NCLAT upholds delisting scheme finding SEBI Regulation 37 safeguards adequate for public shareholders despite valuation challenges

The NCLAT dismissed an appeal challenging a scheme of arrangement for delisting. The court held that SEBI's Regulation 37 provides adequate safeguards for public shareholders through valuation requirements, voting thresholds, and exit mechanisms. The appellant's claims regarding reverse book building yielding better prices were deemed speculative. The court found no evidence of undue influence from the company's outreach initiative, noting SEBI's administrative warning didn't invalidate voting. SEBI's relaxation was within regulatory powers and couldn't be appealed. The joint valuation report met requirements, and participation of ICICI group employees/mutual funds was appropriate with negligible impact. The appellant lacked standing to object under Section 230(4).

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ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the scheme of arrangement prejudices public shareholders by removing the right to reverse book building (RBB).
• Whether the valuation and swap ratio under the scheme are unfair.
• Whether the relaxation granted by SEBI is valid.
• Whether the outreach exercise by ICICI Bank and SEBI's administrative warning indicates undue influence over shareholders.
• Whether there was a failure to disclose the relaxation granted by SEBI.
• Whether the participation of ICICI group employees and mutual funds in voting as public shareholders was appropriate.
• Whether the appellant is entitled to object to the scheme under Section 230(4) of the Companies Act, 2013.

ISSUE-WISE DETAILED ANALYSIS

1. Prejudice to Public Shareholders and Reverse Book Building (RBB)

The appellant argued that the scheme prejudices public shareholders by removing the RBB process, potentially yielding a better price. The Court noted that Regulation 37 of the SEBI (Delisting of Equity Shares) Regulations 2021 provides an alternative delisting mechanism with safeguards such as valuation not less than the 60-day volume-weighted average price (VWAP), a voting threshold of 66% of public shareholders, and the frequent trading of holding company shares. These safeguards ensure shareholder protection, and the claim that RBB would guarantee a better price is speculative. The Court emphasized that valuation is a matter of professional judgment and cannot be faulted if recognized methods are followed.

2. Valuation and Swap Ratio

The appellant contended that the valuation and swap ratio were unfair. The Court highlighted that the joint valuation report was prepared by independent valuers using recognized methods and supported by fairness opinions from SEBI-registered merchant bankers. The valuation adhered to the minimum requirement under Regulation 37(2)(j) of the Delisting Regulations. Citing precedents, the Court reiterated that valuation is a complex fact-based issue best left to experts and should not be scrutinized by the courts.

3. Validity of SEBI's Relaxation

The appellant questioned the validity of SEBI's relaxation. The Court noted that Regulation 42 of the Delisting Regulations empowers SEBI to grant such relaxations. The NCLT correctly concluded that the relaxation was within SEBI's regulatory powers and that the companies were entitled to propose the scheme under Regulation 37. The Court referenced a Supreme Court decision affirming SEBI's broad powers to protect investor interests.

4. Outreach Exercise and Undue Influence

The appellant alleged undue influence from ICICI Bank's outreach initiative. The Court found no evidence of legal breaches or undue influence in SEBI's administrative warning. Citing precedents, the Court stated that influence through suggestions or appeals does not constitute undue influence unless free agency is impaired. SEBI found no evidence of undue influence, and the appellant's voting against the scheme further disproved any coercion claims.

5. Disclosure of SEBI's Relaxation

The appellant argued that the relaxation granted by SEBI was not disclosed. The Court noted that the Explanatory Statement provided to shareholders included the grounds, justification, and details of the relaxation. SEBI's appellate authority upheld this disclosure as sufficient, and the relaxation letter was deemed confidential. The Court concluded that all necessary information for informed voting was available to shareholders.

6. Participation of Employees and Mutual Funds in Voting

The appellant challenged the participation of ICICI group employees and mutual funds in voting. The Court observed that the participation of ICICI Prudential funds was negligible and did not impact the overall voting. The definition of "public shareholding" does not exclude employees holding ESOP shares, and the argument against their inclusion as public shareholders was rejected.

7. Entitlement to Object under Section 230(4)

The appellant's entitlement to object to the scheme was questioned due to not meeting the 10% threshold under Section 230(4) of the Companies Act, 2013. The Court noted that the appellant held only 0.002% of ICICI Securities' shares, failing to meet the threshold. The provision aims to prevent frivolous objections by shareholders with minimal holdings. The Court emphasized the principle of shareholder democracy and the overwhelming approval of the scheme by the majority of shareholders.

SIGNIFICANT HOLDINGS

• The Court held that the scheme's safeguards under Regulation 37 of the Delisting Regulations adequately protect public shareholders, and the removal of RBB does not prejudice them.
• The Court affirmed that valuation is a complex issue best left to experts, and the joint valuation report met regulatory requirements.
• The relaxation granted by SEBI was within its regulatory powers, and the Court cannot sit in appeal over SEBI's decisions.
• The Court found no evidence of undue influence from ICICI Bank's outreach initiative, and SEBI's administrative warning did not suggest any legal breach.
• The disclosure of SEBI's relaxation was deemed sufficient, and the shareholders had all necessary information for informed voting.
• The participation of ICICI group employees and mutual funds in voting was appropriate and had a negligible impact on the outcome.
• The appellant's lack of entitlement to object under Section 230(4) was upheld, and the scheme's approval by the majority of shareholders was emphasized.

In conclusion, the Court dismissed all appeals, finding no illegality in the process or terms of the scheme. The appellant's contentions were rejected as speculative and unfounded, and the majority shareholders' approval of the scheme was upheld. The Court emphasized the principle of shareholder democracy and the need to prevent frivolous objections by shareholders with minimal holdings.

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