TaxTMI 
TaxTMI 
TaxTMI 
1999 (9) TMI 754
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....anufacture of Coffee, Tea, Chicory, Cocoa, Milk Powder, Condensed Milk, Cheese, Plain and flavoured, Yogada, Shrikhond and the like as also to carry on the business in processing, manipulating, preparing, preserving, canning, refining, bottling, baying, rendering marketable and dealing in their prepared, manufactured or raw state and whether in wholesale and/or in retail. The object of the petitioner-company-ACL is also to carry on the business in Coffee either as principals or agents all or any of the trades or businesses of dealers, merchants, general merchants, buyers etc. The petitioner company-ACL is also engaged in the business of production and sale of instant coffee. 3. The transferee company 'The Consolidated Coffee Estates (1943) Ltd. was incorporated on 19-11-1943 under the provisions of the Indian Companies Act, 1943 and with effect from 12-6-1967 its name was changed to Consolidated Coffee Ltd. ('CCL') and is an existing public company within the meaning of the Companies Act. Its registered office is situated in Kodagu in the State of Karnataka. The authorised share capital of the transferee company-CCL is Rs. 9,80,00,000 divided into 98,00,000 equity shares of Rs. 10....
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.... coffee (chicory mixed) under the Tata Cafe (pure) and Tata Kaapi (chicory mixed) brands. 6. Coffee Lands Ltd. ('CLL') is a public limited company and its registered office is situated in Saklaspur, Hassan District, in the State of Karnataka. The main object of CIL is to cultivate any estates, lands and properties and to grow thereon coffee, tea, rubber, pepper, oranges, cardamoms, cincho na, cereals, timber, garden etc., and to carry on the business of planters, growers, curers, manufacturers, farmers, and to prepare, process, manufacture and render marketable the produce and products of any estates, lands or properties of the company etc. The transferee company-CCL holds about 34.45 per cent of the equity share capital of CLL. Charagni Ltd. ('CL') is also a public limited company and its Regis-tered office is situated in Saklaspur of Hassan District in the State of Karnataka. The main objects of CL are to carry on the business of manufacture of smokeless briquetted fule and its by products of tar, gas etc., by conversion of agricultural/forestry residue/wastes of whatsoever nature, and to carry on and undertake the business of finance, investment and trading, hire purchase leasi....
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....ssets 1,608.25 3,671.22 Investments 356.33 863.15 Current assets, loans & Advances 2,232.24 6,075.07 Less Current liabilities & provisions (422.80) (4,052.03) Net current assets 1,809.44 2,023.04 Miscellaneous expenses 9.18 523.82 Total 3,783.20 7,081.23 10. The reasons for the proposed amalgamation are more particularly set out in Para 9 of the petition. Some of the salient features of the scheme of amalgamation are that the instant coffee marketed by the transferee company-CCL is manufactured by the transferor company-ACL. The business of the transferor company-ACL primarily comprises of manu-facture of instant coffee at its export oriented unit, the bulk of which is exported and the balance is sold in the domestic tariff area as per applicable rules, including to the transferee company-CCL. The transferor-company ACL is also a subsidiary of TTL. The transferee company-CCL is the largest coffee plantation company in Asia and the largest coffee curer in the country and has substantial presence in the four main value added segments of the coffee market. There is commonality of business of the transferor company-ACL and the transferee company-CCL. The combinatio....
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....e company-CCL and the continuance of all contracts and proceedings by or against the transferee company-CCL shall not affect any transaction or proceedings already concluded by the transferor company-ACL prior to the scheme becoming effective. 12. The transferee company-CCL, in consideration of the transfer of and vesting of the undertakings and properties of the transferor company- ACL in terms of the Scheme, shall, without any further application or deed, issue and allot to the members of the transferor company-ACL whose names appear in the register of members of the transferor compa- ny-ACL on such date as the Board of Directors of the Transferee Company will determine (hereafter called 'the record date'), one equity share of Rs. 10 each in the transferee company-CCL credited as fully paid up for every six fully paid up equity shares of Rs. 10 each held by them in the transferor company-ACL. No fractional shares shall be issued by the transferee company-CCL in respect of the fractional entitlements, if any, to which the shareholders of the transferor company-ACL may be entitled on issue and allotment of the new equity shares of the transferee company-CCL. The Directors of the t....
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.... the petitioner- transferor company-ACL. In pursuance of the order passed by this Court on 17-9-1998, the meeting of the shareholders of the petitioner transferor company-ACL had been convened under the Chairmanship of Mr. Vilas A. A. Afzulpurkar, Advocate. After due notice of the said meeting by pre-paid letter post under certificate of posting to each equity share holder of the transferor company-ACL, together with a form of proxy, meeting was held on 23-10-1998. Prior to that, the notice of the said meeting was also advertised in one issue of English daily, Deccan Chronicle, and one issue of Eenadu, a telugu daily, on 28-9-1998. As per the report of the Chairman, Mr. Vilas A. Af zulpurkar, the said meeting was attended personally or by proxy by 233 equity shareholders of the petitioner transferor company- ACL and entitled together to 77,45,397 equity shares of Rs. 10 each fully paid up. By a majority of 76,74,443 votes against 61,536 votes, the following resolution was passed at the meeting. "Resolved that the Scheme of Amalgamation of Asian Coffee Ltd. into Consolidated Coffee Ltd. as embodied in the Scheme, a copy whereof is placed before this meeting and initialled by the C....
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....hey are offering one equity share of Rs. 10 each in the transferee company-CCL for every six equity shares of Rs. 10 each of the transferor company-ACL whose market price is less than Rs. 120. The net effect is that the transferor company-ACL share price is arrived at Rs. 20 even though the book value is more than Rs. 20. If the book value of the share is discounted by 10 times, the market price of the share should be Rs. 200 thereby the exchange ratio should be a minimum of two shares in the transferee company-CCL for every one share of the transferor company-ACL. In the year 1995-96, intentionally, an amount of Rs. 356 lakhs was diverted to a sick BIFR company from the transferor company- ACL without any income from the investment and on the contrary borrowings were shown by the transferor company-ACL for its opera- tions by paying interest and this resulted in reduction of profits. The management has resorted to a dubious method of domestic marketing by selling the product of the transferor company-ACL on almost actual cost at very reduced price than the actual selling price to none other than the transferee company-CCL and TTL and the entire profits of the transferor company-AC....
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....nd without any proper basis of arriving at the exchange ratio. During the meeting held on 23-10-1998, the applicant has questioned the valuation report done by the auditors and had sought information regarding the basis on which the valuation report has been finalised by the auditors, but it was not made available to him. M.N. Raiji & Co., and A.F. Ferguson Company had prepared the valuation report and it was confirmed by the ANZ Grindlays Bank. While M.N. Raiji & Co., are the statutory auditor of the transferee company-CCL, A.F. Ferguson Company are the statutory auditor of the associated company of the transferee company-CCL namely TISCO. ANZ Grindlays Bank is the banker of TTL. Therefore, it cannot be said that fair and independent valuation has been done. The valuation report should be obtained from an independent auditor and till then the scheme of amalgamation should not be confirmed. The transferor company-ACL through its counter resisted this application. 17. Vadlamudi Rama Rao, another shareholder of the transferor compa- ny-ACL also filed C.A. 686 of 1998 of objecting the confirmation of the scheme of amalgamation on the ground that the proposed exchange ratio is arbitra....
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....et 48,36,030 shares of Rs. 10 each of Sapthagiri Agro Industries Ltd. Excluding the assets and liabilities of Sapthagiri Agro Industries Ltd., the transferee company-CCL will make a clear profit of Rs. 2.90 crores. This clearly exploits the exchange ratio of the scheme and is against the interests of the transfer company ACL and will benefit the shareholders of the transferee compa- ny-CCL to a large extent and TTL will get more benefit at the cost of other minority shareholders. Since the transferor company-ACL is a subsidiary holding of TTL, the remaining 40 per cent shareholders are put to loss if the exchange ratio is not amended. A request for appointment of a leading Advocate to calculate the exchange ratio on the normal accepted principle of calculation of exchange ratio has been made in this report. The transferor company-ACL has submitted its counter to this report alleging that Sapthagiri Agro Industries Ltd., is a sick company and has been referred to BIFR under section 22 of SICA Act, and similar representation made by the Regional Director has been rejected by the Karnataka High Court vide order dated 15/16-3-1999 while disposing of the applications filed by the other ....
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....for the applicant in C.A. No. 687 of 1998 has urged that the TTL / holding 65 per cent voting in the transferor company-ACL is the holding company of the transferee company-CCL and, therefore, giving lesser number of shares in the transferee company. CCL to the minority shareholders of the transferor company-ACL would benefit only TTL. Only with a view to benefit TTL, the proposed exchange ratio has been fixed at 6 : 1. The Chartered Accountants who have valued the shares are the Chartered Accountants of CCL and TTL and, therefore, there is a built in bias. He has further argued that out of 76,74,443 votes polled in favour of the merger, TTL holds 75,29,904 votes as it holds 75,29,904 shares and, therefore, the number of votes of the other independent shareholders who supported the merger comes to 1,44,539 as against 61,536 votes cast by the share holders who have opposed the merger. Therefore, it cannot be said that the overwhelming majority of the shareholders had supported the reso-lution of merger. The actual details of the calculation and the manner in which the proposed exchange ratio of 6:1 has been arrived at were never furnished to the shareholders. Neither an independent ....
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....uld not be relied upon, particularly because they have not supplied the calculations. The pro- posed exchange ratio is neither fair nor reasonable. The transferor company-ACL has earned profit of Rs. 809.79 lakhs in the year 1995-96, but with a view to reduce the value of the share, the profits have been reduced to Rs. 152.13 lakhs and Rs. 149.15 lakhs respectively for the years 1996-97 and 1997-98. It has also been urged that the votes have not been properly counted by the chairperson. The shareholders who are interest- ed in TTL and the transferee company-CCL have voted for the merger only with a view to ultimately help TTL. Relying on Patiala Starch & Chemical Works Ltd., In re AIR 1958 30 (Punjab) and on Bank ofBaroda Ltd. v. Mahindra Ugine Steel Co. Ltd. [1976] 46 Comp. Case. 227 (Guj.), it has been argued that where the shareholders have not independently guarded their interests by examining the proposal in the scheme of amalgamation, the Court cannot abdicate responsibility of examining the proposal to verify whether it is fair and reasonable. The company Judge should go into the question of valuation and fixation of exchange ratio and if it is not satisfied about the valuat....
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....been deliberately fixed. The votes were validly cast and have been duly accepted by the Chairman and there is no substance in the argument that the shares held by TTL should be excluded while consid-ering whether the resolution has been passed with overwhelming major- ity or not. The request for furnishing the details of calculations relating to the exchange ratio has been rejected by this Court on 1-3-1999 and, therefore, this point cannot be reagitated now. The Auditors have applied the three well accepted methods for arriving at the exchange ratio, that is (1) the yield method (2) the asset value method and (3) the market value method and, therefore, no reliance can be placed on the share exchange ratio arrived at only on the basis of the book value method. The applicant in C.A. 674 of 1998 himself is not certain on the share exchange ratio because in Para 7 the share in the transferee company-CCL has been shown as 1:2 share in the transferor company-ACL while in Para 13, it has been shown as 1:2.30 and in the valuation report submitted by him, it has been shown as 1:3.65. In the valuation report submitted by Narasimharao & Associates, market value has not been taken into consid....
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....ion a scheme of compromise or arrangement, in the case of Miheer H. Mafatlal (supra) . "1.The sanctioning Court has to see to it that all the requisite statutory procedure for supporting such a scheme has been complied with and that the requisite meetings as contemplated by Section 391(1)(a) have been held. 2.That the scheme put up for sanction of the Court is backed up by the requisite majority vote as required by Section 391, sub-section (2). 3.That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class. 4.That all necessary material indicated by Section 393(1)(a ) is placed before the voters at the concerned meetings as contemplated by Section 391, sub-section (1). 5. That all the requisite material contemplated by the proviso to sub- section (2) of Section 391 of the Act is placed before the Court by the concerned applicant seeking sanction for such a scheme and the Court ....
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....no mistake can be pointed out in the said valuation, it is not for the Court to substitute its exchange ratio, especially when the same has been accepted without demur by the overwhelming majority of the shareholders of the two companies or to say that the shareholders in their collective wisdom should not have accepted the said exchange ratio on the ground that it will be detrimental to their interest. 31. The grievance of the applicants-objectors is regarding the proposed exchange ratio. The question, therefore, falls for determination is whether the proposed exchange ratio is reasonable and fair or not?. 32. In the light of Tinter he law laid down by the Supreme Court in the case of Miheer H. Mafatlal ( supra) and referred to above, I will now proceed to deal with the point for determination indicated in the preceding para- graph. 33. At the outset, it is to be remarked that the learned counsel of the transferor company-ACL had produced the details of the valuation report as also the calculations on the basis of which the Chartered Accountants N.M. Raiji & Co., and A.F. Ferguson & Co., who have been appointed as valuers, had proposed the exchange ratio. The learned counsel of....
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....he transferee company-CCL were themselves doubtful about the correctness of the valuation report. On the other hand, it appears that, only with a view to have a second opinion, the work was entrusted to ANZ Investment Bank. 37. From what is stated above, it cannot be said that the Valuers have only narrated in their report the theory as to how the exchange ratio should be worked out and have actually not applied that theory on the relevant material and data for working out the proposed exchange ratio. 38. True that TTL holds 75,29,904 shares, but there appears to be no valid reason for excluding these votes while determining whether the scheme of amalgamation has been passed with overwhelming majority by its members including through proxies present and voting, or not. Even for the sake of argument, these 75,29,904 votes are not taken into consider-ation, the scheme of amalgamation has been approved with sufficient majority because 1,44,539 valid votes had been cast in favour of the scheme as against 61,536 votes polled against the scheme of merger. 39. It is not disputed before me that, during the year 1994-95, TTL had offered one equity share for every five shares of the trans....
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....rification and valuation reports of inventories as on 31 -3-1998, balance confirmation certificates in respect of the secured loans, unsecured loans, sundry debtors, cash and bank balances, loans and advances, current liabilities and contingent liabilities, though required for determination of the exchange ratio, were not supplied to it. The third reason is that the market value of the shares has not been considered by it. It is apposite to mention that the applicant-objector, Mr. Challa Rajendra Prasad, did not obtain the valuation report from Narasimharao & Associates before the extraordinary general body meeting was scheduled to be convened and did not place it to be considered at that meeting so as to enable the members to consider the same. On the other hand, the Board of Directors of the transferor company-ACL and the transferee company-CCL have unanimously approved the scheme of the proposed amalgamation and the scheme of amalgamation has been passed with overwhelming major- ity in the extraordinary general body meeting. 41. It is also not out of place to mention that the applicant-objector, Mr. Challa Rajendra Prasad himself has proposed different exchange ratios on differ....