to Exclusively Listed Companies (ELCs) within which they had to obtain listing upon compliance with the listing requirements of a nation-wide stock exchange and it was not the time period given for providing exit to non-promoter shareholders. (xi) The 5th Exit Circular dated 10.10.2016 provided the modality/procedure for exit to public, non-promoter shareholders which should have been followed. According to Annexure A of this circular, there had to be a public announcement by the promoter of the company in one national newspaper and one regional newspaper with material information relating to exit opportunities to its shareholders, which should have included the proposed exit price per share. Thereafter, the exiting shareholders were required to tender their shares to the company and the promoter was required to open an escrow account in favour of the independent valuer/designated stock exchange and the total estimated amount of consideration based on the exit price and number of outstanding public shareholders was to be deposited in the escrow account. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e principles of Res Judicata would, therefore, apply in the present appeal as, a similar issue has been heard and decided through an order dated 23.11.2017 by the SAT. (iv) The Special Resolution approving the reduction of share capital of Respondent No. 1 Company was passed in the EGM with a majority of 89.56% on 12.12.2016 and at that time section 100-104 of the erstwhile Companies Act, 1956 were in force. With the enactment and coming in force of the Companies Act, 2013 on 15.12.2016, the Respondent No. 1 Company applied for necessary approval by filing petition section 66 of the Companies Act, 2013 because provision of section 66 of the Companies Act, 2013 is pari materia to section 100 of the Companies Act, 1956. (v) Madras Stock Exchange ( MSE ) was in the process of getting de-recognised and exclusively listed companies (ELCs) earlier listed with MSE, were required to either get listed on a nation-wide stock exchange or provide exit to its public, non-promoter shareholders. Since the Respondent No. 1 company did not enter into any listing agreement with a nation-wide stock exchange, it ceased to be a listed company, a fact which is taken note in the Impugned Order in p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only for buy-back of shares under section 52 (2)(e) is erroneous and untenable. (x) The judgments of Hon ble Madras High Court in Parry s Confectionary Ltd. vs. Unknown (2004 122 Comp Case 900 Mad.) and in the matter of In Re: Nestle India Ltd. [MANU/DE/2751/2008] were cited in support of the contention. (xi) Hon ble Supreme Court has held in the matter of Hindustan Lever Employees Union vs. Hindustan Lever Ltd. (AIR (1995) SC 470) that the valuation of shares is a technical and complex issue, which can be appropriately left to the accounting expert and merely because some other method of valuation could be resorted to, which could possibly be more favourable to the objector, this alone cannot militate against granting approval to the modality adopted by the company, and the court s obligation is to see that valuation was done in accordance with law and it was carried out by an independent body. (xii) After the order of NCLT dated 18.9.2019, Respondent No 1 Company transferred requisite funds to a Special Bank Account in HDFC Bank, which has thereafter, issued demand drafts/warrants to the company s shareholders and out of 2506 such non-promoter shareholders, more than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll mean an incremental amount of Rs.207/- per equity share over and above Rs.107/- per share. In the Opinion Section of the Valuation Report, the valuer has said that it is the Company s discretion and decision to adopt the most appropriate value and the Company shall adopt a suitable fair value per equity share based on factors and reasons considered appropriate by the Company. 12. The Learned Senior Counsel for Respondents has cited the following judgments in support: - (i) The Hon ble Delhi High Court in the matter of Reckitt Benckiser (India) Ltd. vs Unknown (122 (2005) DLT 612) and Sandvik Asia Limited vs Bharat Kumar Padamsi (MANU/MH/0237/2009). (ii) The Hon ble Supreme Court of India in the matter of Hindustan Lever Employees Union v/s Hindustan Lever Ltd. [1994 SUPPL (4) SCR 723] and G.L. Sultania and Anr. v/s SEBI [2006 67 SCL 71 SAT]. 13. The issues that are relevant in deciding this appeal are as follows:- (i) Whether the Adjudicating Authority hearing the matter in a Single Member Bench was legally competent to consider the matter after remand by NCLAT, , which matter was earlier heard by a Division Bench of NCLT? (ii) Whether the Special Resolution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r: Provided that it shall be competent for the Members of the Tribunal authorised in this behalf to function as a Bench consisting of a single Judicial Member and exercise the powers of the Tribunal in respect of such class of cases or such matters pertaining to such class of cases, as the President may, by general or special order, specify: 15. We note that sub-section (3) of section 419 of the Companies Act, 2013 provides that if a Single Member Bench comprising of a Single Judicial Member is constituted by President of NCLT in respect of such class of cases or such matters pertaining to such class of cases, then such a Bench would be considered competent to hear such cases. We also note that the Single Member (Judicial) Bench constituted at NCLT, Chennai by the order of the Hon ble President, NCLT on 27.11.2017 in exercise of powers under section 419 of the Companies Act, 2013, whose copy is attached with the report of the Learned Amicus Curiae, the Single Judicial Member, Bench was entrusted with powers to dispose of cases relating to Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016. Thus, it is clear that the Single Judicial Member Bench that heard th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h in excess of the wants of the company, can be paid off. Insofar as the present case of providing exit to the shareholders of the company, it is clear that the payoff of any paid up share capital is not in excess of the wants of the company, but due to the reason that this exclusively listed company Reed Relays on Madras Stock Exchange has got delisted because Madras Stock Exchange has been de-recognized. Therefore, either Madras Stock Exchange has to get itself listed on any other nationwide stock exchange or provide exit to its shareholders following its various Exit Circulars, particularly Exit circular dated 10.10.2016. Since Madras Stock Exchange had decided not get itself listed on any nationwide stock exchange, it has to provide exit to its non-promoters shareholders and the mechanism/modality for providing exit to such shareholders was stipulated by SEBI in the various Exit Circulars starting with circulars dated 29.12.2008, 13.5.2014, 22.5.2014, 17.4.2015 and 10.10.2016. These circulars which are reproduced in Appeal paper book, Vol. II of the documents filed by the Appellant (vide dy. No. 30794), take note of the fact that exclusively listed company has got de-listed an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In this connection, we note that the first Exit Circular dated 29.12.2008 makes it clear in para 8 that the companies which are listed in such derecognized regional stock exchanges, and Madras Stock Exchange is one of them, has to provide exit option to shareholders as per SEBI De-Listing Guidelines/Regulations after taking shareholders approval for the same within a time frame, which is to be specified by SEBI. Thereafter, circular dated 17.4.2015 allows a timeline of 18 months within which such companies have to obtain listing after complying with the listing requirements of the nationwide stock exchange subject to certain conditions or provide exit to its public, non-promoter shareholders. Again, an Exit Circular issued by SEBI on 10.10.2016 (called the 5th Exit Circular), provides a procedure to provide exit to investors in para 4 (d), wherein it is clarified that the exclusively listed companies shall be required to ensure compliance with the procedure for exit which is prescribed in Annexure A attached to this circular. Further para 5(a) of this 5th Exit Circular provides that the period of three months from 10.10.2016 i.e. date of the circular, is provided to the ELC to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cided and resolved to provide exit to its public shareholders through reduction of the Company s paid-up equity capital from Rs.1,07,68,090 consisting of 10,76,809 equity shares of Rs. 10/- each fully paid up to Rs.43,48,470 consisting of 4,34,847 issued, subscribed and fully paid-up equity shares of Rs. 10 each by cancelling 6,41,962 issued, subscribed and paid up equity shares of Rs. 10/- each, which are the shares held by the non-promoters shareholders by paying against the each cancelled share a sum of Rs.107/- per equity share of Rs. 10/-. It is clear that while the circular dated 10.10.2016 of SEBI had already been issued, which the company should have known, the Company s Board did not take note of this circular in its Board meeting on 13.10.2016 and followed a procedure that had not been stipulated by SEBI through its Exit Circulars, and which actually meant compulsory buy-back of shares rather than the opportunity of voluntary exit option. 22. The Learned Senior Counsel for Appellant has also pointed to certain assumptions and conditions stated in the valuation report, which make the valuation report itself not fully reflective of the correct valuation of shares. In pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available time of 75 days, which was stipulated in circular dated 10.10.2016, to provide exit to its public shareholders, why it did not take note of this stipulation, but on the contrary rushed through with the appointment of an auditor/valuer, who was not taken from the panel of valuers by SEBI, and thereafter, after receipt of the valuation report finalized payoff to the shareholders, all within a period of 7 days. In our view, once SEBI has issued very detailed and clear guidelines vide its circular dated 10.10.2016, it was incumbent on the Company to take it into consideration and restart the procedure, since it had a total time period of 75 days to provide exit option to its public shareholders starting from 10.10.2016. Such a move would have brought in greater confidence among its exiting shareholders, regarding transparency and fairness in the entire process, an obligation that the Company had towards its public shareholders, even if they were in minority. Moreover, the use of Premium Security Account by the Company to buy-back the shares instead of the buy-back by the promoters using their own funds, is also an infringement of the procedure laid down by the SEBI in its Exi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake payment to the exiting public shareholders, the procedure adopted is not in accordance with the procedure stipulated for providing exit to public shareholders by SEBI consequent to de-recognition of an exclusively listed company after de-recognition of a Madras Stock Exchange. 27. We also find that for ELCs exclusively listed companies that have moved to dissemination board and have been delisted, exit option is to be given to its public shareholders (other than promoters) at a value to be determined as per the methodology of valuation of share provided in Exit Circular dated 10.10.2016. This exit option to be given to the shareholders is voluntary, whereas the Special Resolution adopted by the company in its EGM held on 12.12.2016 under Section 100 of the Companies Act, 1956 provides for compulsory buyback of shares, which is not in consonance to SEBI guidelines issued for providing exit option to the public shareholders of ELCs of a de-recognized Regional Stock Exchange. Thus, we note that under the guise of providing an exit option to non-promoter shareholders in terms of the Exit Circulars issued by SEBI, the company has resorted to reduction of share capital under Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h all the other shares of the same class. We note that in the present case, the exit option to be given to public shareholders is voluntary, and has to be undertaken in the manner provided in Exit Circular dated 10.10.2016 which is issued under the statutory mandate of SEBI. Therefore, we are of the opinion that the two judgments cited by Learned Counsel for Respondent No. 1 would not be applicable in the present case. 31. We also note that the judgment of Hon ble Delhi High Court in the matter of Nestle India Limited (supra) and of Hon ble Madras High Court in the matter of Parry s Confectionaries Ltd. (supra) would also not apply in the present case because the use of promoters funds has been stipulated in the Exit Circular dated 10.10.2016 whereas in the cases cited the use of Securities Premium Account in paying off shareholders was found to be permitted under section 52 (1) of the Companies Act, 2013. 32. We also note that the judgment of Hon ble Supreme Court in the matter of GL Sultania vs SEBI (supra) regarding non-interference by the court in the matter of valuation of shares would hold when the experts have valued the shares using their expertise and knowledge, whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondent No.1 company shall provide voluntary exit to its non-promoter, public shareholders in the manner outlined in the Exit Circular of SEBI dated 10.10. 2016. Since it appears that a number of non-promoter shareholders have already availed of the buy-back of shares and accepted demand drafts/warrants in payment, the company shall now engage an independent valuer from amongst the SEBI approved panel and cause a valuation exercise to be undertaken based on financials as they existed on 10.10.2016. Those non-promoter shareholders shall be paid the difference amount if the valuation comes to be more than Rs. 107/- per share. The non-promoter shareholders who have not accepted any payment till now shall be entitled to receive the full value of their shareholding as per the accepted valuation. Further, the non-promoter shareholders shall be given interest @ 9% p.a. on the amount due to them for the period 10.10.2016 till the date of this order. This entire exercise shall be completed within 75 days from the date of this order. With the above directions, the appeal is disposed of. 36. In the facts and circumstances of the case, there is no order as to costs. - - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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