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TMI Blog2025 (1) TMI 555X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Shivendra Singh, Mr. Yojit Pareek, Advocates for Income Tax. Mr. Sajjan Poovayya Sr. Advocate with Mr. K.V. Girish Chowdary, Mr. Palash Maheshwari, Mr. D. Satya Sai Sumanth, Advocates for Intervention Applicant For Appellant : Mr. Sajjan Poovayya Sr. Advocate with Mr. K.V. Girish Chowdary, Mr. Palash Maheshwari, Mr. D. Satya Sai Sumanth, Advocates For the Respondents : Ms. Munisha Gandhi, Sr. Advocate with Mr. Vaibhav Sharma, Ms. Salina Chalana, Advocates for R- 1. Mr. Vaibhav Sharma, Advocate for R- 2 & 3 JUDGMENT ( Hybrid Mode ) [ Per : Ajai Das Mehrotra , Member ( Technical ) ] Company Appeal (AT) No. 120 of 2023 is filed by Indiabulls Real Estate Ltd. (hereinafter called the 'IBREL' or the 'Transferee Company'), NAM Estates Private Limited (hereinafter called the 'NAMEPL' or the 'Transferor Company No. 1') and Embassy One Commercial Property Developments Private Limited (hereinafter called 'EOCPDPL' or the 'Transferor Company No. 2') against the order dated 09.05.2023 in CA No. 9/2023 & CA No. 29/2023 and CP (CAA) No. 14/Chd/Hry/2022 passed by Ld. NCLT Chandigarh Bench, Chandigarh, wherein the Second Motion Company Petition filed by Transferee Company under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed by equity shareholders by 99.9987% out of the total shareholders present and voting in the meeting. iii) All the directions issued by Ld. NCLT were complied with by the Transferee Company including publication of notice of hearing in English and Vernacular newspapers and notices to various Government/Statutory Regulatory Authorities. iv) The Petitioner Company submitted that no objection to the scheme was received by the Petitioner Company or any of its representatives till date. v) The Competition Commission of India, in letter dated 24.02.2021 gave their no objection stating that "the proposed combination is not likely to have any appreciable adverse effect on competition in India in any relevant market(s) and the proposed combination is approved under Section 31(1) of the Competition Commission Act, 2002". vi) The Statutory Auditors confirmed that the Scheme is in compliance with the applicable Indian Accounting Standards as specified in Section 133 of Companies Act, 2013. vii) The Registrar of Companies and the Regional Director initially raised some observations which were clarified by the Petitioners Companies, and in para 15, the Ld. NCLT noted as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17.09.2022, the Income Tax Department informed that incriminating material was seized, indicating over valuation of the assets of the Embassy group while transferring the same to M/s NAMEPL. It was pointed out that there are inconsistencies and incorrect assumptions made while valuing the assets. The Income Tax Department pointed out that one of the joint development project, namely Embassy Cornerstone Tech Valley, was undertaken by the Embassy group where the land doesn't belong to it. The value of this asset has been estimated at Rs. 581 crores and the land for development was 100 acres, and it was decided by parties that 67% built-up area was for the Embassy group and 33% belonged to Cornerstone group. Cornerstone had failed to acquire 20 acres and the total land available for development is only 80 acres. The reduction of the measurements of assets (land) has not been conveyed to IBREL and its shareholders. As per the Embassy group approximately 8 acres of land still needs to be acquired by the Cornerstone group out of the 80 acres. The Embassy group has valued the land on the basis of joint development agreement for 80 acres. It was further mentioned that in the "valuation cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic shareholders have also approved the scheme with overwhelming majority. The scheme has been additionally vetted and cleared by the SEBI and Stock Exchanges. xvii) The Valuer, Mr. Mander Vikas Gadkari, filed an affidavit dated 14.03.2023 supporting his valuation report. The Second Valuer, Mr. Niranjan Kumar also filed an affidavit dated 14.03.2023 supporting his valuation report. xviii) Valuation reports submitted by Mr. Niranjan Kumar/NS Kumar and Company and Mr. Mander Vikas Gadkari/BDO* (wrongly stated as IBDO in the order of NCLT) have stated number of limitations, qualifications, exclusions and disclaimers in the report. It was noted that the Valuer had not done any independent evaluation or appraisal of the assets of the company and no analysis of any potential or actual litigation or possible unasserted claims has been made. xix) The main issue for discussion is "whether a Fair equity swap ratio determined solely on the basis of information furnished by the management without the valuer making any independent verification of the same be accepted as a basis of a credible amalgamation process". xx) The relevant provisions of Sections 230, 232 and 247 of the Companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion that it is not a fit case to sanction the scheme of amalgamation. Hence, the CP(CAA) No. 14/Chd/Hry/2022 stands dismissed. As discussed above, CA No. 9/2023 & CA No. 29/2023 are also dismissed." 5. Surprisingly, the report dated 11.04.2023 of Amicus Curiae appointed by Ld. NCLT, Chandigarh is not reproduced/discussed in the impugned order. At the end of his report, the Amicus Curiae, CA (Dr) Debashis Mitra, gave his opinion, which is reproduced below: "D. Opinion In view of the above, in my considered view :- 1. It is recognized that a Registered Valuer (RV), shall prepare the valuation report of the company based on information and records concerned as provided by the management. The management remains liable for the correctness and veracity thereof. However, significant inputs provided to the RV by the management/owners should be considered, investigated and /or corroborated by the Valuer. The various projections of business growth, profitability, and cash flows etc, which are used in the valuation report are the company's estimates. The RV should consider the reliability and credibility of projections after testing the assumptions made by the management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & the swap ratios* of 67:33 was decided between Nam Estates Private Limited, Embassy One Commercial Property Development Private Limited and India bulls Real Estate Limited. Subsequently, the swap ratio* was revised to 74:26 based on 80 acres of land which could be acquired at Embassy Cornerstone Tech Valley Project at Bangalore. The Joint Development Agreement ("JDA") for 80 acres with the revised sharing ratio (74:26) was executed between the parties on 15 Nov 2021 (which is after the date of valuation report being August 18, 2020), with the provision for reverting to the original ratio of 67:33 upon completion of acquisition of the balance lands by the Landowner. Further clarity is required as to how the swap ratio could be revised post the valuation date of 18th August,2020 & whether the revision adequately compensates Embassy Group for loss in value due to reduction in the area of the land to be developed. It is also not clear as to whether all material facts were disclosed to the stakeholders relating to the revision in the swap ratio. The swap ratio should not be contrary to any law, should not violate public interest and the same should be fair and approved by ove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, Regional Director, Ministry of Corporate Affairs and Competition Commission of India and their replies were placed on record. (e) The scheme was approved by an overwhelming 99.998% shareholders, much higher than the threshold of 75% required under Section 230 of the Companies Act, 2013. (f) All the pre-requisites prescribed under Section 230 of Companies Act, have been complied with. (g) The report of BDO has been made on the basis of the International Valuation Standards. Only the report of NS Kumar & Co. is made as per ICAI valuation standards. The ICAI Standards 201 (2018), in point 18 itself states that "The valuation shall not be constituted as an audit or review in accordance with the auditing standards applicable in India, accounting/ financial/ commercial/ legal/ tax/ environmental due diligence or forensic/investigation services, and shall not include verification or validation work." Thus, verification or investigation is not required to be done during the valuation exercise. (h) The Ld. NCLT, Chandigarh had incorrectly assumed that Valuer was required to do independent verification of the assets of the amalgamating companies. (i) There are multiple projects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the joint development partner, were events subsequent to the valuation report. However, due to changed profit sharing ratio, the cashflow from the JDA will hardly be affected and this aspect has been confirmed by the Valuer in affidavit dated 01.03.2023, which is as under: "10.2. Assuming all other factors considered in the valuation report remain same, if the area to be developed is reduced from 100 acres to 80 acres (and the said reduction is reflected in the last phase of development), then the revision in JDA ratio from 67% to 74% adequately compensates Embassy Group for loss in value due to such reduction in the area of the land to be developed." Reliance was placed on the following judgments: (i) Mihir H. Mafatlal Vs. Mafatlal Industries Limited [(1996) 10 SCL 70], where the Hon'ble Supreme Court held that courts should not scrutinize the scheme when shareholders have exercised their commercial wisdom. (ii) Hindustan Lever Employees' Union vs. Hindustan Lever Limited [(1994) 2 SCL 157 (SC)], where it was held that once the requisite majority approves the scheme, the court should not interfere. (iii) RHI India Private Limited and Ors. vs. Union of India (MANU/NL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luru submitted a factual report on valuation based on the prima facie evidences found during search, and since the department is not expert in valuation and the said office didn't have any further comments to offer on same." 11. In Rejoinder to the counter affidavit dated 07.12.2023, the Appellants submitted that the Scheme of Amalgamation, in Clause 3.2(xiv) of Part III read with Clause 15.2(xiv) of Part IV, provides that all tax liabilities including any tax proceedings (whether direct or indirect) payable by NAM Estates Private Limited or Embassy One Commercial Property Developments Private Limited, respectively, shall be treated as the tax liability/proceedings of the Amalgamated Company and accordingly, the concerned tax authorities shall not be prejudicially affected by the proposed merger under the Scheme. The Appellants reiterated the position of the Cornerstone project stating that it was communicated to them after the valuations that only 80 acres were acquired by the joint venture partner and thereafter, the profit sharing ratio was altered from 67:33 to 74:26, enhancing the share of Embassy Group, which ensured that similar cashflow comes to the Appellant Companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rstone Project, there was another issue regarding Concord Land which was land leased by KIADB in favour of Concord India Pvt. Ltd. It is alleged by the objector that resumption proceedings were initiated by KIADB as of 31.08.2023 and in this case interim orders were passed by Karnataka High Court on 29.10.2021 in Writ Petition No. 18952 of 2021 which ought to have been duly disclosed. It was also submitted that the impact of internal restructuring of NAMEPL was not considered by the valuers while working out the swap ratio. 14. In its response, the Learned Counsel for Respondent No. 1 (IBREL) submitted as follows: i) Mr. Tejo Ratna Kongara acquired shares through Share Purchase Agreement (SPA) dated 08.12.2022 and his shareholding is only 0.003%. The previous shareholder Mr. Dhanekula Dharanish had already filed CA No. 192 of 2022 before the Ld. NCLT, Chandigarh raising certain objections against the Scheme. Under the SPA, it was claimed that Mr. Tejo Ratna Kongara inherited the right to persist with the objections filed by Mr. Dhanekula Dharanish. ii) Mr. Tejo Ratna Kongara purchased the shares fully aware of the ongoing amalgamation proceedings and the objections raised by M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision in this case. We also agree with Ld. NCLT that the reports submitted by the Income Tax Department are not to be shared with a minority shareholder who has no locus to intervene, as his shareholding is less than the minimum prescribed in Section 230 (4) of the Companies Act, 2013. Company Appeal (AT) No.215-216 of 2023 are accordingly dismissed. 17. The issue in the main appeal Company Appeal (AT) No.120 of 2023 is (a) whether any material information was suppressed which had a substantial impact on valuation of the shares, and the consequential share swap ratio, or whether the valuation done by the valuers is appropriate, and (b) whether the Tribunal could have rejected the Scheme, even when overwhelming majority of shareholders and creditors have approved it. 18. To answer to the controversy, we first examine the issue whether the valuation method used, and the consequent valuation, is acceptable or not. 19. The valuation of shares has been done by two recognised independent valuers, one in Mumbai and the other in Pune. The valuation was done by N.S. Kumar and Company and BDO Valuation Advisory LLP and both the valuers are registered with IBBI. Both the valuation repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which render the Cost Approach (net asset value) or the Market Approach (application of market multiples) inappropriate. However, it is important that valuation must recognise the additional risks in such a case (e.g. project execution risk, lack of past track record, etc.) by using an appropriate discount rate." ( Emphasis supplied ) 21. The said DCF method is also recognised in Rule 11(UA) of Income Tax Rules 1962, the relevant part of which is under: "11UA. [(1)] For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,- (a) Valuation of jewellery,- (i) ..... (ii) ..... (iii) ..... (b) Valuation of archaeological collections, drawings, paintings, sculptures or any work of art,- (i) ..... (ii) ..... (iii) ..... (c) Valuation of shares and securities,- (a) ..... (b) ..... (c) ..... [(2)] Notwithstanding anything contained in sub-clause (b) or subclause (c), as the case may be, of clause (c) of sub-rule (1):- (A) the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of the /explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Chartered Accountant as per the discounted free cash flow method, where the shares of the company are not listed on any recognised stock exchange in India; and (c) the price as applicable to transfer of shares from resident to nonresident as per the pricing guidelines laid down by the Reserve Bank from time to time, where the issue of shares is on preferential allotment." The said rules were revised by RBI Notification No. FEMA 306/2014 dated 23.05.2010 and following method was prescribed: "b. the valuation of shares done as per any internationally accepted pricing methodology for valuation of shares on arm's length basis, duly certified by a Chartered Accountant or a SEBI registered Merchant Banker where the shares of the company are not listed on any recognised stock exchange in India." 24. Ongoing through the standards, Rules and Judgments cited above, we are of the opinion that DCF method is one of the recognised methods for valuation of shares and the valuers, as well as the amalgamating companies cannot be faulted for using it. It is also to be noted that DCF method relies on future earnings, rather than ownership of assets. 25. The allegation that valuer has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various provisions of the Companies Act, 2013 and Competition Act. SEBI and Stock Exchanges have not raised any compliance issue regarding the listed entities involved in the Scheme. 28. The Ld. NCLT, Bangaluru, which had jurisdiction over both the Transferor Companies had accepted and approved the Scheme. As recorded in the previous paragraphs, the Income Tax Department had subsequently stated that they are not experts in valuation, and that in case Tribunal is approving the scheme, the interests of Revenue be protected. 29. The objection raised regarding Cornerstone Project is primarily that joint venture partner, namely, Cornerstone Group was unable to acquire 100 acres of land, and there was shortage of 20 acres in acquisition. Whether this shortage is so fatal as to cause rejection of the Scheme is the issue to be decided herein. It is admitted fact that there is shortage in acquisition of land, as also the said information was not passed on by Cornerstone Group to the amalgamating companies, and they were unaware about it. Consequently, the said information was also not available to the shareholders when they were approving the Scheme. However, we find that valuation of sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he merger would not be in interest of the shareholders and creditors & consequently in the public interest. To my mind in a given case, the interest of the shareholders may or may not be synonymous with the public interest. But in the instant case determination of the share exchange ratio does not affect public interest. Therefore, the submission of the learned counsel for the Regional Director that the amalgamation not being in the interest of shareholders will also be opposed to public interest is untenable as they do not coincide. It may also be noticed that both the transferor and the transferee companies, are the subsidiaries of Pepsico. Both the companies are closely held companies and the share exchange ratio seems to be fair to the shareholders. The Regional Director has not been able to show that the valuation is manifestly unreasonable, unfair and arbitrary. This being so, the judgment of the shareholders must be respected & cannot be disturbed." ( Emphasis supplied ) 33. The Court's obligation is to be satisfied that the valuation was in accordance with law and it was carried out by an independent body. While stating so, the Hon'ble Supreme Court in Hindustan Lever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bona fides in action, and the fundamental rules of reasonable management of public business, if breached, will become justiciable." (Emphasis supplied) 34. It has been held by Hon'ble Supreme Court in the case of Miheer H. Mafatlal v Mafatlal Industries Ltd. (1997) 1 SCC 579, it is for the equity shareholders acting bona fide in the interest of their class as a whole to accept a particular scheme and once the exchange ratio is worked out by a recognised firm of Chartered Accountants who are experts in the field of valuation and if no mistake can be pointed out in the said valuation, it is not for the court to substitute its exchange ratio, especially when the same has been accepted without demur by the overwhelming majority of the shareholders (para 39 and 40 of the judgment). 35. Following the said judgment in Miheer Mafatlal, the Hon'ble Gujarat High Court in the case of Gujrat Ambuja Cotspin Ltd., 1998 SCC OnLine Guj 390 : (2001) 104 Comp Cas 397 refused to interfere in the valuation of shares done by the experts. 36. Hon'ble Supreme Court in Duncans Industries Ltd. vs. State of U.P. and Ors. (2000) 1 SCC 633 in paragraph 15 has held as under: "15. The question of valua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Company Court under Sections 391 to 394 are well established. The limitations put on this jurisdiction can be equated with the jurisdiction of the judicial review under Articles 226 and 227 of the Constitution of India. It is not an appellate jurisdiction. The application under Section 391 for sanction of the scheme of amalgamation cannot be treated as an appeal. The scheme is to be examined by the company court within the limited scope of supervisory jurisdiction". ........ 37. To conclude, the scheme was opposed by one unsecured creditor of value Rs. 4.48 lakhs. Barring one such opposition, the scheme was approved by one and all from all the classes. One person cannot dictate his baseless commercial wisdom on the 99% voters. If the majority cannot be allowed to coerce the minority, even the molecule or microscopic minority can never be allowed to stall the scheme approved by almost 100% members. To do so, would be to mock at the vast majority who overwhelmingly are in favour f the scheme. Even minority cannot tyrannise the majority". ........ 50. Further, I do no find any unfairness or unjustness in the scheme. The A.P.I.L shareholders have accepted the swap rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14. Independently all of these, as a company court, I have been satisfied with the scheme proposed as a whole is just, fair and reasonable from the point of view of all concerned". ( Emphasis supplied ) 39. Hon'ble High Court of Calcutta in the case of Suresh Kumar Rungta vs. Roadco (India) Pvt. Ltd. & Ors. has relied upon a judgment of the English Court in Fletcher & Anr. vs. Royal Automobile Club Ltd. reported in (2000) 1 BCLC 331 wherein it was held that if the effect was the same had fraud been practised and it not having been practised, the court should not set aside a judgment on the ground of fraud. The relevant part of the judgement is as under: "30. The Ld. Judge has relied on the judgment in Fletcher & Anr. v. Royal Automobile Club Ltd. reported in (2000) 1 BCLC 331. On the basis of the said judgment the learned Judge has held that if the effect was the same had fraud been practised and it not having been practised, the court should not set aside a judgment on the ground of fraud....." 40. In the case of Challa Rajendra Prasad vs. Asian Coffee Ltd. 1999 SCC Online AP 92, while rejecting the request of the objector seeking details of valuation, the High Court of An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it appears that, the petitions require to be allowed and the scheme of amalgamation, as presented along with the same require to be sanctioned. The same is hereby accordingly allowed and sanctioned". ( Emphasis supplied ) 42. In the case of M/s Vodafone Essar Ltd. & Ors. and M/s Vodafone Essar Infrastructure Ltd. (Company Petition No. 334/2009), the Delhi High Court examined objections raised by the Income Tax Department concerning the proposed demerger scheme. The objections included concerns about the potential negative net worth of the transferor companies' post-demerger, possibly impairing their ability to meet tax liabilities, and arguments that the scheme might contradict public interest, despite aligning government policies promoting infrastructure sharing. The department also highlighted potential tax evasion risks, though the court clarified that lawful tax avoidance does not inherently render a scheme against public interest. Additionally. disputes over the valuation and accounting treatment of transferred assets were acknowledged, with the court leaving such matters to tax authorities for resolution. Ultimately, the court sanctioned the scheme but preserved the ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is nobody's case that the swap ratio is contrary to any law. It is also nobody's case that the experts who submitted the valuation report were not independent so far as the question of fairness is concerned. It is clear from the material produced on record that 99.94 percent of the shareholders have voted in favour of the resolution and therefore, in my opinion, when 99.94 per cent, of the shareholders find that the swap ratio is not unfair, this court would not be justified in interfering with the same". ( Emphasis supplied ) 44. In the present case valuation has been done by two independent experts using DCF method which is universally accepted and recognised for valuation of shares. No objection/comment regarding competence of valuers is made by any concerned party. A Category I Merchant Banker has affirmed the share-swap ratio. It is nobody's case that valuation is contrary to any law. There is no evidence of fraud or malafides on the part of persons undertaking the valuation. The shareholders have approved the Scheme with overwhelming majority of nearly 100%. The creditors have also approved the Scheme with nearly 100% majority. The amalgamating companies have nu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d hereinunder, upon approving, the scheme does not confer any additional right, authority or power to the amalgamated company or does not take away the right, power or authority of any other company or person or statutory body vis a vis any of the Petitioner Companies. Hence, there is no impediment in approving the scheme". (*Steyr India Ltd. is earlier name of Concord India Pvt. Ltd.) The said order of NCLT Bangaluru, was not challenged by the objector or any other party. 46. We note that Ld. NCLT, Bengaluru had already approved the Scheme viz. a viz. Transferor Companies. The Cornerstone Project and the Concord land issue were of the Transferor Companies, in whose case approval to the Scheme of amalgamation has already been granted by the Ld. NCLT, Bengaluru. 47. In conclusion, on going through the facts of this case and guidelines provided by various judicial pronouncements cited above, we find that in the present case the valuation of shares and determination of Fair Equity Share Exchange Ratio has been done by experts, and the method of valuation used, namely, Discounted Cash Flow Method is universally accepted as a valid recognised method for valuation of shares. Whate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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