[2009] 94 SCL 1 (BOM.)
HIGH COURT OF BOMBAY
Hindalco Industries Ltd., In re
A.M. KHANWILKAR, J.
COMPANY PETITION NO. 293 OF 2009
COMPANY APPLICATION NO. 234 OF 2009
JUNE 22, 2009
Section 391 of the Companies Act, 1956 - Compromise and arrangement - Whether a person who is neither a shareholder nor a creditor of a company has no locus standi to raise objection in relation to a scheme propounded by such company under section 391 - Held, yes - Petitioner-company filed composite petition to obtain sanction of scheme of arrangement involving its financial restructuring and its equity shareholders - Proposed scheme was for undertaking financial restructuring exercise, whereby it would create a ‘reconstruction reserve account’ from its securities premium account balance to adjust expenses as defined in scheme - Proposed scheme also provided that as and when board of petitioner determined that a part or whole of balance remaining in reconstruction reserve account was no longer required, same could be transferred to security premium account of company as per terms and conditions of scheme - Proposed scheme had been approved by requisite majority of equity shareholders - Regional Director stated that scheme was not prejudicial to interest of shareholders and public - However, pursuant to an objection raised by one ‘B’, Regional Director filed further affidavit recommending that Court might place time-limit for implementation of scheme so as to assuage apprehension of objector that scheme allowed board of directors of company unrestricted discretion to keep adjusting expenses against securities premium account without any time-limit - Whether since Regional Director had not adverted to any provision of law which obligated petitioner to limit period to write off all expenses in books of account, there was no tangible reason to justify such restriction - Held, yes - Whether, in terms of section 211(3A) and section 211(3B), deviation from accounting standard is permissible subject to compliance of requirement of disclosure in profit and loss account and balance sheet of such deviation and reason for such deviation and financial effects thereof - Held, yes - Whether since petitioner assured to comply with provisions of section 211 by making such disclosure, it could not be faulted with regard to profit and loss account and balance sheet being in deviation for accounting standards - Held, yes - Whether since all requisite statutory compliance had been fulfilled by petitioner, proposed scheme was to be sanctioned - Held, yes
FACTS
The petitioner-company filed composite petition to obtain sanction to the scheme of arrangement involving its financial restructuring and its equity shareholders. The composite scheme of arrangement was for undertaking financial restructuring exercise, whereby it would create a ‘reconstruction reserve account’ from its securities premium account balance to adjust expenses as defined in the scheme. The scheme also provided that as and when the board of petitioner determined that a part or whole of the balance remaining in the reconstruction reserve account was no longer required, the same could be transferred to the security premium account of the company as per the terms and conditions of the scheme. The scheme had been approved by the requisite majority of equity shareholders. In the extraordinary general meeting, a special resolution was passed by the requisite majority as per the provisions of section 100 for utilization of the securities premium account of the petitioner as stated in the proposed scheme. The creditors would not be effected by the proposed financial restructuring as there was no reduction in the amount payable to any of the creditors and, therefore, no compromise or arrangement was contemplated with the creditors. The Regional Director stated that scheme was not prejudicial to the interest of shareholders and public. However, the Regional Director filed further affidavit in which he had referred to the objections raised by one ‘B’, which were received under the cover of letter of a Member of Parliament for examination. The Regional Director recommended that the Court might place time-limit for implementation of the scheme so as to assuage the apprehension of the objector that the scheme allowed the board of directors of the company unrestricted discretion to keep adjusting the expenses against the security premium account without any time-limit. The Regional Director had recommended to limit write-off of the expenses to the securities premium accounts in the books of account upto 31-3-2009 and not thereafter. However, except observing that, no justification had been offered by the Regional Director as to why such restriction was necessitated. No provision of law had been relied upon to justify that recommendation. The scheme was also objected to by one ‘R’, who filed affidavit to oppose the proposed scheme.
HELD
Admittedly, the objector ‘R’ was neither a shareholder nor a creditor of the petitioner. If it was so, the petitioner was justified in contending that such person had no locus to raise objection in relation to the scheme propounded by the company under section 391. Having regard to the fact that the instant petition was a composite petition under section 391 as well as sections 100 and 101, the person who was neither a shareholder nor a creditor of the company would have no locus. However, since the objection was also taken by one of the shareholders, the Court would nevertheless address the objections on merits. [Para 9]
Insofar as the second objector ‘B’ was concerned, two-fold grievance was made by the petitioner. Firstly, that he was not a bona fide complainant. He possessed only one share on the relevant date. He had participated in the meeting and his objections were overruled by the overwhelming majority of equity shareholders. Significantly, he procured 50 additional shares of the company after the meeting in which he had raised objection to the proposed scheme. The grievance of the petitioner was well-founded, inasmuch as, no prudent person who had opposed the proposed scheme, would think of acquiring additional shares of the same company. Indeed, the fact that the objector possessed only one share on the relevant date did not mean that he was denuded of his right of raising objection. Nevertheless, there was substance in the stand taken by the petitioner that the complaint filed by that objector was not bona fide. [Para 10]
Be that as it may, revering to the merits of the issues raised, it was argued that the Regional Director in his further affidavit had opined that the scheme allowed the board of directors of the company unrestricted discretion to keep adjusting the expenses against securities premium account without any time-limit. The Regional Director had, therefore, recommended placing time-limit for implementation of the scheme and to limit write-off of the expenses to securities premium accounts in the books of account upto 31-3-2009 and not thereafter. The petitioner was to be agreed within the term that the changed opinion of the Regional Director inspite of having found that the objections taken by the objector ‘B’ were untenable was on account of intervention of the Member of Parliament at the behest of the objector, who had forwarded the complaint for reconsideration. Significantly, the Regional Director had not adverted to any provision of law which obligated the petitioner to limit the period to write-off all the expenses in the books of account. It would have been a different matter, if the law obliged the company to do so within a particular time. In the absence of such requirement, the Regional Director ought to have assigned tangible reason as to why it was still necessary to impose the outer limit for writing-off the expenses. Even during the argument advanced on behalf of the Regional Director or for that matter the objectors, there was no tangible reason to justify such restriction. Understood thus, taking any other view would be interfering with the commercial wisdom or business decision of the overwhelming majority of stakeholders of the company, who had reposed trust and confidence in the board of directors, who were expected to exercise their discretion with prudence. [Para 11]
In the instant case, none of the objectors were in a position to point out as to what prejudice would be caused to the shareholders. On the other hand, the Registrar of Companies as well as Regional Director including the Bombay Stock Exchange had unambiguously opined that the proposed scheme was not prejudicial to the interests of the shareholders and public. Suffice it to observe that no tangible basis was forthcoming as to why the proposed scheme should be approved with amendment of placing time-limit for implementation of scheme and to limit write-off securities premium account up to 31-3-2009 and not thereafter. If the equity shareholders or the stakeholders of the company had resolved consciously and approved the proposed scheme, inspite of open ended scheme, they had exercised business discretion. It was not open for the Court to sit over the said view as an Appellate Court, unless the same was against the framework of law or public policy. There was nothing wrong in the decision to spread out or adjust and write-off all the expenses. The fact that that might enable the company to declare sufficient dividend as had been declared in the past, did not militate against the company; so long as the company made necessary declaration of all the facts and figures in its books of account. [Para 14]
The next question was as to whether there would be violation of accounting standards. The objection would have to be answered keeping in mind provisions of section 211. On a conjoint reading of sub-sections (3A) and (3B) of section 211, it necessarily follows that deviation from the accounting standards is permissible subject, however, to compliance of the requirement of disclosure in the profit and loss account and balance sheet of such deviation and the reasons for such deviation and financial effects thereof. In other words, deviation of accounting standards is not wholly prohibited, but is regulated by the provisions of section 211. The petitioner assured to abide by the said regime. So long as such disclosure was made, the company could not be faulted with regard to the profit and loss account and balance sheet being in deviation from the accounting standards. Even the guidelines issued by the Institute of Chartered Accountants of India, restate this position. [Para 15]
A priori, it is not as if deviation of the accounting standards per se can be a ground to reject the scheme propounded by the petitioner. In the instant case, it was noticed that the scheme was the product of conscious act of the shareholders. It was their commercial wisdom or business decision. In their wisdom, they had approved the proposed scheme which bestowed complete discretion in the board in which they had full confidence. As aforesaid, there is no law which prohibits adjustment of loss by spreading it out including that of the subsidiary companies. There was no manifest unfairness to the shareholders in any manner. No creditor was affected by the proposed scheme. [Para 16]
To get over that position, it was argued by objector No. 2 that the petition should be thrown out on account of non-disclosure of material facts. It was the case of objector No. 2 that the petitioner had not disclosed about the proceedings before the SEBI, Appellate Tribunal. Significantly, the said proceedings had no concern with the issue that arose for consideration. Moreover, the scheme clearly provided that the scheme would not affect the pending legal proceedings or any orders passed against the petitioner. It was then argued by the objector that once the securities premium account was to be transferred, the amount lying in the said account at instant stage would become unavailable in the event the objector was to succeed in his pending proceedings before the authority. The argument clearly overlooked that if the authority were to so direct, the petitioner would be bound to pay the amount as per the said order. The fact that there would be no security premium account existing in future or that the amount in the said account was insufficient would not extricate the petitioner from the obligation to pay as per the order of the competent authority or the Court. Accordingly, that apprehension was completely misplaced. [Para 17]
The objector would then argue that the petitioner was a profit making company. The accounts of the petitioner-company should reproduce a fair and accurate financial position and that the losses should necessarily be adjusted to the profit and loss account and not against the Reserve Account. All those objections would have to be only stated to be rejected for reasons already recorded in the earlier part of the judgment. Similarly, argument of the objector that the scheme provided for wide and undefined discretion in the Board also did not commend. Those matters would fall within the realm of commercial wisdom and sound business practice which petitioner intended to adopt. The Court could not sit over the said decision as Court of Appeal. The argument of the objectors that the scheme did not disclose the amount or for that matter non-operating extraordinary expenses was also of no avail. The petitioner had rightly pointed out that the books of account were prepared in accordance with the requirement of law. Not only the books of account and the balance sheet of the petitioner were duly prepared, but a separate consolidated statement of the petitioner and its subsidiary was also prepared and issued. Financial position of the company was reflected from the consolidated accounts prepared in accordance with the requirement of law. [Para 18]
The objector placed emphasis on clause 58 of the Accounting Standards (AS) 28 (issued 2002). Relying upon this provision, it was argued that impairment loss should necessarily be considered as an expense to be reflected in the profit and loss account of the company contemporaneously. However, on reading that provision, it was not possible to take the view that it completely prohibited adjustment of losses of companies or that of subsidiary company. Assuming that the interpretation given by the objectors was to be accepted, it would result in deviation of the accounting standards. As aforesaid, provisions of section 211 would answer that argument; inasmuch as, section 211 allows deviation of accounting standards subject to complying with the parameters provided therein. [Para 19]
The objectors would then argue that none of the expenses referred to in clause 1.4 such as legal professional fees in connection with financing/refinancing acquisition or diminution in the value of investments in subsidiary companies could be adjusted against the Reserve Account. Besides, no justification was forthcoming as to why all the expenses referred to in clause 1.4 of the scheme should be adjusted from the Reserve Account and not in the profit and loss account. Once again that argument would be of no avail having regard to the view already taken that observing accounting standards is a norm, but deviation is not impermissible. Deviation can be resorted to subject to complying with the requirement of section 211(3B). Moreover, the decision was expression of commercial wisdom or business decision of the shareholders, which could not be lightly interfered with by the Court. Notably, the restructuring would not be prejudicial to the interest of the shareholders, creditors or public. The reduction did not involve either diminution of any liability in respect of unpaid capital or the payment to any shareholder of any paid-up capital. There was no reduction in the amount payable to any of the creditors. There was no compromise or arrangement with the creditors. The asset cover ratio as per the agreement with the creditors would continue even after the restructuring. The restructuring did not involve any cash outflow or affect the normal operations of the petitioner. It would not impact the ability of the company to honour its commitments and to pay its debts. Whereas, it was intended to project a more realistic picture of the financial position of the company. [Para 20]
Taking overall view of the matter, there was no substance in the objections taken to the proposed scheme either by the two objectors or the recommendation of the Regional Director for placing time limit up to 31-3-2009. In that view of the matter, the petition should succeed. [Para 21]
Since all the requisite statutory compliances had been fulfilled, company petition filed by the petitioner was to be made absolute in terms of prayer. [Para 22]
CASE REVIEW
S.K. Gupta v. K.P. Jain [1979] 49 Comp. Cas. 342 (SC) (para 9) distinguished.
Parrys Confectionary Ltd., In re [2004] 56 SCL 34 (Mad.) (para 11); Re Ratners Group Plc. [1988] Ch.D. 685 (para 12); Hyderabad Industries Ltd., In re [2004] 55 SCL 1 (AP) (para 12) and Zee Telefilms Ltd., In re [2004] 53 SCL 387 (Bom.) (para 14) followed.
Sukumar Chand Jain v. SEBI [2008] 87 SCL 184 (Sat - Mum.) (para 10) approved.
CASES REFERRED TO
ICICI Ltd. v. Financial & Management Services Ltd. [1998] 17 SCL 429 (Bom.) (para 9), SEBI v. Sterlite Industries (India) Ltd. [2003] 45 SCL 475 (Bom.) (para 9), S.K. Gupta v. K.P. Jain [1979] 49 Comp. Cas. 342 (SC) (para 9), Sukumar Chand Jain v. SEBI [2008] 87 SCL 184 (SAT - Mum.) (para 10), Parrys Confectionery Ltd., In re [2004] 56 SCL 34 (Mad.) (para 11), Re Ratners Group Plc. [1988] Ch. D. 685 (para 12), Hyderabad Industries Ltd., In re [2004] 55 SCL 1 (AP) (para 12) and Zee Telefilms Ltd., In re [2004] 53 SCL 387 (Bom.) (para 14).
Janak Dwarkadas and Sharan Jagtiani for the Petitioner. Simil Purohit, Vivek Khemka, Ram Niranjan, Shaunak Thakkar, Dr. Santosh Raje and Bhupendra Gandhi for the Objector. C.J. Joy, Y.R. Mishra and V.B. Tiwari for the Regional Director. Prashant Chavan and Suhas Patil for MIDC Creditors.
[2009] 94 SCL 35 (BOM.)
HIGH COURT OF BOMBAY
Reliance Industries Ltd., In re
A.M. KHANWILKAR, J.
COMPANY PETITION NO. 296 OF 2009
CONNECTED WITH COMPANY APPLICATION NO. 288 OF 2009
JUNE 29, 2009
Section 394, read with section 391, of the Companies Act, 1956 - Amalgamation - Whether High Court cannot sit over decision of board of directors and of class of stakeholders as Court of appeal and scrutinize criticism pressed into service by objectors, disregarding commercial wisdom of overwhelming majority of equity shareholders as a class - Held, yes - Petitioner-transferee-company sought for sanction of its scheme of amalgamation with transferor-company - Board of directors of both transferor and transferee-companies in their respective board meetings approved proposed scheme, keeping in mind swap ratio as suggested in valuers report and fairness report given by experts - Both transferor and transferee-companies had obtained approval from concerned stock exchange - Scheme was unanimously approved by equity shareholders, secured and unsecured creditors of transferee-company - Regional Director and Registrar of Companies had also consented to approve proposed scheme - However, sanction to scheme was objected to by objectors stating that act of transferee-company smacked of undue haste as board meeting of transferee-company in which decision to amalgamate two companies was taken was held on 27-2-2009 and reports of experts were made ready on 2-3-2009 and board of directors approved proposed scheme on same day, i.e., on 2-3-2009; that it was clear case of non-application of mind; that in valuer’s report no relevant and material information was made available to Court by experts regarding justification of swap ratio; and that swap ratio determined was unfair to shareholders of petitioner-company - Whether fact that entire process was completed in a short spell did not per se mean that decision of board of directors giving approval to proposed scheme suffered from non-application of mind - Held, yes - Whether since board of directors had gone by opinion given by experts of good standing and reputation, particularly with regard to share swap ratio, decision so taken by board of directors could not be termed as contrary to law or against public policy - Held, yes - Whether since no one had doubted integrity and honesty of valuers who had given their share valuation report or fairness report and objectors had not been able to point out that method adopted by valuers was impermissible or absurd, there was no reason to discard valuation of shares or swap ratio determined by experts in their valuation and fairness reports - Held, yes - Whether since transferee-company had complied with all statutory requirements and Regional Director as well as Registrar of Companies including concerned Stock Exchanges had given their approval/consent to proposed scheme, as same was not prejudicial to any stakeholders of transferee-company or public, proposed scheme was to be sanctioned - Held, yes
FACTS
The petitioner-company, i.e., transferee-company sought for sanction of scheme of amalgamation with transferor-company. The board of directors of both, the transferor as well as transferee-company in their respective board meetings approved the proposed scheme, keeping in mind the exchange ratio suggested by ‘M’. The said swap ratio was approved by other two consultants, namely, ‘ML’ and ‘C’ appointed to give their fairness report. Both the transferor and transferee-companies being listed companies had obtained approval from the concerned stock exchanges. The scheme was approved with an overwhelming majority of the equity shareholders and unanimously by the secured creditors and unsecured creditors of the transferee-company. The Regional Director and the Registrar of Companies had also consented to approve the proposed scheme. However, on publication of notice the objectors objected to the scheme and sought for rejection of the instant petition stating that the act of the transferee-company smacked of undue haste, as the board meeting of the transferee-company was held on 27-2-2009, in which decision to amalgamate two companies was taken and valuation report and fairness report of experts were made ready on 2-3-2009 and the scheme had been approved by the board of directors on the same day; that it was a clear case of non-application of mind not only on part of the board of directors, but also by the valuers appointed by the petitioner-company; that the valuers report, if read clause-by-clause or as a whole clearly indicated that no details were forthcoming and no relevant and material information was made available to the Court by experts regarding justification of swap ratio; that there were some proceedings pending regarding gas supply agreement between the transferee-company and ‘R’ but same had not been taken into account; that the swap ratio determined was unfair to the shareholders of the petitioner-company; and that since there were certain proceedings and investigations pending against the transferee-company before the regulatory authority, the attempt of propounding the scheme was to frustrate the said pending action.
HELD
The scope of intervention by the company Judge while considering the scheme of amalgamation such as the instant one, is no more res integra. The objections which were canvassed before the Court, would not militate against the petitioner-company for, it could not be said that any requisite statutory procedure had not been complied with nor it was a case where the scheme was not supported by requisite majority of votes of class of stakeholders. Significantly, in the instant case, the companies appointed a renowned firm to undertake the determination of swap ratio of the respective shares. No one had doubted the integrity or honesty of the said expert. Moreover, the company got checked and approved the opinion of the former by two other independent firms, who, in turn, had agreed with the said determination to be fair. It was also not possible to take the view that the concerned meetings of the creditors or members or any class of them were not furnished with the relevant material to enable them to arrive at an informed decision for approving the scheme-in-question. On the other hand, it was noticed that requisite majority of the concerned class of voters had found the scheme to be just and fair to the class as a whole. If so, their decision would legitimately bind even the dissenting members of that class. It was not the case of the objector that necessary material indicated under section 393 was not placed before the voters at the concerned meeting, as was required to be held in terms of section 391 and directions given by the High Court. Moreover, all the requisite material envisaged under section 391(2) had been placed before the Court by the petitioner-company. Going by the said material, it was not possible to take the view that the scheme was prejudicial either to the shareholders or to the public. As a matter of fact, the Registrar of Companies as well as the Regional Director including the concerned Stock Exchanges had given approval/consent to the proposed scheme. Nothing had been brought to notice so as to take the view that the scheme was violative of any provisions of law or against the public policy. The scheme as a whole was found to be just, fair and reasonable from the point of view of taking commercial decision which was beneficial to the class represented by them for whom the scheme was made. [Para 9]
In other words, all the parameters to be borne in mind had been fulfilled in the instant case. It necessarily followed that the Court would have no jurisdiction to sit over the commercial wisdom of the majority of the class of persons, who with their open eyes had given approval to the scheme. Merely because some other method of valuation could be resorted to and would be a bit favourable to the shareholders, that alone could not militate against granting approval to the scheme propounded by the company. What is imperative is that the determination should not be contrary to law and/or unfair to the shareholders of the company which was being merged. The Court’s obligation was to be satisfied that valuation was in accordance with law and it was carried out by an independent body. [Para 10]
As regards the grievance of the objectors that the petitioner-company had introduced the scheme with undue haste, or for that matter, it was a case of non-application of mind. If the meeting of the transferee-company was held on 27-2-2009 and the reports of the experts were made ready on 2-3-2009 coupled with the fact that the board of directors approved the proposed scheme on the same day, on 2-3-2009, that, by itself, did not mean that it was a case of non-application of mind. The report of the valuers either prepared by ‘M’ or the fairness report prepared by ‘ML’ if read as a whole, it took into account all the relevant factors which ought to be kept in mind to form an opinion about the swap ratio. The valuers had indicated the approach and the basis of the amalgamation. It had referred to four possible methods that could be borne in mind for arrival at the decision. Each method had been analysed in the report. Insofar as net asset value methodology was concerned, it was mentioned that the valuers had computed net asset value of equity shares of both the companies. They had used the provisional consolidated balance sheet as at 31-12-2008 of the transferee-company and provisional balance sheet as at 31-12-2008 of the transferor-company to make suitable adjustment as deemed appropriate. The valuers had adverted to the Comparable Companies’ Multiple (CCM) Method. It was noted in the report that the valuers had used Enterprises Value (EV) to EBITDA valuation multiple of comparable listed companies for the purpose of the valuation analysis. They had then considered historical and current market price method which was with reference to the equity shares quoted on a Stock Exchange. It then proceeded to observe that in the instant case shares of the transferee-company and the transferor-company were listed on the BSE and the NSE and there were regular transactions in their equity shares with reasonable volumes. Keeping that in mind, the volume weighted average share price of transferee-company over an appropriate period was considered for determining the value of the transferee-company and the transferor-company under the market price methodology. It was clearly mentioned that Discounted Cash Flow (DCF) Method was not applied to the facts of the instant case. At the end, the basis of amalgamation was spelt out in the report to give swap ratio of 1:16. Notably, the fairness report of ‘ML’ also referred to share valuation report submitted by ‘M’. On analyzing all the relevant aspects, even the fairness report prepared by ‘ML’ approved the swap ratio recommended by ‘M’. It was noted that exchange ratio was fair from the financial point of view to the holders of equity shares of the transferee-company as a class. The report set out the basis for arriving at that opinion. The report clearly mentioned that the opinion was necessarily based upon the market, economic and other conditions as they existed and could be evaluated on the information made available to the valuers as of the date of the report, including the capital structure of the transferor-company and the transferee-company as on the date of the report. Besides, it clearly recorded that they had assumed that in the course of obtaining the necessary regulatory or other consents or approvals (contractual or otherwise) for the merger, no restrictions, including any divestiture requirements or amendments or modifications would be imposed that would have material adverse effect on the contemplated benefits of the merger. The third report of ‘C’ also, more or less, reiterated the same position. [Para 12]
The question was as to whether the experts had given their opinion without analyzing the relevant matter. Looking at the report, it was not possible to come to that conclusion. The report referred to aspects which according to the experts would require consideration for arriving at decision regarding appropriateness of share swap ratio. It was not the case of the objectors that said considerations were extraneous as such, nor the objectors were in a position to point out as to how the opinion recorded by the experts regarding swap ratio could be termed as absurd or manifestly wrong. Suffice it to observe that the reports given by the experts which were the basis to accord approval by the board of directors could not be said to suffer from the vice of non-application of mind. The fact that the entire process was completed in short spell might at best indicate that the experts gave their opinion on an urgent basis. One could not be oblivious to the fact that with the development in computer technology, the working of calculation can be programmed. If the basic figures are fed in the computer, the calculations howsoever complicated would become readily available. Moreover, even due to the development in communication technology on account of fax, e-mail, video conferencing, etc., communication is instant. Significantly the offices of the petitioner-company as well as of the experts was located in Mumbai. Suffice it to observe that the experts gave their opinion on an urgent basis, presumably because of the insistence of the petitioner-company, who, in turn, was keen to speed up the entire merger process. The fairness of the scheme could not be doubted with reference to those facts. It was not the case of the objectors that the experts’ opinion (reports) were not placed before the board of directors when the decision was taken by the board, albeit at 10.15 a.m. the same day. In other words, the fact that on the same day, the board of directors proceeded to give approval to the proposed scheme did not per se mean that the decision of the board of directors suffered from non-application of mind, nor it was possible to doubt the fairness of the scheme merely because the petitioner-company was keen to speed up the entire process of amalgamation. The fact remained that the class of stakeholders got complete opportunity and information before they took a conscious decision to approve the scheme with requisite majority. Suffice it to note that the board of directors obviously had gone by opinion given by experts of good standing and reputation, particularly with regard to shares swap ratio; decision so taken by board of directors could not be termed as contrary to law or against the public policy. The objectors were not in a position to demonstrate as to how the valuation reports were unfair and to whom. They had not substantiated their plea as to why the swap ratio determined by the experts was wrong. No other expert report was relied by the objectors to make good that argument, nor any legal basis was pointed out to persuade the Court to discard the said valuation/fairness reports. If so, the Court could not sit over the decision of the board of directors and of the class of stakeholders as the Court of appeal and scrutinize the criticism pressed into service by the objectors disregarding the commercial wisdom of the overwhelming majority of the equity shareholders as a class. [Para 13]
Insofar as the criticism with regard to the contents of the valuation report either on the ground that it did not give any forecast or disclose any logic but only conclusion, even that argument did not commend. On reading the reports clause by clause and as a whole, no fault could be found with the ultimate opinion reached by the experts regarding share swap ratio, which was founded on tangible material and basis. The argument of the objectors that the report was manifestation of conflicting opinion in any manner could not be accepted. The fact that the language of the report would given an impression that the expert did not take the responsibility of the accuracy of the figures furnished to them by the company or that they had not made any independent valuation of the assets and liability of the companies on their own, did not mean that the relevant factors for determination of swap ratio had not been considered by the experts. Obviously, the opinion of the experts was based on the information provided by the company. There was nothing to show that the figures available in the books of account provided to the experts were incorrect or otherwise. Thus, there was nothing in the said reports to indicate that the consideration weighed with the experts in arriving at the opinion was impermissible or unacceptable. It was not possible to countenance the grievance of the objectors that the reports deprived the Court from basic information regarding justification of share swap ratio. As aforesaid, experts had adverted to different methods of evaluation of shares before recording their opinion and had given justification for the ultimate conclusion reached by them. Even in the instant case, no one had doubted the integrity and honesty of the valuers, who had given their share valuation report or fairness report, as the case may be, nor the objectors had been able to point out that the method adopted by the valuers was impermissible or absurd. If so, there was no reason to discard the valuation of shares or the swap ratio determined by the experts. [Para 14]
Insofar as the grievance made by the objectors that the experts had not reckoned the impact of the liability of the company in relation to the pending proceedings against the company pertaining to gas supply agreement, the petitioner in the reply filed before the Court had stated that the facts relating to the said proceedings had been in public domain. The valuers and advisors were aware of and took the same into account as was normally done in similar circumstances. Even if that statement appearing in the affidavit was to be ignored as it was not supported by the contents of the reports, it would make no difference inasmuch as once the valuation report was accepted, the impact due to the outcome of the pending legal proceedings could not be the basis to reject the scheme propounded by the company, especially when the same had been approved by an overwhelming majority of shareholders and unanimously by the secured and unsecured creditors. [Para 15]
Even the argument of the objectors that 41 per cent of the shares had been acquired by the group companies did not take the matter any further. There was force in the submission made by the petitioner that at best that was a grievance concerning misutilisation of funds of the group company, which could not be reckoned while considering the issue of approval of the scheme submitted under section 391 by the transferee-company. [Para 16]
The argument of the objectors that the company, consequent to approval of the scheme, would resort to elimination of transaction between transferor-company and the petitioner-company in their books of account, was based on the statement appearing in the affidavit of the Regional Director. That statement, however, could not be read out of context for elimination of all transactions between the transferor and transferee-company would be the natural consequence of merger inasmuch as the transaction of transferor-company would naturally be adjusted after the merger and would not continue to remain in the books of account of the transferee-company. Even the argument of the objectors that separate accounts of the two companies ought to have been prepared was an argument of desperation. [Para 17]
Insofar as the apprehension of the objectors that consequent to merger, the petitioner-company would be extricated from all pending proceedings and investigations pending before the Regulatory authority, the same was also misplaced. There was no such provision in the instant scheme. On the other hand, the pending proceedings and investigations would have to be continued and carried to its logical end irrespective of the approval to the instant scheme of merger. [Para 18]
In the circumstances, since the petitioner-company had complied with all the statutory requirements and formalities and the Regional Director as well as the Registrar of Companies including the concerned Stock Exchanges had given their approval/consent to proposed scheme and scheme not being prejudicial to any stakeholders of the petitioner-company or public, the petition deserved to be allowed. [Para 19]
CASE REVIEW
Hindustan Lever Employees’ Union v. Hindustan Lever Ltd. [1994] 2 SCL 157 (SC) (para 10); German Remedies Ltd., In re [2004] 50 SCL 77 (Bom.) (para 11) and Kamala Sugar Mills Ltd., In re [1984] 55 Comp. Cas. 308 (Mad.) (para 14) followed.
CASES REFERRED TO
Mafatlal Industries Ltd., In re [1996] 87 Comp. Cas. 792/[1995] 3 SCL 69 (Guj.) (para 6), Hindustan Lever Employees’ Union v. Hindustan Lever Ltd. [1994] 2 SCL 157 (SC) (para 10), Tata Oil Mills Co. Ltd., In re [1994] 81 Comp. Cas. 754 (Bom.) (para 11), German Remedies Ltd., In re [2004] 50 SCL 77 (Bom.) (para 11), CWT v. Mahadev Jalan [1972] 86 ITR 621 (SC) (para 12),Kamala Sugar Mills Ltd., In re [1984] 55 Comp. Cas. 308 (Mad.) (para 14) and Mihir H. Mafatlal v. Mafatlal Industries Ltd. [1996] 10 SCL 70 (SC) (para 14).
I.M. Chagla, Janak Dwarkadas Virag Tulzapurkar, Tapan Deshpande, Aditya Mehta, Amarchand Mangal Das for the Petitioner. Vinod Joshi, Ms. Lata Pate, S.C. Pal, C.J. Joy and S.K. Mohapatra for the Regional Director. Rohit Kapadia Yash Kapadia and Vivek M. Sharma for Objector. Shailesh Mehta, F.E.D. Vetre, Sandeep Parikh, Ms. Swati Bamugad Indian Law Alliance for Objector. Anookumar Seth, Vishvesh Mahadeorao Raste in person Objector.
[2009] 94 SCL 21 (SAT - MUM.)
SECURITIES APPELLATE TRIBUNAL, MUMBAI
Harinarayan G. Bajaj
v.
Investors Protection Fund of Stock Exchange, Mumbai
JUSTICE N.K. SODHI, PRESIDING OFFICER
AND SAMAR RAY, MEMBER
APPEAL NO. 153 OF 2008
JULY 15, 2009
Section 11 of the Securities and Exchange Board of India Act, 1992, read with Comprehensive Guidelines for Investor Protection Fund at Stock Exchange - Powers and Functions of Board - Whether guidelines which are statutory in force shall override provisions of trust deed and rules governing Investor Protection Fund insofar as they are inconsistent with provisions of guidelines and it is guidelines which shall govern disbursement from Investor Protection Fund - Held, yes - Whether no exchange can defeat claim of an investor, if it is otherwise eligible under guidelines, merely because it failed to amend its trust deed or rules in accordance with guidelines - Held, yes - Appellant was an investor who traded on BSE through several brokers - Appellant had traded with two brokers ‘D’ and ‘T’ and had two arbitration awards in his favour - Awards had become final and appellant claimed that award amount against brokers who had been declared defaulters on BSE should be paid out of Investor Protection Fund - BSE rejected appellant’s claim on ground that he too owed large sums of money to others on exchange - Whether since amount claimed by appellant under arbitration award had become final and his claim satisfied all requirements of guidelines for disbursement from fund, that amount could not be withheld on ground that another broker had a claim against him - Held, yes - Whether, therefore, impugned communication by which BSE had withheld amounts due to appellant from ‘D’ and ‘T’ was to be set aside and BSE was to be directed to release forthwith amounts due under two awards - Held, yes
FACTS
The appellant was an investor who traded on the BSE through several brokers. The appellant had traded with two brokers ‘D’ and ‘T’ and had two arbitration awards in his favour. Those awards had become final between the parties and the appellant had been pursuing with the BSE for the release of the awarded amounts without success. The appellant claimed that the awards against ‘D’ and ‘T’ who had been declared defaulters by the BSE should be paid out from the Investor Protection Fund which is a trust established by the BSE for the protection and benefit of the constituents of defaulter members of the exchange. The claim of the appellant was rejected by the BSE on ground that the BSE had received letters from two brokers informing it that they had filed arbitration cases against the appellant for their claim against him. The Executive Director of the BSE by invoking bye-law 232(b) of the Bye Laws, directed the trustees of the fund not to pay amount due to appellant. The appellant filed a writ petition in the Bombay High Court which was withdrawn as the BSE decided to reconsider the appellant’s claim. The trustees of the fund, however, rejected the claim of the appellant. The appellant again filed a writ petition which was dismissed on ground that in terms of clause 5A of the trust deed and rule 7E of the Rules framed by the BSE absolute discretion can be exercised by trust by withholding the amount payable to a member of the public against defaulting member of the Stock Exchange if the claimant is liable to pay some amount to some other persons of the claimant, and, therefore, it could not be said that an illegality was committed by the Stock Exchange in withholding the disbursal of the amount from the Investor Protection Fund. After the dismissal of the writ petition, the appellant paid the amount due to broker ‘M’ and in terms of the liberty granted by the Governing Board of the BSE, filed another appeal before it which was dismissed and the decision was communicated as per the impugned communication stating that in view of huge outstanding against the appellant on the exchange, the amount towards arbitration awards obtained by him could not be paid from the Investor Protection Fund.
On appeal :
HELD
It was true that the plea which the appellant was then raising had been raised before the High Court as well in writ petition which was rejected. The High Court had taken note of clause 5A of the trust deed and rule 7E of the Rules and observed that the discretion conferred by those two provisions on the trustees in the matter of disbursement from the fund was absolute; and that the BSE committed no illegality in withholding the amount payable to the appellant as he was liable to pay some amount to some other persons. The High Court had also taken note of the fact that proceedings against the appellant were pending in another case. The High Court gave its decision on 9-6-2003 when there were no guidelines issued by the Board and the entire matter of disbursement was governed by the provisions of the trust deed and the rules thereunder. After the High Court rendered its decision and rejected the claim of the appellant, the Board came out with comprehensive guidelines issued under section 11(1), dealing with the constitution, management and utilization of the fund. These guidelines have a statutory force. The Board had directed all the stock exchanges to bring about necessary amendments to their respective trust deeds/rules/regulations governing such funds so as to bring fund in line with the guidelines. Paras 21 to 24 of the guidelines, when read together with other relevant paragraphs of the guidelines, take away the discretion from the exchange/board of trustees in the matter of disbursements from the fund and make it mandatory that all eligible claims shall be disbursed from the investor protection fund. Paras 12 to 15 of the guidelines define the eligible claims. These paragraphs make it clear that the claim made by a client against a defaulting member of the exchange is an eligible claim and the only claims which can be rejected under the guidelines are those arising out of speculative transactions. A speculative transaction is one in which the contract for the purchase or sale of shares or debentures is settled otherwise than by actual delivery or transfer of the scrips. It was common ground between the parties that the claim of the appellant did not arise out of speculative transactions. The claim of the appellant being eligible under the guidelines had to be disbursed from the fund, as it did not exceed the maximum amount fixed by the BSE for payment of compensation to the investors on account of default of members. This is the mandate of paragraphs 21 and 23 of the guidelines. Normally, when a broker-member defaulted on the exchange, his membership card was auctioned with a view to realize his assets and liabilities before disbursement claims were entertained. Para 22 of the guidelines brings about changes that the exchange/investor protection fund need not wait for the realization of assets and liabilities and that the claim should be disbursed to the client. Para 23 further makes it clear that once a claim has crystallized, the trust shall disburse the same. The appellant was claiming the amount under an arbitration award which he had obtained against ‘D’ and having become final the claim had crystallized. Therefore, the claim of the appellant satisfied all the requirements of the guidelines for disbursement from the fund and that the amount could not be withheld on the ground that another broker had a claim against him. It was clear that the claim of a broker against the appellant could not be met from the fund. If a broker-member of the exchange had an award against the appellant, he could enforce the same in accordance with law. On that ground, the claim of the appellant against ‘D’ which stood crystallized could not be withheld. [Para 7]
The contention of respondent No. 2, that the trust deed of the fund and the rules had not been amended after the publication of the guidelines and, therefore, the disbursement from the fund should continue to be governed by the trust deed and rules, could not be accepted. Guidelines which are statutory in force shall override provisions of the trust deed and the rules insofar as they are inconsistent with the provisions of the guidelines and it is guideline which shall govern disbursement from the investor protection fund. The guidelines have taken away the absolute discretion which earlier vested in the Board of Trustees and the claims of the investors now have to be met strictly in accordance with the guidelines. The very purpose of issuing the guidelines was to make the stock exchanges across the country to adopt a uniform pattern in the matter of constitution, management and utilization of the fund. No exchange can defeat the claim of an investor, if it is otherwise eligible under the guidelines, merely because it failed to amend its trust deed or rules governing the investor protection fund in accordance with guidelines. It is high time the BSE brought its trust deed and the rules in accordance with the guidelines and realize that disbursements from the fund are no longer in its absolute discretion. These will have to be governed by the guidelines. The High Court’s order did not operate as res judicata because it did not consider the guidelines which brought about a substantial change as these were issued long after its order. Therefore, the action of the BSE in withholding the amount due to the appellant from ‘D’ could not be sustained. [Para 8]
‘T’ was a registered stock broker and the appellant had an arbitration award against it for a certain sum. ‘M’ another broker on, the BSE had obtained an award against the appellant for some amount. ‘M’ informed the BSE that he had a claim against the appellant and, therefore, the amounts due to the latter should not be disbursed. The BSE invoked the provisions of the bye-law 232(b) of the Bye-Laws and by the impugned communication informed the appellant that the amount due to him from ‘T’ had been set apart but was not being released to him. Clause (b) of bye-law 232 provides that if a creditor-member has a claim against a defaulting constituent, then the secretary of the exchange shall direct any member or members not to pay or deliver to the defaulting constituents any monies or securities up to an amount or value not exceeding the creditor member’s claim payable or deliverable by him to the defaulting constituent. The appellant claimed that the amount due to him under the award against ‘T’ should be released to him under the interim orders passed by the Supreme Court. There was merit in the claim of the appellant. While the appellant was pursuing his claims with the BSE for the disbursement of the amounts due to him under the awards against ‘D’ and ‘T’, the Board had initiated action against the appellant and his son under sections 11 and 11B and by order dated 25-6-2003 directed the appellant and his son to disassociate themselves from the capital market for a period of 5 years and they were also prohibited from dealing in securities for a period of 10 years. The appellant and his son, both filed an appeal before the Tribunal which was allowed and the order dated 25-6-2003 was set aside. The Board then filed an appeal in the Supreme Court against the order of the Tribunal, which was pending. In the pending appeal, the Board made two prayers, namely, for stay of order of the Tribunal and secondly, restraining the appellant from receiving any money from the BSE. It was clear from the order of the Supreme Court that the prayer for stay made by the Board was not granted. A prayer made and not granted is deemed to have been rejected. The Supreme Court, pending the hearing and final disposal of civil appeal, specifically directed that the appellant would be entitled to receive from the brokers of the BSE monies payable to them for trading, subject to the result of the civil appeal. The order in no uncertain terms established the claim of the appellant to receive the amount due from the brokers of the BSE including ‘T’, notwithstanding bye-law 232(b) of the Bye-Laws. The BSE contended that it was not a party in the appeal before the Supreme Court and, therefore, it was not bound to comply with the order. It was true that the BSE is not a party before the Supreme Court but it could not be heard to say that it was not bound by the order. If it wanted to continue to withhold the amount due to the appellant in the exercise of its power under bye-law 232(b), it should have moved an application in the Supreme Court to get the order modified. Not having done so, it was bound to implement the order. In view of the interim order passed by the Supreme Court, the appellant was entitled to the release of the amount due to him from ‘T’ which the BSE had already set apart from its (T’s) margin money/security. Thus, for the reasons recorded above, the appeal was to be allowed and the impugned communication by which the BSE had withheld the amounts due to the appellant from ‘D’ and ‘T’ was to be set aside and the BSE was to be directed to release forthwith the amounts due under the two awards. [Para 9]
Shailesh H. Bajaj for the Appellant. P.N. Modi and Sagar Divekar for the Respondent.
