TaxTMI 
TaxTMI 
2007 (5) TMI 334
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....l Appeal No. 1704/2006 has been filed against Appeal Nos. 137, 159, 160, 161 and 164 of 2005 and Civil Appeal No. 1740 of 2006 has been filed against Appeal Nos. 158, 162, 163 and 139 of 2005. The Appellate Tribunal by its impugned judgment and order dismissed all the appeals. 2. The grievance of the appellants before the Securities Appellate Tribunal was that the Securities and Exchange Board (hereinafter referred to as the 'Board') as well as the Merchant Banker had not properly valued the shares of the target company in accordance with the parameters laid down in Regulation 20(5) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 ('Takeover Code'). Respondent No. 3, who is the real contesting respondent, on the other hand contended before the Appellate Tribunal that the valuation of shares was done having regard to the parameters laid down under Regulation 20(5) of the Takeover Code and the Board had taken all necessary precautions to safeguard the interest of the shareholders so as to ensure payment of best price for the shares to be sold by them. It was further contended that the shares were valued by three repu....
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....igible, that is less than 0.30 per cent. The shares of the target company are infrequently traded. In the year 1994 about 40 per cent of the equity capital of the target company was transferred to Shri C.K. Somany pursuant to a family settlement arrived at between the brothers. According to the appellants on 5-8-1994 there was an agreement between Shri C.K. Somany, Respondent No. 3 and his brothers for the sale of the entire balance shareholding in the target company held by his brothers to Respondent No. 3, Shri C.K. Somany at the price of Rs. 267 per share. This, however, is disputed by Respondent No. 3, Shri C.K. Somany. In this background disputes arose between the parties and the brothers of Respondent No. 3, Shri C.K. Somany filed Civil Suit No. 35 of 1997 before the Calcutta High Court against Respondent Nos. 2 and 3 and others for specific performance of the agreement dated 5-8-1994. In that suit an ex parte order of injunction was passed restraining Respondent No. 3 Shri C.K. Somany from selling the shares obtained from the other brothers in the target company. In his written statement Respondent No. 3 Shri C.K. Somany made a counter claim and prayed for a mandatory injunc....
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....nnouncement was very low and had not been determined in accordance with the parameters laid down in Regulation 20(5) of the Takeover Code. Since the price offered by the acquirers respondents 2 and 3 as determined by the Merchant Banker was not acceptable to the appellants, respondents 2 and 3 in consultation with the Merchant Banker namely, M/s. UTI Bank appointed M/s. Deloitte Haskin and Sells, a firm of Chartered Accountants, to value the shares of the target company. The aforesaid firm of valuers determined the price of each share of the target company as Rs. 43.02. The appellants still persisted in their objection that the value of each share determined by the aforesaid firm of valuers was not correct. 10. Before approving the draft letter of offer, and having regard to the objections raised by the appellants, the Board appointed M/s. Patni & Company to value the shares. The aforesaid valuers namely, M/s. Patni & Company valued the shares of the target company at the rate of Rs. 63.50 per share by one method and Rs. 64.17 by another method which had the approval of this Court in Hindustan Lever Employees' Union v. Hindustan Lever Ltd. [1994] 2 SCL 157 (SC). 11. Responden....
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....luers took into account something, which ought not to have been taken into account or interpreted the regulations wrongly, or proceeded on some erroneous principles. The interest of the shareholders had to be protected. The appellate Tribunal could also be asked to interfere if it was found that the offer price arrived at was so extravagantly high or so inadequately low that one could infer that the valuer must have committed an error in working out the offer price for the public offer. The appellate Tribunal, however, noticed that there was no allegation of mala fide either against the Board in approving the public offer or against the three valuers whose reports were considered by the Board. Since the shares were not traded frequently the valuers had to keep in mind the principles incorporated in Regulation 20(5) of the Takeover Code. It noticed that if only clauses (a) and (b) of Regulation 20(5) were to be considered, the only negotiated price under (a) being Rs. 40 per share the minimum offer price to be incorporated in the public offer could be Rs. 40 per share. However, the merchant bankers as well as the valuers also considered the matters which were relevant under Regulati....
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.... sick company under the BIFR. The valuers had taken into account the net value of its shares. The submission that the entire assets of its subsidiary should have been taken into account in working out the value of the shares of the target company was untenable. It further held that the said M/s. Ace Glass Containers Ltd. was not a subsidiary of the Target Company within the meaning of that term in section 4(1) of the Companies Act since the target company did not own more than ½ in nominal value of the equity share capital of M/s. Ace Glass Containers Ltd. It also held that the Target Company did not control the composition of the Board of Directors of M/s. Ace Glass Containers Ltd. Moreover even M/s. Bajoria, whose valuation report had been relied upon by the appellants, proceeded on the basis that M/s. Ace Glass Containers Ltd. was not a subsidiary company of the target company. This position was also accepted by Shri Sultania, one of the appellants before it. The appellate Tribunal held that there was nothing on record on the basis of which it could be reasonably concluded that the valuation reports of the three valuers suffered from the vice of perversity or gross error.....
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....tion 20(5) of the Takeover Code and, therefore, it could not be characterized as either erroneous, arbitrary or unreasonable. 23. Aggrieved by the order of the appellate Tribunal the appellants have filed the instant appeals under section 15(Z) of the Securities and Exchange Board of India Act, 1992. The appeal to this Court against the decision or the order of the Securities Appellate Tribunal may be entertained on any question of law arising out of such order. 24. Counsel for the appellants submitted that questions of law do arise for consideration of this Court. He referred to several decisions of this Court and submitted that the Board failed to appreciate that the valuation report of Patni & Co. failed to take into account all the relevant factors enumerated in section 20(5) of the Take Over Code, in particular he referred to the factors mentioned in clause (c) of sub-regulation (5) of Regulation 20 and submitted that for failure to properly appreciate those factors the Board ought to have rejected the report of the aforesaid valuer. 25. It cannot be denied that the Board under the Act is a regulatory authority charged with the duty to protect the interest of investor....
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....lack of competition and many other factors go individually or together to make up the goodwill, though locality always plays a considerable part. At the same time, locality is not everything. In the case of a theatre or restaurant, what is catered, how the service is run and what the competition is, contribute also to the goodwill. In that case a question arose whether the goodwill of the company in question was calculated in accordance with law. This, the Court observed was a question of law. It was found that the Tribunal had taken into account only the value of the lease hold of the site to the subsidiary company, and rejected the other considerations which go to make up the goodwill of the business. This Court concluded that it was manifest that the matter of goodwill needed to be considered in a much broader way than what the Tribunal did. A question of law did arise in the case. It will thus appear that this Court held that a question of law did arise for consideration if in valuing the goodwill only one factor was considered and other ignored i.e. all relevant factors were not considered. The question was whether the goodwill was calculated in accordance with law. 28. In ....
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....he root of the valuation. The same decision also lays down that if the valuer applied the standard methods of valuation, considered the matter from all appropriate angles without taking into account any irrelevant material or eschewing from consideration any relevant material, his valuation could not be challenged on the ground of its being vitiated by fundamental error. 31. In Duncans Industries Ltd. v. State of UP [2000] 1 SCC 633 this Court held that the question of valuation is basically a question of fact and this Court is normally reluctant to interfere with the finding on such a question of fact if it is based on relevant material on record. Similarly in Miheer H. Mafatlal v. Mafatlal Industries Ltd. [1997] 1 SCC 519 this Court sounded a note of caution observing that valuation of shares is a technical and complex problem which can be appropriately left to the consideration of experts in the field of accountancy. So many imponderables enter the exercise of valuation of shares. 32. These decisions clearly lay down the principle that valuation of shares is not only a question of fact, but also raised technical and complex issues which may be appropriately left to the wis....
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....to the month in which the public announcement is made is less than five per cent (by number of shares) of the listed shares. For this purpose, the weighted average number of shares listed during the said six months period may be taken. (ii) In case of disinvestment of a Public Sector Undertaking, the shares of such an undertaking shall be deemed to be infrequently traded, if on the stock exchange, the annualized trading turnover in the shares during the preceding six calendar months prior to the month, in which the Central Government or the State Government as the case may be opens the financial bid, is less than five per cent (by the number of shares) of the listed shares. For this purpose, the weighted average number of shares listed during the six months period may be taken. (iii) In case of shares which have been listed within six months preceding the public announcement, the trading turnover may be annualized with reference to the actual number of days for which the shares have been listed". 34. So far as clauses (a) and (b) are concerned, there can be no dispute that the highest price offered by the acquirers for the shares of the target company under the Memorandum ....
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....inciples are applied, different valuers may arrive at different valuations. Each one of them may be right, yet the valuations may differ. Mathematical precision and exactitude are not the attributes of share valuation, for at best the valuation arrived at by an expert is only his opinion as to what the value of the share should be. No doubt the variation may not be very wide between two valuations prepared honestly by two valuers applying the correct approach and the correct principles, but some variation is unavoidable. 38. There is one other factor which cannot be ignored. The Regulation seeks to protect the interest of an investor by ensuring that he gets a fair price for his shares in the target company. 39. For the acquirer the decision to acquire shares is a commercial decision. The same block of shares may have different value for different acquirers. An acquirer who intends to control the management of the target company by acquisition of the shares in question, without acquiring majority shares, may value the shares differently from an acquirer who is already in management of the Company but wishes to acquire the majority of shares to strengthen his voting rights. A ....
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....if the offer price is found to be fairly arrived at after due consideration of the matters enumerated in the Regulation. We do not wish to express any considered opinion in this regard, because that question does not arise in the facts of this case. The acquirer in the instant case did not challenge, rather accepted the suggestion of the Board to incorporate in his offer document the offer price based on the valuation report of M/s. Patni and Company which was the highest. 42. Learned counsel for the appellants submitted that the Board in approving the letter of offer of the acquirers failed in performance of its duty as required under the Act and Regulations and consequently failed to pass appropriate directions including, to revise the offer price in terms of the mandate under the Takeover Code. According to him, the Board ought to have passed a reasoned order after giving to the appellants and other complainants an opportunity of hearing before determining the offer price for the public announcement. He contended that apart from the report of M/s. Patni and Company, the Board had before it several communications of the appellant pointing out the statutory scheme and evidence ....
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....ion reports before it in the light of the provisions of the Regulations, the Board was satisfied that the valuation of shares done by M/s. Patni and Company represented the fair value of the shares. It was also the highest and therefore favourable to the interest of shareholders. There is nothing in the scheme of Regulation 20 which requires the Board to pass a reasoned order while approving the offer price declared in such public offer document. 45. We are of the considered view that the submission urged by the appellants is not tenable. There is nothing in the Regulations which requires the Board to pass a reasoned order for all it does as a regulator. Being a regulator the Board has to take various steps, issue directions from time to time and pass appropriate orders. While considering the offer price to be incorporated in the letter of offer it must no doubt apply its mind to the offer price proposed to be incorporated in the letter of offer and the basis thereof. If it finds that the offer price is reasonable and the valuation report is satisfactory it may approve the offer price to be incorporated in the letter of offer. The power of the Board under Regulation 44(f) must b....
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....was also in the interest of the shareholders. The suggestion of the Board to the acquirers to incorporate in the public offer, the offer price on the basis of the valuation report of M/s. Patni and Company was accepted by the acquirers and the offer price earlier suggested by them was enhanced. We are, therefore, satisfied that the Board acted in a reasonable manner and in consonance with the Regulations. Only after considering all relevant matters it approved the offer price to be incorporated in the public offer document. 46. We shall deal with the valuation reports of M/s. Anand K. Associates and M/s. Sanjay Bajoria and Associates later. 47. It was next contended that the appellate authority also failed to exercise its powers inasmuch as it failed to appreciate that the Board had clearly failed in discharge of its duty and had further failed in not exercising powers conferred upon it which were to be exercised in favour of the investors. We find from the impugned order of the appellate authority that it has considered all aspects of the matter and has reached a firm conclusion that the Board had acted in a judicious manner having regard to all relevant considerations. Ther....
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....tions the profits of the Company had decreased. In Hindustan Lever, the principle that for working out the average profit, profit of only those years which were normal and not affected by abnormal situations should be considered, was approved. Taking the capitalization rate as 15 per cent as suggested for manufacturing Companies in erstwhile Controller of Capital Issues guidelines, the value of shares has been worked out to Rs. 55.06 per share. 52. By adopting the Net Asset Value Method the value of Rs. 77 per share has been worked out by dividing the Share Capital of the Company plus Reserves and Surplus (excluding Revaluation Reserve and Contingent Liabilities) by the number of equity shares of the Company. 53. Applying the Market Value Method, having regard to the infrequently traded shares of the Company, the average of market price of six months prior to 7-10-2002, the reference date as stated in the letter of offer has been taken resulting in a value of Rs. 66.87 per share. 54. Combining all the three values and giving them appropriate weightage, value of each share has been worked out to Rs. 64.18. In applying the weightage, the precedent in Hindustan Lever Employee....
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....o account. It has thereafter proceeded to make the necessary calculations after giving due weightage to various factors. In doing so the valuer has relied upon the principles approved by this Court in Hindustan Lever Employees' Union's case (supra). Learned counsel for the appellants submitted that the principles approved in Hindustan Lever Employees' Union's case (supra) were not relevant and should not have been applied by the valuer. This was because that was a case of amalgamation of two companies and it was in that context that the valuation of the shares had to be determined. It is true that Hindustan Lever Employees' Union's case (supra) related to a case of amalgamation but for determining the value of the shares of the companies for the purpose of equivalence and to determine the ratio in which the shares were to be allotted, the valuer had to determine the value of the shares of the amalgamating companies applying the same accounting principles of valuation which are usually applied by the valuer in valuation of shares for other purposes as well. We, therefore, find no substance in the submission of learned counsel for the appellants that the valuer had committed a mistak....
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....ry industry category reflect the "full year", the "latest quarter" and the "trailing twelve months" figures. The Capital Market source itself says that the companies with an earning per share (EPS) of less than (1) are not considered. According to him the "trailing twelve months" reflects the most current computation of the price earnings multiple and that period includes more companies with an EPS of more than (1) and was, therefore, more representative of the market. 68. The valuer in its report has observed that the Industry P/E of 20.9 is not the correct indicator of the industry. As the industry (glass and glass products) covers 12 companies out of which 6 companies are loss making hence having a negative P/E ratio and the other 3 companies having minimal profit, the Industry Composite P/E ratio of 20.9 is calculated based on P/E ratio of 3 profit making companies only, thereby ignoring the performance of other 9 companies. Moreover P/E ratio of glass and glass product industry is very fluctuating because of infrequent trading of shares of most of the companies in this sector. It is for these reasons that P/E ratio of 9.6 (Source - Capital Market dated March1-14, 2004 secto....
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....ments are considered because parent company is entitled to dividend only and has no right whatsoever in the assets of subsidiary and associate companies. 72. The appellants made a grievance that the capitalization ratio of 15 per cent was taken by Patni & Company whereas the capitalization ratio should have been 8 per cent. It was submitted that the guidelines issued by the CCI had been repealed and, therefore, reliance could not be placed on the aforesaid guidelines. 73. To this the respondents have replied by saying that the CCI guidelines have always been and continued to be a material and significant indicator for purpose of valuation in India. The mere fact that the CCI as a statutory authority has since been abolished does not make the CCI guidelines redundant. 74. The report of Patni & Company shows that the CCI guidelines had been followed which laid down the principles which are applicable in working out the profit earning capacity which involve two important factors, namely - average profit before tax and capitalization ratio. 75. Another objection of the appellants is that if revaluation reserve was considered the Net Asset Value would have come to Rs. 124.82....
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....ly 50 per cent. Adopting these principles and taking into account the discounting rate of 15 per cent applicable in terms of the CCI guidelines a value of Rs. 55.06 per share was computed by the valuer. The valuer also independently applying the yield value and without applying HLL principles computed the value of the shares as Rs. 34.39. After having arrived at two distinct values as aforesaid, the valuer adopted the higher of the two values. 80. We have only referred to some of the objections raised by the appellants and we must observe that several other similar objections were raised by them. We have also noticed the reply of the respondents and in most cases the observations of the valuer. It appears to us that the appellant expects this Court to act as an expert itself. This, we are forbidden from doing. Unless it is shown that some well accepted principle of valuation has been departed from without any reason, or that the approach adopted is patently erroneous or that relevant factors have not been considered by the valuer or that the valuation was made on a fundamentally erroneous basis or that the valuer adopted a demonstrably wrong approach or a fundamental error going....