Court Rejects Scheme of Arrangement by Demerger for Unfairly Benefiting Promoters Over Shareholders

The court rejected the application for sanction of a Scheme of Arrangement by demerger as it was deemed unfair, primarily benefiting the promoters and not the shareholders. Procedural lapses and non-compliance with statutory provisions further led to the scheme being deemed unsanctionable. The court found that the conversion of bonds and preference shares into equity shares would not benefit shareholders and that the scheme did not adhere to SEBI guidelines and Companies Act provisions.

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Issues Involved:
1. Sanction of a Scheme of Arrangement by demerger.
2. Objections raised by shareholders.
3. Compliance with procedural requirements.
4. Fairness of the Scheme.
5. Conversion of bonds and preference shares into equity shares.
6. Compliance with SEBI guidelines and Companies Act provisions.

Issue-Wise Detailed Analysis:

1. Sanction of a Scheme of Arrangement by demerger:
The petitioner sought the court's sanction for a Scheme of Arrangement by demerger, which had been approved by shareholders, creditors, and stock exchanges (BSE and CSE). The scheme was also compliant with the necessary formalities and had no objections from employees. The petitioner cited precedents such as Miheer H. Mafatlal v. Mafatlal Industries Ltd., Hindustan Lever Employees' Union v. Hindustan Lever Ltd., and Maknam Investments Ltd. as supporting the sanction of the scheme.

2. Objections raised by shareholders:
A shareholder, representing himself and 99 others, objected to the scheme, questioning the veracity of the Attendance Slip and the appointed date for undervaluing shares. Another objector, holding 0.28% shares, raised issues regarding the non-maintenance of the Attendance Register and the appointed date. Both objectors argued that the valuation report was not challenged and there was no allegation of fraud against the chartered accountants.

3. Compliance with procedural requirements:
The objectors argued that the meeting under section 391(1) of the Companies Act, 1956, was not conducted fairly, citing discrepancies in the attendance slips and ballot papers. The petitioner countered that the meeting was conducted properly and that any procedural lapses alleged by the objectors were unsubstantiated.

4. Fairness of the Scheme:
The objectors contended that the scheme was unfair and prejudicial to the interests of the shareholders of the transferor company. They argued that the conversion of non-convertible preferential shares and bonds into equity shares would unfairly dilute their shareholding. The petitioner maintained that the scheme was fair and that the valuation report by Ernst & Young was not challenged.

5. Conversion of bonds and preference shares into equity shares:
The scheme proposed the conversion of Zero Coupon Redeemable Preference Shares (ZCRPS) and Zero Coupon Non-Convertible Bonds (ZCNCB) into equity shares, which would increase the promoter's shareholding in Florence Alumina Ltd. (FAL). The court found that this conversion would benefit the promoters and not the shareholders, and that the scheme sought to modify the 2003 Scheme without proper requisitioning of a meeting or filing an appropriate application.

6. Compliance with SEBI guidelines and Companies Act provisions:
The objectors argued that the scheme did not comply with SEBI guidelines and section 81(1A) of the Companies Act, 1956, which deals with the issuance of preferential shares. The court agreed that the special procedure laid down in section 81(1A) should have been followed for the issuance of shares, and that the single window clearance theory did not apply in this case.

Conclusion:
The court concluded that the scheme was not fair, just, or bona fide, as it primarily benefited the promoters and not the shareholders. The procedural lapses and non-compliance with statutory provisions further rendered the scheme unsanctionable. Accordingly, the application for sanction of the Scheme of Arrangement and Demerger was rejected.

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