2018 (12) TMI 739 - Tri - Companies Law

Tribunal rejects Amalgamation Scheme for tax avoidance, deems unfair and against public interest.

The Tribunal declined to sanction the Scheme of Amalgamation and Arrangement between the Transferor and Transferee Companies due to non-compliance with ... Scheme of Amalgamation and Arrangement - public interest - tax avoidance / impermissible avoidance agreement (GAAR) - compliance with Income Tax provisions - SEBI (Substantial Acquisition of Shares and Takeovers) Regulations - open offer obligation - reduction of shareholding tiers / simplification of shareholding structure - use of Securities Premium and reduction of capital under Section 52 and Section 66 - sanctioning power of the TribunalScheme of Amalgamation and Arrangement - public interest - sanctioning power of the Tribunal - Whether the proposed Scheme should be sanctioned by the Tribunal - HELD THAT: - The Tribunal examined the scheme whereby the transferor (Gabs) holding equity in the transferee (Ajanta Pharma) would be merged and the transferee would issue equivalent shares to the transferor's shareholders (the common promoters). On the material before it the Bench found the scheme chiefly benefits the four shareholders of the transferor who are common promoters and results in a substantial benefit to them (market value of shares far exceeding the transferor's paid-up capital and book value). The Tribunal concluded that the scheme, as presented, would permit the common promoters to obtain a large private benefit without corresponding benefit to the wider body of transferee shareholders and without satisfying intervening statutory obligations; therefore the scheme is unfair and unreasonable and is not in the public interest. Having regard to these determinative considerations the Bench declined to sanction the scheme. [Paras 36, 37, 38, 40, 55]Scheme not sanctioned as it is unfair, unreasonable and not in the public interestCompliance with Income Tax provisions - tax avoidance / impermissible avoidance agreement (GAAR) - Validity of Income Tax Department objections and their effect on sanctioning the Scheme - HELD THAT: - The Income Tax Department objected that the amalgamation would result in significant tax loss to the exchequer (DDT on distribution and capital gains or business profit tax) and that the scheme may amount to an impermissible avoidance agreement or round trip financing. The Tribunal found the Department's objections to be prima facie valid and of sufficient gravity that the crucial issue of tax liability ought to be settled before any sanction is granted. The Bench observed that any transfer effected by the scheme must comply with applicable tax law and that the petitioners had not provided adequate details or an undertaking to address the tax consequences relied upon by the Income Tax Department. [Paras 21, 37, 39, 50]Income Tax objections are meritorious; tax implications must be resolved prior to sanctionSEBI (Substantial Acquisition of Shares and Takeovers) Regulations - open offer obligation - reduction of shareholding tiers / simplification of shareholding structure - Whether the scheme complies with takeover/open offer obligations under the SEBI SAST Regulations - HELD THAT: - The Bench analysed promoter and concert party holdings and the effect of allotting transferee shares to the transferor's shareholders (who are common promoters). It noted that the scheme, as structured, contains no provision for complying with Regulation 3 (and related provisions) of the SEBI SAST Regulations and that by sanctioning the scheme as proposed the common promoters could escape obligations to make an open offer. The Tribunal observed that the petitioners have not demonstrated compliance with takeover regulations and that prima facie the common promoters would be required to comply with the SAST regime. [Paras 51, 52, 53]Scheme fails to provide for compliance with SEBI SAST Regulations; open offer obligations must be addressedTreatment of post appointed date share allotment - Scheme of Amalgamation and Arrangement - Treatment of 700 equity shares allotted by the transferor after the Appointed Date - HELD THAT: - The Tribunal noted that 700 equity shares were allotted by the transferor on 18.03.2017, after the appointed date of 01.04.2016. The scheme did not explain the treatment of these shares or the large securities premium credited on account of the allotment. The Bench held that because the scheme fails to account for these allotments and the related securities premium, those 700 shares would not be entitled to receive new transferee shares under the scheme unless their treatment is properly explained and regularised. [Paras 25, 27]700 shares allotted after the appointed date are not entitled under the scheme unless proper treatment is furnishedUse of Securities Premium and reduction of capital under Section 52 and Section 66 - accounting treatment and auditor certificate - Whether accounting treatment and statutory certifications required under Sections 52/66 and applicable Accounting Standards have been furnished - HELD THAT: - The Regional Director had recommended compliance with accounting standards and a certificate from auditors that the accounting treatment conforms with the Accounting Standards under Section 133. The petitioners filed an auditor's certificate with the Tribunal and gave undertakings to comply with accounting standards and statutory requirements, including utilisation of securities premium as envisaged in the scheme. The Tribunal recorded these filings and undertakings but treated them as insufficient to cure the scheme's other fundamental infirmities (tax, SEBI compliance and disproportionate promoter benefit). [Paras 10, 15, 16, 17]Auditor certificate and undertakings filed, but do not obviate the scheme's substantive defectsFinal Conclusion: The Tribunal refused to sanction the proposed Scheme of Amalgamation and Arrangement: it concluded the scheme principally benefits the common promoters, risks substantial loss to the public exchequer by avoiding tax, fails to provide for compliance with SEBI takeover obligations and leaves unexplained post appointed date share allotments; accordingly the scheme is unfair, unreasonable and not in the public interest and cannot be sanctioned in its present form. Issues Involved:1. Approval of the Scheme of Amalgamation and Arrangement.2. Compliance with the Companies Act, 2013.3. Compliance with Income Tax regulations.4. Compliance with SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.5. Public interest and fairness of the scheme.Issue-wise Detailed Analysis:1. Approval of the Scheme of Amalgamation and Arrangement:The Tribunal was asked to sanction the Scheme of Amalgamation and Arrangement under Sections 230 to 232 read with Section 52 and Section 66 of the Companies Act, 2013, between the Transferor Company and the Transferee Company. The rationale provided for the scheme included simplification of the shareholding structure, direct holding of shares by the promoter group, and no change in the financial position of the Transferee Company. The scheme was approved by 99.99% of the Transferee Company's shareholders and unanimously by the Transferor Company's shareholders.2. Compliance with the Companies Act, 2013:The Petitioner Companies complied with all the directions in orders passed in Company Scheme Application Nos. 791 and 792 of 2017 and filed necessary affidavits of compliance. The Regional Director's report noted that the scheme was not prejudicial to the interest of shareholders and public, subject to certain conditions, such as compliance with Section 232(6) regarding the appointed date and tax implications. The Petitioner Companies undertook to comply with all statutory requirements under the Companies Act, 2013, and the rules made thereunder.3. Compliance with Income Tax regulations:The Income Tax Department raised objections, arguing that the scheme would result in a tax loss of approximately Rs. 421.66 Crores due to the avoidance of Dividend Distribution Tax (DDT) and Income Tax on business profits. The department highlighted that the scheme was a deliberate measure to avoid tax burden and was an Impermissible Avoidance Agreement (IAA). The Tribunal found merit in the objections raised by the Income Tax Department and noted that the scheme did not provide details regarding compliance with the tax liability.4. Compliance with SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011:The Tribunal observed that the scheme did not comply with SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. The Agrawal Family, acting in concert, held 61.17% shares in the Transferee Company and 100% shares in the Transferor Company. The scheme did not provide for an open offer as required under Regulation 3(1) or 3(2) of the SEBI Regulations, which would have required acquiring at least 26% of the total shares of the target company.5. Public interest and fairness of the scheme:The Tribunal concluded that the scheme was devised mainly to benefit the four shareholders of the Transferor Company, who were also the promoters of the Transferee Company. The scheme would result in a huge tax liability being avoided and did not serve any public interest. The Tribunal emphasized that any scheme of amalgamation must comply with applicable laws and should be in the interest of the public and shareholders. The Tribunal held that the scheme was unfair, unreasonable, and not in the public interest, and therefore, decided not to sanction the scheme as proposed.