TaxTMI 
TaxTMI 
2010 (5) TMI 399
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....Industries Ltd. [1996] 87 Comp. Cas. 792^1 (SC), Hindustan Lever Employees' Union v. Hindustan Lever Ltd. [1995] 83 Comp. Cas. 30 (SC) and Maknam Investments Ltd., In re [1996] 87 Comp. Cas. 689 ^2 (Cal.), the Scheme be sanctioned. 1.2 The Scheme has been objected by a shareholder who has affirmed an affidavit for himself and 99 shareholders. The veracity of the Attendance Slip has been disputed and the inspection sought though given was not taken. An adjournment was sought of the meeting by the said objector and the same was disallowed and meeting was held on 13-9-2006. The BSE raised objections to the first Scheme and the same was modified by making the relevant changes. The first objection relates to the appointed date for undervaluing the shares. The financial results are declared every six months. The Attendance Slip was not spacious enough for the notings made. 1.3. Two scrutineers are to be appointed, one is to be a shareholder and the other can be anyone. In the instant case, a shareholder and the Company Secretary were appointed as scrutineers. 1.4 The objector - Krishnagopal Motilal - Chandak (Chandak) has increased his shareholding in spite of objecting to the S....
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....., In re [1970] 40 Comp. Cas. 819 (Guj.), Gobind Pritamdas Malkani v. Amarendra Nath Sircar [1980] 50 Comp. Cas. 219 (Cal.), P.M.P. Auto Industries Ltd., In re [1994] 80 Comp. Cas. 289 (Bom.), 117 Comp. Cas. 718 (sic). Therefore, the Scheme ought to be sanctioned. The first Scheme has been modified by the existing Scheme. All correspondence exchanged between the Stock Exchange and the petitioners has been disclosed in the supplementary affidavit. Such modification was made in view of the directives issued by the Stock Exchange. Non-clearance of the Stock Exchange caused the modifications to be made. 1.8 The Exchange ratio under the first Scheme was 100 : 128 which has not been objected to by Fofalia. Therefore, the objection regarding Exchange ratio cannot be sustained. In the affidavit filed by Chandak in October, 2007, he has admitted that the price of shares is fair and that the valuation of the seed division is 600 crores. If from the demerger Chandak benefits as will appear from the chart handed to Court, the question of raising any objection cannot arise. 1.9 The conversion creates a new majority. In the transferee-company the objectors are getting a stake, which they d....
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....st. This differs from the Attendance Slips which is part of the record. The report of the Chairman and minutes of the meeting have recorded 797 ballots. The Attendance Register also records attendance of 797 shareholders. In paragraph 5(h) of Chandak's affidavit affirmed on 5-2-2007 it has been categorically stated that 173 admission slips were given and therefore 173 ballot papers ought to be there. This has been admitted in the affidavit-in-reply by Pawan Kumar Rastogi (Rastogi) on 11-4-2007. On the basis of the attendance slips given, ballots were cast but have not been found. The objectors were prevented from casting their votes. Therefore, the meeting under section 391(1) of the 1956 Act was not conducted fairly. These are factors which Court is to consider while sanctioning a scheme and 3/4th majority should not be the only guiding criteria. Although the ballots cast were 751, the attendance slips were 619 in number, therefore, 178 are missing. On inspection taken the ballots of Chandak and his proxies have not been found. At page 463 a proxy form of 24+19 shareholders having 20,000 shares has been annexed. No corresponding ballot papers could be found. Although the attendanc....
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....rsion pattern. By the second report, the preferential shares and bonds of 85 crores would on demerger go to FAL. The report of Ernst & Young shows this to be a fair basis of valuation. The conversion proposed has also been accepted by Ernst & Young and FAL's own chartered accountants. Initially FAL was a shell company and steps were taken by allotment of shares to create it into a 100 per cent subsidiary of the transferor-company. This was done in February, 2006. The shareholding of Chandak was known to the applicants. On 3-3-2006, however, the first Scheme was withdrawn. 2.5-2 From 31-5-2006, the second Chapter starts and once again a fairness report being the second fairness report from Ernst & Young is sought. In this second report, the allotment ratio is worked out for the first time. In the first proposal, the allotment ratio was 100 : 128 while in the second proposal the ratio was 60 : 40. There is an increase in the public holding and an application was made for approval of the second Scheme to the Bombay Stock Exchange. By the second Scheme, the Scheme of 2003 was sought to be modified. The liability of the applicant No. 1 in the form of bond and preferential shares of J....
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.... safeguards provided in addition to section 81. Regulation 3(1)(c) of the Takeover Code of 1997 has been omitted, therefore, the SEBI guidelines are to apply to preferential allotments. If section 81(1A) meeting was held then preferential allotment is to be shown in Books and Register of Share prospectively and not retrospectively. The preferential allotment, in the instant case, is dependant on sanction of Scheme and what cannot be permitted under section 81, cannot be allowed under section 391. Single window clearance is permitted only if it is legal. The objector Chandak had 7.21 per cent shares and on sanction of Scheme, his shareholding will be reduced to 3.75 per cent. In case of 7.28 per cent shareholding the offer can be accepted but not on the reduced holding. The Takeover Code of 1997 is under the 1992 Act, and any violation of rules and regulations will attract penalty. Section 81(1A) deals with allotment of preferential shares, this will attract the 1997 Code and violation thereof is an offence. Admittedly no meeting was held under section 81(1A) of the Companies Act. The only meeting held is under section 391. The Scheme is to apply retrospectively from the appointed d....
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....id objections raised the Scheme ought not to be sanctioned. 3. Case of Second Objector FOFALIA 3.1 The Scheme is a complicated one. It not only seeks demerger but something else. 3.2 From a reading of Clause 1.1.3 of the Scheme, it will appear that no business was done by FAL. From a reading of Clause 1.1.2 it will appear that the undertakings were not there and in fact, the investments were only of group companies. The business of the transferor-company related to operations only in respect of the seed division. The sanction of the Scheme will result in increase in shareholding, benefits whereof will be enjoyed by the promoters. The reasons for demerger have not been disclosed and the motive for sanction is ulterior and not for the reasons advocated. The explanatory statement has made an incorrect representation as in Clause 4, it says that it had only the hybrid undertaking. There is no justification in the Scheme for conversion. This is a totally separate issue unconnected with the Scheme and has been made a part of the demerger for converting the instruments into shares. Under the 2003 Scheme, the bonds and preferential shares issued to the transferor-company are sough....
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.... on appeal by order dated 14-12-2006 which supports the said proposition. The decision relied on by the applicants are distinguishable. The instant case is not one of bad faith. The objectors in the reported decisions were getting more while in the instant case, they are getting less by denudation of their shareholding. The majority are expected to act bona fide and in an honest manner and not as is being done in the instant case. The bonds and preferential shares which are the liabilities of the Seed undertaking are not transferred to FAL but are retained by the transferor-company which is contrary to the Income-tax Act and Clause 1.1.7 will take effect without compliance of section 2(19)(AA)(ii) of the Income-tax Act. 3.7 The Stock Exchange has no power to issue directives in a Scheme of Arrangement. The Stock Exchange is only concerned with buying, selling and dealing in securities and not Schemes, under section 391 of the 1956 Act. The powers of the Stock Exchange will appear from section 7A of the 1956 Regulations. From the supplementary affidavit it will appear that the Stock Exchange has not directed modifications in the Scheme as it is not empowered to do so. The reasons....
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....airness of the proposed exchange ratio. 4.3 There is no allegation with regard to the Chairman's Report in the pleadings. Lawyers were deputed to take inspection. As the names of the objectors appear in the attendance register, the attendance slips is insignificant. In the event the objectors were prevented from exercising their votes, nothing prevented them from complaining to Court at the earliest. The existence of cogent evidence is necessary to substantiate the charge, mere suspicion will not be enough, but charge must be established by legal testimony. For the said proposition, reliance is placed on 1886 (11) Moo Indian Appeals 43, Seth Maniklal Mansukhbai v. Raja Bijoy Singh Dudhoria AIR 1921 PC 69 and Duvvur Dasratharammareddy v. State of Andhra Pradesh [1971] 3 SCC 247. Therefore, there has been no procedural lapse. 4.4 In 1975 (3) AER 382, it has been held that promoter shareholders is not a separate class. 1966 (2) Comp. LJ 278 is no longer good law. 5. Reply by Objector Chandak 5.1 Counsel for objector Chandak submits that Duvvur Dasratharammareddy's case (supra) is distinguishable as it a case under the Code of Criminal Procedure, 1886 (11) Moo Indian Appeal....
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....for issuing notice was filed the only audited Balance Sheet available was of 31-3-2005. 6.4 The share exchange ratio can also not be faulted as no better ratio has been produced. The method adopted has also not been challenged nor the method to be adopted suggested. In fact by the share exchange ratio adopted the objector Chandak stands to gain and can have no grievance in case of profits earned. 6.5 The retention of liability by the transferee-company is a decision taken in the commercial wisdom of the management and calls for no inter-ference. 6.6 The next and most important issue to be considered is whether the terms of the Scheme are fair. 6.7 The Scheme, sanction of which is sought seeks demerger of the seed division from the investment division. This does not, however, seem to be the sole purpose of the Scheme. It also seeks conversion of the Zero Coupon Redeemable Preference Shares (ZCRPS) and Zero Coupon Non-Convertible Bonds (ZCNCB) given under the 2003 Scheme. 6.8 By such conversion J.K. Industries Ltd. (JKIL), the promoter-company acquires shares in Florence Alumina Ltd. (FAL), the applicant No. 2 whereby its shareholding increases. This increase will not ....
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....ficient cash-flow. On a reading of the cash-flow statement in the audited Balance Sheet for the year ended 31-3-2005 a sum of Rs. 1,186.82 lakhs was lying to the credit of the applicant No. 1 and, therefore, it was capable of redeeming the Bonds by payment of the 1st instalment. 6.17 A Scheme is aimed at not adversely affecting the shareholders or creditors and, therefore, is placed before the class of shareholders (equity or preference). If the opinion of the shareholder was not needed, the Scheme could have been accepted without their approval. In the instant case, the Scheme is not intended to benefit the shareholder but is pro-promoter. 6.18 Single window clearance though accepted in P.M.P. Auto Industries Ltd.'s case (supra) and followed in subsequent decisions, will not be applicable in the instant case as by virtue of the conversion further shares are being allotted to JKIL and for this purpose, the special procedure laid down in section 81(1A) ought to have been followed. 6.19 The single window clearance contemplated will only apply if the alteration is restricted to the structural changes of the Company for implementation of the Scheme. The issuance of shares for ....