TaxTMI 
TaxTMI 
2009 (6) TMI 583
X X X X Extracts X X X X
X X X X Extracts X X X X
....visions of Companies Act, 1956. That name was subsequently changed to Reliance Textile Industries Limited on 11-3-1977. Later on, the place of registered office of the Petitioner company was changed from State of Karnataka to State of Maharashtra on 2-7-1977. Thereafter, the name of the Petitioner Company was changed to Reliance Industries Limited on 27-6-1985. The shares of the Petitioner Company are listed on the Bombay Stock Exchange and the National Stock Exchange of India. 3.The Petitioner Company has been established to carry on business set out in the Memorandum of Association, which is appended to the Petition. The Board of Directors of both the Transferor as well as Transferee Company in their respective Board Meetings approved the proposed scheme, keeping in mind the exchange ratio suggested by M/s. Ernst & Young Private Limited and M/s. Morgan Stanley India Company Private Limited. The said swap ratio was approved by other two consultants appointed to give their fairness report namely Merrill Lynch and City Group Global Market India Ltd. 4. The Board of Directors of the Petitioner Company in its meeting on 2-3-2009 approved the scheme. The Scheme also received appr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re was declared invalid. Accordingly, the scheme was approved unanimously by the Secured creditors (including debenture holders) present and voting, either in person or by proxy at the said meeting. In the meeting of unsecured Creditors, 994 unsecured creditors either personally or by proxy or authorized representative attended the said meeting. Out of them 801 unsecured creditors having aggregate outstanding value of Rs. 566.76 Crore and constituting 100 per cent in number representing 100 per cent in value, present in person or by proxy and voting at the meeting, voted in favour of the Scheme. No unsecured creditors present in person or by proxy and voting at the meeting, voted against the Scheme. Whereas, votes of 193 unsecured creditors having outstanding value of Rs. 13.37 crores were declared invalid. Accordingly, the scheme was approved unanimously by the unsecured creditors present either in person or by proxy and voting at the said meetings. 5. After the Scheme was duly approved by overwhelming majority of the Equity shareholders and unanimously by the secured and unsecured Creditors, present Petition has been moved by the Transferee Company for sanction of the scheme o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Board meetings held on 2-3-2009, have approved the proposed scheme. Both the Transferor and Transferee companies being listed Companies, have obtained approval from the concerned Stock Exchanges. The Petitioner thereafter filed application seeking direction from this Court to hold meeting of its shareholders and creditors to seek their approval to the scheme. This Court issued certain directions on 6-3-2009, including to hold meetings on 4-4-2009. The Petitioner Company has complied with the directions given by this Court. It is noticed that all the relevant documents including valuation report and fairness opinion issued in relation to the scheme were kept for inspection of the shareholders and creditors of the Petitioner Company upto the date of meetings. In the meeting of the Equity Shareholders, Secured Creditors (including debenture holders) and Unsecured Creditors of the Petitioner company convened on 4-4-2009, the Scheme was approved with overwhelming majority of the Equity Shareholders and unanimously by the Secured Creditors (including debenture holders) and Unsecured Creditors of the Petitioner Company, present and voting at the respective meetings. Significantly, the R....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bjector Shailesh Mehta was in relation to the contents of the valuation report. He was at pains to point out that the valuers' report if read clause by clause or as a whole clearly indicates that no details are forthcoming. Forecast is not given, nor the valuation of the shares of the Transferee Company and the basis on which the same is done can be discerned. He submits that the report clearly admits of the fact that due diligence has not been carried out. In his submission, the report gives conflicting opinion, without disclosing any logic. Besides, it is only a document stating the conclusion of the valuers. Even with regard to the contents of the fairness report, similar criticism was made. It was stated that the basis on which the report is founded is not disclosed in any of this report. Adopting the same argument Counsel for the other objector Mr. Anup Kumar Seth, addition- ally argued that valuation done by the third Valuer M/s. City Group has not been produced by the Petitioner Company. The Valuation/Fairness Reports, according to him, fail to give arithmetical calculation on the basis of which the final conclusion has been reached by the concerned expert. It is argued that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s no more res integra. The objections which are canvassed before this Court in my opinion, would not militate against the Petitioner Company. For, it cannot be said that any requisite statutory procedure has not been complied with. Nor it is a case where the scheme is not supported by requisite majority of votes of class of stakeholders. Significantly, in the present case the Companies appointed a renowned firm to undertake the determination of swap ratio of the respective shares. No one has doubted the integrity or honesty of the said expert. Moreover, the Company got checked and approved the opinion of the former by two other indepen- dent firms, who in turn have agreed with the said determination to be fair. It is also not possible to take the view that the concerned meetings of the Creditors or members or any class of them were not furnished with the relevant material to enable them to arrive at an informed decision for approving the scheme in question. On the other hand, it is noticed that requisite majority of the concerned class of voters have found the scheme to be just and fair to the class as a whole. If so, their decision would legitimately bind even the dissenting membe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ved at by the Company was incorrect, observed thus :- "In my opinion, the exchange ratio as arrived at by Mr. Malegam has received the approval of shareholders holding more than 99 per cent (in number and value) shares at the meetings. No one except the shareholders holding minimum percentage of shares have complained before me. The valuation has been confirmed to be fair by two eminent firms of auditors. It would be extremely difficult to hold that the same is unfair. In any case, it has been approved by an overwhelming majority of persons affected and there is no basis to doubt their judgment. I, therefore, do not find any substance in this objection." This view taken by the High Court has been approved by the Apex Court in the case of Hindustan Lever Employees' Union (supra). As observed earlier, the Apex Court went on to hold that what is imperative is that such determination of valuation or determination done by the company should not be contrary to the provisions of law or unfair to the class of stakeholder of the Company, which was being merged. If it was a case covered by such situation, the Court would be within its power to refuse approval to the proposed scheme. Re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ort prepared by Merrill Lynch if read as a whole, it takes into account all the relevant factors which ought to be kept in mind to form an opinion about the swap ratio. The valuers have indicated the approach and the basis of the amalgamation. It has referred to four possible methods that could be borne in mind for arrival of the decision. Each method has been analysed in the report. Insofar as net asset value methodology is concerned, it is mentioned that the valuers have computed net asset value of equity shares of both the companies. They have used the provisional consolidated balance sheet as at 31-12-2008 of RIL, and provisional balance sheet as at 31-12-2008 of RPL to make suitable adjustment as deemed appropriate. The valuers have adverted to the Comparable Companies' Multiple (CCM) Method. It is noted in the report that the valuers have used Enterprises Value (EV) to EBITDA valuation multiple of comparable listed companies for the purpose of the valuation analysis. They have then considered Historical and Current Market Price Method which is with reference to the equity shares quoted on a Stock Exchange. Significantly, the valuers have adverted to the exposition of the A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d various qualitative factors relevant to each company and the business dynamics and growth potentials of the business of the Companies, having regard to information base, management representations and perceptions, key underlying assumption and limitations. In the ultimate analysis, valuation will have to be tempered by the exercise of judicious discretion and judgment taking into account all the relevant factors. There will always be several factors, e.g. quality and integrity of the management, present and prospective competition, yield on comparable securities and market sentiment, etc., which are not evident from the face of the balance sheets but which will strongly influence the worth of a share. This concept is also recognized in judicial decisions. For example, Viscount Simon Bd in Gold Coast Selection Trust Ltd. v. Humphrey reported in 30 TC 209 (House of Lords) and quoted with approval by the Supreme Court of India in case reported in 176 ITR 417 as under : 'If the asset takes the form of fully paid shares, the valuation will take into account not only the terms of the agreement but a number of other factors, such as prospective yield, marketability, the general ou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....out analysing the relevant matter. Looking at the report, it is not possible to come to that conclusion. The report refers to aspects which according to the experts would require consideration for arriving at decision regarding appropriateness of share swap ratio. It is not the case of the objectors that said considerations were extraneous as such. Nor the objectors are in a position to point out as to how the opinion recorded by the experts regarding swap ratio can be termed as absurd or manifestly wrong. Suffice it to observe that the reports given by the experts which were the basis to accord approval by the Board of Directors cannot be said to suffer from the vice of non-application of mind. The fact that the entire process was completed in short spell, may at best indicate that the Experts gave their opinion on urgent basis. We cannot be oblivious to the fact that with the development in computer technology, the working of calculation can be programmed. If the basic figures are fed in the computer, the calculations howsoever complicated would become readily available. Moreover, even due to the development in communication technology on account of fax, e-mail, video conferencin....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... clause by clause and as a whole, no fault can be found with the ultimate opinion reached by the experts regarding share swap ratio, which is founded on tangible material and basis. I am not at all impressed by the argument of the objectors that the report is manifestation of conflicting opinion in any manner. The fact that the language of the report would give an impression that the Expert does not take the responsibility of the accuracy of the figures furnished to them by the Company or that they have not made any independent valuation of the assets and liabilities of the companies on their own, does not mean that the relevant factors for determination of swap ratio have not been considered by the experts. Obviously, the opinion of the Experts is based on the information provided by the Company. There is nothing to show that the figures available in the Books of Account provided to the Experts were incorrect or otherwise. Thus, there is nothing in the said Reports to indicate that the consideration weighed with the Experts in arriving at the opinion is impermissible or unacceptable. It is not possible to countenance the grievance of the objectors that the reports deprive the Cour....
X X X X Extracts X X X X
X X X X Extracts X X X X
....7) Even in the present case, no one has doubted the integrity and honesty of the valuers, who have given their share valuation report or fairness report, as the case may be. Nor the objectors have been able to point out that the method adopted by the valuers was impermissible or absurd. If so, I find no reason to discard the valuation of shares or the swap ratio determined by the Experts. 15. Insofar as the grievance made by the objectors that the experts have not reckoned the impact of the liability of the Company in relation to the pending proceedings against the Company pertaining Gas Supply Agreement. The Petitioner in the reply filed before this Court has stated that the facts relating to the said proceedings have been in public domain. The valuers and advisors were aware of and took the same into account as is normally done in similar circumstances. Even if this statement appearing in the affidavit was to be ignored as it is not supported by the contents of the Reports, in my opinion, it would make no difference. Inasmuch as, once the valuation report is accepted, the impact due to the outcome of the pending legal proceedings cannot be the basis to reject the scheme pro....