2025 (11) TMI 132 - AT - Companies Law

Sanctioning order upheld; shareholder without 10% under Section 230(4) not 'aggrieved person' under Section 421

Manu Rishi Guptha Versus Icici Securities Limited, ICICI Bank Limited and Securities And Exchange Board Of India, Mumbai

NCLAT upholds the sanctioning order and dismisses the appeals. The tribunal found no illegality in the scheme process or terms and held the objecting ... Prejudice caused to public shareholders by sanctioning a scheme of arrangement or not - scheme takes away the right to reverse book building - unfair valuation and swap ratio - invalid relaxation granted by SEBI - undue influence caused by the company over its shareholders as is evident from outreach exercise by ICICI Bank and SEBI administrative - non-disclosure of the relaxation granted by SEBI - participation of employees and mutual funds of ICICI group in the voting as public shareholders - HELD THAT:- Not only is the Appellant not entitled in terms of the proviso to Section 230(4) to object to the Scheme, but the Appellant has also failed to demonstrate any illegality in either the process followed for sanctioning of the Scheme or in the terms of the Scheme itself. The Impugned Order is a detailed, well-reasoned order which has effectively dealt with all the contentions raised by the Appellant whilst noting that the Appellant is not entitled to object to the Scheme. The Appellant does not meet the 10% threshold under Section 230(4) of the Companies Act, 2013 (Act) to object to the Scheme. As of 20 March 2024, Manu Rishi Gupta, the appellant, RG held 0.002% of ICICI Securities’ shares. Section 230(4) is a mandatory provision, introduced pursuant to the recommendations contained in the 2005 Expert Report on Company Law to prevent frivolous objections by shareholders with miniscule shareholdings. It is settled law that ‘what cannot be done directly cannot be done indirectly’—since the Appellants have no right to object, they cannot maintain the Appeals as “aggrieved persons,” in terms of Section 421 of the Act. In this regard, it may be noted that 93.82% of equity shareholders and 71.89% of public shareholders have approved the Scheme way back in March 2024. However, it is only at the instance of the Appellant, who holds a miniscule 0.002% shares, the implementation of the Scheme is being delayed and the majority shareholders are being deprived of the benefits of the Scheme. This militates against the basic principle of shareholder’s democracy, which permeates through all corporate actions. The contentions raised does not inspires to set aside a reasoned order, hence all appeals are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether public shareholders are prejudiced by sanctioning a scheme of arrangement under the regulatory alternate delisting mechanism (Reg. 37) instead of a reverse book-building process (RBB). 2. Whether the valuation and the swap ratio underpinning the scheme are unfair or vitiate the scheme. 3. Whether regulatory relaxation granted by the securities regulator to permit the scheme was invalid or reviewable by the Tribunal. 4. Whether outreach/contact by the acquiring entity and an administrative warning from the regulator constitute undue influence that invalidates shareholder voting. 5. Whether non-disclosure of the regulator's confidential relaxation letter to shareholders or objectors amounts to failure of disclosure that vitiates the scheme. 6. Whether participation in the shareholder vote by employees and group mutual funds classified as public shareholders was improper and affected validity of the voting outcome. 7. Whether the objector has standing to maintain objections and appeals given the statutory threshold for objection under Section 230(4) (i.e., minimum shareholding requirement). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Prejudice from using Reg. 37 alternative delisting route vs. RBB Legal framework: The Delisting Regulations include an express alternative delisting route under Reg. 37 with specified safeguards (minimum valuation floor, enhanced public voting threshold, and transferrable liquidity via holding company shares). Precedent treatment: Tribunal accords deference to the regulatory design and legislative intent behind introducing an alternative mechanism with built-in safeguards; it treats stock-exchange price discovery and regulatory safeguards as sufficient protection for public shareholders. Interpretation and reasoning: The Court accepts that Reg. 37 was adopted after considered deliberation and contains safeguards (60-day VWAP floor, 66% public shareholder threshold plus Section 230 requirements, and liquidity via holding company trading). The speculative suggestion that RBB would have produced a better price is rejected because valuation outcomes are not guaranteed and RBB is not mandated where Reg. 37 applies. The Tribunal also notes that shareholders retain exit options before and after delisting. Ratio vs. Obiter: Ratio - regulatory alternative with statutory safeguards does not, per se, prejudice public shareholders; speculative advantage of RBB is insufficient to invalidate the scheme. Conclusion: Use of Reg. 37 rather than RBB does not demonstrate prejudice to public shareholders and does not vitiate the scheme. Issue 2 - Fairness of valuation and swap ratio Legal framework: Valuation required to meet minimum regulatory thresholds (including 60-day VWAP) and prepared by registered valuers; fairness opinions by registered merchant bankers. Precedent treatment: Courts/tribunals generally decline to substitute their judgment for technical valuation exercises performed by qualified valuers; valuation is treated as a question of fact and expert technical judgment. Interpretation and reasoning: The joint valuation used internationally recognised valuation methods, was prepared by independent registered valuers, supported by fairness opinions, and met the regulatory minimum. Given the technical nature of valuation and adherence to prescribed methodology, the Tribunal will not re-open valuation disputes absent demonstrable illegality or procedural infirmity. Ratio vs. Obiter: Ratio - absent demonstrable procedural or legal infirmity, valuation and swap ratio determined by independent registered valuers and supported by required opinions cannot be invalidated by the Tribunal. Conclusion: The valuation and swap ratio are not shown to be unfair or legally infirm so as to set aside the scheme. Issue 3 - Validity and reviewability of regulatory relaxation Legal framework: The securities regulator is empowered to grant relaxations from strict compliance with delisting regulations; such exercise of regulatory power is within the regulator's expertise. Precedent treatment: The Tribunal declines to act as an appellate forum over discretionary regulatory relaxations absent demonstrated illegality; regulatory expertise is given deference. Interpretation and reasoning: The relaxation was granted under the regulator's statutory powers. The Tribunal deems it beyond the scope of these proceedings to substitute its judgment for the regulator's exercise of discretion. Disclosure regarding how the scheme meets Reg. 37(2) requirements was provided in the Explanatory Statement. Ratio vs. Obiter: Ratio - a statutory regulator's discretionary relaxation, exercised under empowering provisions, is not ordinarily susceptible to collateral challenge in scheme sanction proceedings unless shown to be illegal or outside jurisdiction. Conclusion: The relaxation is valid for purposes of permitting the scheme and is not reviewable here on mere disagreement. Issue 4 - Outreach by acquiring entity and administrative warning: undue influence Legal framework: Undue influence to invalidate votes requires impairment of the free agency of voters; mere appeals, suggestions, or outreach do not per se amount to undue influence. Precedent treatment: Established authority requires a showing that free agency was impaired; mere influence, persuasion, or solicitation is insufficient. Interpretation and reasoning: The administrative warning did not identify any legal breach or that votes were influenced or invalid; regulator's submissions indicated no evidence of undue influence. The objector's own vote against the scheme demonstrates unimpaired free agency. The outreach was at best a procedural concern not linked to vote invalidation. Ratio vs. Obiter: Ratio - absence of evidence that outreach impaired free agency means votes remain valid; administrative admonition alone does not invalidate voting. Conclusion: Outreach and the administrative warning do not amount to undue influence that vitiates the shareholder voting or the scheme. Issue 5 - Non-disclosure of regulator's relaxation letter Legal framework: Disclosure obligations require shareholders be furnished with information necessary to make an informed vote; certain regulatory documents may be treated as confidential by the regulator. Precedent treatment: A confidential regulatory relaxation letter may be withheld where the regulator deems it confidential, provided sufficient disclosure of grounds and effects is made to shareholders. Interpretation and reasoning: The Explanatory Statement and other materials disclosed the grounds, justification and details of the relaxation sufficient for shareholders to take an informed decision; the regulator declined to provide the relaxation letter in a separate appeal, treating it as confidential. Exchanges' NOCs reproduced regulator observations requiring disclosure of grounds and details, which were furnished in the Explanatory Statement. Ratio vs. Obiter: Ratio - non-disclosure of a confidential regulator letter does not vitiate a scheme if the explanatory materials disclose the necessary grounds and details enabling informed shareholder voting. Conclusion: There was adequate disclosure; withholding of the confidential relaxation letter does not invalidate the scheme. Issue 6 - Participation of employees and group mutual funds as public shareholders Legal framework: Definitions of public shareholding under applicable securities rules do not categorically exclude employees holding ESOP shares; classification depends on statutory definitions, not objector preference. Precedent treatment: Where a shareholder falls within the statutory definition of public shareholder, their votes are valid even if affiliated or employee holdings are small and disclosed. Interpretation and reasoning: The funds and employee holdings that cast votes represented a de minimis percentage of paid-up capital (negligible impact). Statutory definitions do not exclude such holders from the public category; no evidence they were promoters or part of promoter group. Ratio vs. Obiter: Ratio - votes of persons who satisfy the statutory definition of public shareholders are valid; negligible aggregate voting by affiliated funds/employees does not taint the outcome. Conclusion: Participation by the cited employee and group funds did not vitiate the voting or scheme. Issue 7 - Standing of the objector given statutory threshold Legal framework: Section 230(4) (statutory threshold) requires minimum shareholding to object to a scheme; regulatory scheme designed to prevent frivolous objections by minuscule shareholders. Precedent treatment: Courts enforce statutory standing thresholds and disallow objections or appeals by shareholders who do not meet the prescribed minimum; related doctrine prevents indirect circumvention of mandatory limitations. Interpretation and reasoning: The objector held a minuscule fraction of shares well below the statutory threshold and thus was not entitled to object. The Tribunal applied the principle that what cannot be done directly cannot be done indirectly; absent qualifying status, objector cannot seek relief as an 'aggrieved person.' The Tribunal also noted the objector's trading activity after announcement undermined bona fides. Ratio vs. Obiter: Ratio - statutory threshold for objection is mandatory; an appellant lacking required shareholding lacks standing to object or maintain the appeal. Conclusion: The objector lacked standing; objections and appeals dismissed on this basis in addition to merits. Overall Disposition The Tribunal concluded that the objector failed to demonstrate illegality, prejudice, or procedural infirmity in process or substance; regulatory relaxation and valuation complied with statutory and regulatory requirements; outreach did not amount to undue influence; disclosure was adequate; employee and affiliated fund votes were valid; and the objector lacked statutory standing. All appeals were dismissed and pending applications disposed of; no order as to costs.