TaxTMI 
TaxTMI 
2009 (7) TMI 767
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....rms of the Scheme without any further act or deed pursuant to section 394 of the Companies Act, 1956. 2. The Demerged Company was incorporated under the provisions of the Indian Companies Act, 1956 in Mumbai on 15-7-2004 under the name "Reliance Infrastructure Developers Private Limited.". Subsequently, the said name has undergone change and the present name of the Demerged Company is "Reliance Communications Limited" with effect from 7-6-2006. On the other hand, Resulting Company was incorporated on 16-4-2001 in the name and style of "Reliance Communications Rajasthan Private Limited". Subsequently, that name has been changed and the present name of the resulting Company is "Reliance Infratel Limited". The Resulting Company is a subsidiary of the Demerged Company. Originally, the Demerged Company held 100 per cent shares in the Resulting Company. However, at present, it has been reduced to 95 per cent, and 5 per cent shares in the Resulting Company are held by Institutions and Banks. 3. The authorised share capital of the Demerged Company is 300,00,00,000 equity shares of Rs. 5 each, valuing Rs. 1500 crores. The issued, subscribed and paid-up capital of the Demerged Company ....
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....er and vesting was done by M/s. R.B. Shah and Associates and certificated by M/s. Chaturvedi and Shah, Chartered Accountants. 5. To effectuate the decision of the Board of Directors, both the Companies filed separate Company Applications being Company Application Nos. 438/2009 and 439/2009 respectively before the Company Judge for directions. On 23-4-2009, the respective companies were directed to convene meeting of the equity shareholders at the specified place, date and time for the purpose of considering and if thought fit, approving with or without modification the arrangement embodied in the Scheme of Arrangement. The said order further nominated persons who were to act as Chairman of the meeting or any adjourned meeting and to report the result of the meeting to the Company Judge. It was further ordered that the convening and holding of the meeting of the sole secured creditor of the Demerged Company to consider and approve the proposed Scheme of Arrangement was dispensed with in view of the averment in Paragraph 18 of the affidavit that the Scheme would not affect the sole secured creditor. The Court was also pleased to dispense with convening and holding of the meeting o....
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....of the fact as to how the Resolution was approved by the shareholders with overwhelming majority as high as constituting 99.32 per cent in number and representing 99.9999 per cent in value, present and voting in person or by proxy or by authorised representative voted in favour of the Scheme. Only 15 equity shareholders holding 2038 shares of Rs. 5 each fully paid-up representing in value the sum of Rs. 10,190 constituting 0.6784 per cent in number and representing 0.0001 per cent in value, present and voting in person or by proxy or by authorised representative voted against the Scheme. The report mentions that the Scheme was approved by the shareholders with requisite majority. 7. Insofar as Chairman's report submitted by Justice M.H. Kania (Retired Chief Justice of India) of the meeting of the equity shareholders of the Resulting Company, it is stated that the meeting was held on the appointed place, time and date after issuance of notices in terms of the order of the Court. In the said meeting, the shareholders requested for more time to study the Scheme and with the unanimous approval of the shareholders present, the Chairman adjourned the meeting to Friday, 5-6-2009 at the....
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....e proposed Scheme and on scrutiny of each of these complaints referred to in the affidavit, it was found that the Scheme was not prejudicial to the interest of the shareholders and the public. Insofar as the points raised by the Regional Director for consideration of the Scheme, the same read thus : "7. The Deponent further submits that : (a )As per the explanatory statement under section 393 of the Companies Act, 1956 circulated to the members of R. Com. and RITL, the net consideration payable by RITL to R. Com. is Rs. 6718.87 crores after adjustment of the liabilities attributable to Optic Fiber Undertaking. In this connection the deponent further submits that clause 2.2 of the scheme dealing with the consideration does not quantify the net consideration payable by RITL on transfer of Optic Fiber Undertaking from R. Com. Hence the petitioners may be directed to file an undertaking before this Hon'ble High Court on the net consideration involved in the scheme. (b )Clause 2.4-3 of the scheme is not in conformity with mandatory Accounting Standard-11 prescribed by the Institute of Chartered Accountants of India. Hence Resulting Company may be directed to comply with Account....
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.... a shareholder of the Demerged Company, did not personally attend the meeting of the equity shareholders convened pursuant to the direction issued by this Court, but had opposed the Scheme of Arrangement by voting (through proxy) against the Scheme. He has, however, stated that he had sent his objection to Registrar of Companies and Regional Director dated 9-7-2009, which reads thus : "9th July 2009, The Registrar of Companies, Everest Building, 100, Marine Drive, Mumbai-400 002. The Regional Director, Ministry of Corporate Affairs, Everest Building, 100, Marine Drive, Mumbai-400 002. Sir, Sub : Scheme of arrangement between Reliance Communications Limited ("Company") and Reliance Infratel Limited (RITL). I am a shareholder of the Company and holding 55 shares under the DP Id-Client Ids IN30017510197978 and 250 shares under the DP Id - Client Ids 1302340000196414. The Company has filed a petition before the Hon'ble Court of Judicature at Bombay for approving the scheme of arrangement to de-merge the Optic Fiber Undertaking of the Company to RITL. I had opposed the scheme of arrangement as it was not possible to ascertain another the scheme ....
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....est to the Company since the appreciation in value of the assets demerged will only accrue to RITL. 6. Accounting treatment proposed to be followed by the Company as mentioned in para 2.3-3 of the Scheme of Arrangement for accounting the difference between the consideration and the net book value is not in line with the Accounting Standards prescribed by the Companies (Accounting Standards) Rules, 2006. 7. Similarly, the Company's proposal as mentioned in para 2.3-4 of the Scheme of Arrangement to utilize the above surplus amount for meeting the future foreign exchange losses is not relevant to the demerger. Since all the critical information required to form an opinion about the benefits that will accrue to the Company and the shareholders are not available in the subject scheme of arrangement, I oppose the subject scheme of arrangement and will be filing necessary petitions before the Hon'ble High Court of Judicature at Bombay. I request you to seek all the above information from the Company before affirming to the Hon'ble Court that the subject scheme is not prejudicial to the interest of the shareholders. Thanking you, Yours faithfully, Sd/-." 12. Accord....
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....ost of this Application be provided for. (e )For such further and other reliefs as this Hon'ble Court may deem fit and proper in the nature and circumstances of the case." 14. This Applicant asserts that they are one of the Creditor of the Demerged Company as the Company owes a sum of Rs. 74,51,125. According to this Applicant, even though an unsecured creditor, no notice of the Petition has been served, nor any intimation with regard to the proposed Scheme was received. Whereas, incorrect statement is made by the Company of such compliance. On this basis, the Applicant contends that the order passed by this Court of dispensation of convening of meeting of the unsecured creditors, deserves to be set-aside. According to this Applicant, no meeting was held. As per his information, as of 31-12-2008, the Demerged Company has an unsecured loan of about Rs. 27,000 crores and current liabilities of Rs. 31,000 crores. 15. There are two other Applications filed on 13-7-2009 being company Application No. 760/2009 and 761/2009 by Rajkot Saher/Jilla Grahak Suraksha Mandal praying for following reliefs : "(a )That this Hon'ble High Court may be pleased to dismiss and set-aside the o....
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....aterial on record, it can be inferred that this Applicant has been set up by Rajkot Saher/Jilla Grahak Suraksha Mandal, who in turn, have no locus to oppose the proposed Scheme. There is substance in this grievance. Indeed, the said Applicant is a shareholder and had opposed the Scheme of Arrangement by voting, albeit through proxy. However, he did not think it necessary to remain personally present in the meeting so as to educate the other shareholders about the shortcomings, drawbacks or irregularities and illegalities in the proposed Scheme. As observed by the Apex Court in the case of Miheer H. Mafatlal v. Mafatlal Industries Ltd. AIR 1997 SC 506 (See paragraphs 32, 34 and 39), the objections now raised by such Applicant either before the Registrar of Companies/Regional Director or for that matter, before this Court, at the time of opposing the Scheme which was put for the sanction of the Court are clearly afterthought and for the sake of it. It is too late in the day for such objector to contend that the Scheme was unfair to him or other similarly placed persons. As a matter of fact, the Applicant admits that he was inspired to file Applications before this Court and to interv....
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....es in the proposed Scheme. As is noted earlier, the Scheme has been approved with overwhelming majority of shareholders of the Demerged Company and unanimously by the shareholders of the Resulting Company. The opposition constituted only a minscule fraction of 0.6784 per cent in number and representing 0.0001 per cent in value of the Demerged Company. In that, only 15 equity shareholders holding 2038 equity shares of Rs. 5 each fully paid up representing in value sum of Rs. 10,190 voted against the Scheme. Whereas, the overwhelming majority of the shareholders consciously voted in favour of the Scheme. Accordingly, I am convinced that there was no reason to adjourn the matter for the reason stated by the said intervenor. If at all, the Applicant was so keen, he ought to have approached this Court well in advance to seek appropriate directions and not make such grievance for the first time on the date of hearing of the Petition. The only purpose whereof would be to protract the hearing of the Petition for reasons best known to him. The fact that the hearing could be rescheduled to a short date, in my opinion, cannot be the basis to entertain the request of such Applicant. Taking ove....
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....eliance Communication Infrastructure Limited declared a loss of Rs. 1,852 crores in its books. As aforesaid, all issues raised with regard to the said transfers, in my opinion, are of no avail. I would, however, confine the inquiry to matters related to the present Scheme. 22. Insofar as the present Scheme is concerned, the grievance is that, the purpose of the Scheme is to transfer unknown, unidentified and unclear assets from the Demerged Company to the Resulting Company. The valuation of the assets is shown as Rs. 7,206 Crores. It is argued that it is not clear as to which parts of the Optic Fiber are lying with the Demerged Company and the one that was to be transferred to the Resulting Company. According to the Objectors, the disclosures made in the Scheme with respect to the value of the Optic Fiber Limited was vague and not transparent. Further, the Company has not disclosed the book value of the assets which are being transferred to the Resulting Company under the Scheme of Arrangement. This argument will have to be stated to be rejected. It clearly overlooks the figures of the value of Optic Fiber Undertaking reflected in the Books of Account and more so, in the valuati....
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....ads thus : "Summary of Valuation of Specified Tangible Fixed Assets Optical Fiber Network of Reliance Communications Ltd. Ref. No. : RBSA/MUM/2008-09/ADAGDate: 15th March, 2009 1.1 We have been engaged and appointed as Valuation Consultants by Reliance Anil Dhirubhai Ambani Group (Reliance ADAG) company i.e. Reliance Communications Limited (RCOM) for Valuation of Specified Tangible Fixed Assets - Optical Fiber Network of Reliance Communications Ltd. (RCOM) as on 1-4-2008. 1.2 The purpose of the Valuation is determining the 'Market Value' of the Optical Fiber Network of RCOM for reorganization purposes. The material date of Valuation is 1-4-2008. 1.3 RCOM, and Reliance Infratel Ltd. (RITL) are part of Reliance Anil Dhirubhai Ambani Group; and are undergoing a major reorganization/ restructuring as per a Scheme of Arrangement proposed to be filed in the High Court of Mumbai. As per the said proposed scheme the Optical Fiber Network of RCOM shall vest with RITL with effect from 1-4-2008. 1.4 Generally, Depreciated Replacement Cost (DRC) is the Market Value of the Fixed Assets, subject to continued potential profitability of industry and enterprise, for assets that ca....
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....4 1022707044 1022707044 1022707044 Sr. No. Particulars Gross Block Net Block Gross current Replacement Cost Depreciated 10. WBS consumption relating to CWIP 2770054847 2770054847 2770054847 2770054847 11. Pre-Operative Expenses (Item 8,9,10 and 11 are not Valued but taken at cost) 945842752 945842752 945842752 945842752 Grand Total(including CWIP) 57764189144 53221387499 76226777956 72063556081 *Includes the complete OFC network of RCIL transferred from RCIL to RCOM on 1-4-2008. 1.6 The total 'Market Value' of Specified Fixed Assets - Optical Fiber Network of Reliance Communications Limited (RCL) has been assessed in the range of Rs. 6,201.86 Crores. This amounts do not include the assets under the asset head Capital Work in Progress-CWIP, amounting to Rs. 1,004.49 Crores, which has not been valued and has been adopted at cost in the aforesaid tabulation. 1.7 This Valuation Certificate is privileged, and is intended for internal use of Reliance Communications and its group companies. We understand that this Valuation Certificate will be....
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.... of the Scheme. Moreover, the Scheme clearly spells out the scope of arrangement. In the definitions in Part-I of the Scheme, definition of Optic Fiber Undertaking has been articulated as follows : "1.1.6 "Optic Fiber Undertaking" means the entire business of the Demerged Company relating to Optic Fiber along with all related assets, liabilities, employees including specifically the following : 1.1.6.1 all assets wherever situated, whether movable or immovable, leasehold or freehold, tangible or intangible, including all capital work in progress, plant and machinery, equipment, trademarks, trade names, brands, investments and other IP rights, vehicles, furniture, fixtures, office equipment, computer installations, electrical appliances, accessories pertaining to the Optic Fiber Undertaking; 1.1.6.2 all liabilities present and future (including contingent liabilities pertaining to or relatable to the Optic Fiber Undertaking), as may be determined by the Board of the Demerged Company; 1.1.6.3 all rights and licenses, all assignments and grants thereof, all permits, registrations, rights (including rights under any agreement, contracts, applications, letters of intent etc.....
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....ulting Company, subject to non-exclusive right of the Demerged Company to use the optic fiber. The consideration for such transfer is provided in Clause 2.2, Clause 2.2.1 stipulates that the consideration for transfer and vesting of Optic Fiber Undertaking of the Demerged Company to the Resulting Company shall be fair value as may be determined by renowned valuers to be appointed mutually by the Demerged Company and the Resulting Company. It further provides that the Valuers shall assign values to each asset and liability of the Optic Fiber Undertaking which shall be aggregated to determine the consideration for the transfer. 27. As it is a Scheme for transfer of undertaking, non-mention of provision regarding the user charges by the Demerged Company for use of optic fiber, does not militate against the Scheme. That is an arrangement post demerger Scheme to be evolved and adopted by the Board of Directors of the two Companies, as may be suited to them. Obviously, the Board of Directors would act in the best interest of the stakeholders of the respective Companies. It would be a different matter if the Objectors were to substantiate that the valuation of the assets of the Underta....
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....Bank of India, as can be discerned from its Annual Policy Statement 2009-10, the system of BPLR has evolved in such a manner that it has lost its relevance as a meaningful reference rate as bulk of loans are advanced below BPLR. This position can be discerned from paragraph 87 of the Report which reads thus :- "(a) BPLR System: Review 87. Consequent to the Mid-Term Review of October 2005, the Indian Banks' Association (IBA) issued guidelines for determination of Benchmark Prime Lending Rate (BPLR) by banks for appropriate pricing of credit. Over time, however, the system of BPLR has evolved in such a manner that it has lost its relevance as a meaningful reference rate as bulk of loans is advanced below BPLR. Furthermore, this impedes the smooth transmission of monetary signals and makes the loan pricing system non-transparent. It has, therefore, become necessary to review the current procedures and processes of pricing of credit. Accordingly, it is proposed : to constitute a Working Group to review the present BPLR system and suggest changes to make credit pricing more transparent. The Working Group would consult all the stakeholders and submit its report by end- August 20....
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....cial wisdom of the shareholders who have approved the Scheme and also thought it appropriate to bestow complete discretion in the Board of Directors in whom they have full confidence. As aforesaid, there is no law which prohibits deferred payment by the subsidiary company in relation to the commitment under the Scheme sanctioned by the Court; nor there is any law which prescribes for outer limit for such payment. The fact that the payment will be made in deferred manner, by itself, does not result in unfairness to the shareholders of the Demerged Company. In that, the Demerged Company will be suitably compensated by way of interest as provided in Clause 2.2.2 until the consideration is fully paid by the Resulting Company. Accordingly, the issue under consideration does not commend to me. 32. The next issue raised is about breach of accounting standard by the Demerged Company. This argument is made with reference to clause 2.3.3. Clause 2.3.3 of the Scheme reads thus :- "2.3.3 The difference between the consideration and net book value of the Optic Fiber Undertaking, shall unless otherwise determined by the Board of the Demerged Company be credited to the General Reserve Accou....
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....ts own merits in accordance with law, uninfluenced by the approval of the present Scheme. If the Scheme results in breach of any mandatory accounting standards, all questions in that behalf will have to be addressed at the appropriate stage in the concerned proceedings. 35. It may be useful to advert to unreported decision of our High Court in the case of Jindal Iron & Steel Co. Ltd. v. Asstt. CIT [Company Application No. 123 of 2004, dated 2-9-2004]. Similar apprehension expressed by the objectors in that case (incidentally Income-tax Department), was answered in the following manner :- "Mr. Chatterjee then shifted to another argument. He brought to the Court's notice a judgment of the Supreme Court (229 ITR 809) in the case of Marshall & Sons. Mr. Chatterjee submitted that, as per this decision, the merger takes effect from the Appointed Date since in this case the merger is with effect from 1-4-2003. All options of the Income-tax Department would be foreclosed as regards investigation into the fact that the books of account of the Petitioner do not record the liability towards Balli Klockner GmbH, the Creditor objecting to the proposed merger. Therefore, Mr. Chatterjee's l....
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.... the Petitioners through Counsel undertake that they would not plead that the approval of the present Scheme as a defence in the Income-tax proceedings - either pending or to be resorted to by the appropriate Authority. Accordingly, the issue under consideration needs no further elaboration. 38. The next issue is about the provision made in clause 2.3.4, which reads thus :- "2.3.4 Losses on account of changes in exchange rates, relating to loans/liabilities denominated in foreign currencies taken/incurred which have been or are debited to profit and loss account of any year upto the year ending 31-3-2011 may as determined by the Board of Directors and to the extent the balances are available, be adjusted by a corresponding withdrawal from the General Reserves of the demerged company." 39. According to the Objectors, this provision is not relevant to the Scheme of demerger. Insofar as this provision in the Scheme is concerned, none of the Authorities have objected to the same. According to the Companies, it is imperative to make provision regarding loss on account of changes in exchange rates. The Company has relied on the Notification issued by the Ministry of Corporate Af....
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....e designated as a long-term foreign currency monetary item, if the asset or liability is expressed in a foreign currency and has a term of 12 months or more at the date of origination of the asset or liability. Any difference pertaining to accounting periods which commenced on or after 7-12-2006, previously recognized in the profit and loss account before the exercise of the option shall be reversed insofar as it relates to the acquisition of a depreciable capital asset by addition or deduction from the cost of the asset and in other cases by transfer to "Foreign Currency Monetary Item Translation Difference Account" in both cases, by debit or credit, as the case may be, to the general reserve. If the option stated in this paragraph is exercised, disclosure shall be made of the fact of such exercise of such option and of the amount remaining to be amortized in the financial statements of the period in which such option is exercised and in every subsequent period so long as any exchange difference remains unamortized." [F.NO. 17/33/2008/CL-V] JITESH KHOSLA, Jt. Secy. Note. - The principal notification was published in the Gazette of India, Extraordinary, Part II, section 3,....
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....nterprise, as expressed in the reporting currency by applying the closing rate, for making payment towards the whole or a part of the cost of the assets or for repayment of the whole or a part of the monies borrowed by the enterprise from any person, directly or indirectly, in foreign currency specifically for the purpose of acquiring those assets.' 33. As stated above, what triggers the adjustment in the actual cost of the assets, in terms of unamended section 43A of the 1961 Act is the change in the rate of exchange subsequent to the acquisition of asset in foreign currency. The section mandates that at any time there is change in the rate of exchange, the same may be given effect to by way of adjustment of the carrying cost of the fixed assets acquired in foreign currency. But for section 43A which corresponds to para 10 of AS-11 such adjustment in the carrying amount of the fixed assets was not possible, particularly in the light of section 43(1). The unamended section 43A nowhere required as condition precedent for making necessary adjustment in the carrying amount of the fixed asset that there should be actual payment of the increased/decreased liability as a consequence o....
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....ity and in furtherance of this Scheme would part with the assets worth Rs. 7,206 crores. That may cause prejudice to the Creditors. Except this Creditor, no other Creditor has come forward to oppose the present Scheme. The apprehension of this Creditor is completely misplaced. Notably, the Scheme does not affect the claim of unsecured Creditors at all. Besides, the Demerged Company would receive consideration from the Resulting Company in lieu of transfer of specified undertaking on the basis of valuation of the said assets already done. 45. Be that as it may, as has been rightly contended by the Petitioners, the objection of this Creditor is not bona fide. This Creditor claims outstanding amount of around Rs. 75,00,000 (Rupees Seventy-five lakhs), which debt is almost over four years old. This Creditor has not resorted to any legal action for recovery of its outstanding dues for reasons best known to it. Besides, it was argued that this Applicant has made incorrect statement in affidavit on oath that he has not been served with the notice. Whereas, personal notice was dispatched to this Applicant in addition to the publication in terms of the direction given by the Court. In su....