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2009 (12) TMI 527
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....rom buy-back of 'Foreign Currency Convertible Bonds' (FCCBs) and for utilizing 'RRA' for all or any of the expenses as enumerated in clause 1.5, which reads as under : 1.5"Expenses" means and without limiting the generality of the foregoing, includes, inter alia, the following items accounted for in the financial statements of Aurobindo : 1.5.1Amount to be written off towards obsolete or unrealizable assets, whether tangible or intangible or fixed or current; 1.5.2Any unrealizable loans and/or advances, whether recoverable in cash or in kind, whether belonging to Aurobindo or its Subsidiaries and arising on preparation of stand alone and/or Consolidated Financial Statements of Aurobindo; 1.5.3Interest and other financial charges receivable and outstanding for such period as may be determined by the Board on loans/advances made to subsidiaries; 1.5.4Impairment, amortization and/or write off of goodwill; 1.5.5Diminution in the value of investments in subsidiary companies and/or Joint Ventures of Aurobindo and/or any of its subsi-diaries and consequent impairment of goodwill and accu- mulated losses of such subsidiaries on consolidation, in the financial Statement of....
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....g the period commencing from financial years 1997-98 to 2000-01. The details of amounts credited to CRR from out of profits is as follows: Sl. No. Financial Year ending in 31st March Amount credited (in 000s) 1. 1998 46.58 2. 1999 13,388.13 3. 2000 65,475.29 4. 2001 11,090.00 Total 90,000.00 4. After transferring amounts to CRR in four financial years, Aurobindo redeemed preference shares allotted to Canara Bank on 20-12-2000. The shares allotted to SBI Capital Markets and Global Trust Bank were redeemed on 17-5-2000 and 25-5-2000 respectively. To that effect, the company also filed Form No. 5 in accordance with sections 95, 97, 97A(2) and 81(4) of the Companies Act with the Registrar of Companies (RoC). 5. To meet financial requirements, Aurobindo issued FCCBs twice in 2005-06 and 2006-07. The first of these two issues is for 60 million US$ due on 2010 convertible into ordinary shares of Aurobindo. The second one was in two tranches. Tranch A is for US$ 150 million and tranch B is Rs. 50,000,000. The first issue is redeemable on 11-8-2010 and the second issue is redeemable on 11-8-2010 and on 17-5-2011. R....
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....fficient to discharge the liabilities. Aurobindo also obtained no objection letters to the proposed Scheme from Bombay Stock Exchange and National Stock Exchange. Therefore, this application is filed under sections 391 to 393, read with sections 100 to 103, of the Companies Act. This Court ordered notice to Central Government while directing publication of notice of hearing in two newspapers. Aurobindo's counsel took out notice and also served papers on Central Government i.e., Regional Director, Department of Company Affairs, Chennai. No objections have been received by the Court nor any person appeared when the matter was heard. The Registrar of Companies (RoC) purporting to act under authorization issued by Regional Director of Department of Corporate Affairs filed an affidavit stating that Central Government decided not to make any objection to the proposed Scheme. 8. This Court heard learned counsel for Aurobindo on 7-7-2009 and 8-7-2009 and reserved the Orders. Again, the matter was directed to be listed 'For Being Mentioned' for certain clarifications on 20-7-2009 and 27-7-2009. The counsel reiterated the principles governing the cases under the Companies Act which requir....
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....s aspect. The Court, if necessary, can pierce the view of apparent corporate purpose underlying the scheme and can judiciously X-ray the same. 7.That the company Court has also to satisfy itself that members or class of members or creditors or class of creditors, as the case may be, were action bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising the same class whom they purported to represent. 8.That the scheme as a whole is also found to be just, fair and reasonable from the point of view of the prudent men of business taking a commercial decision beneficial of the class represented by them for whom the scheme is meant. 9.Once the aforesaid broad parameters about the requirement of a scheme for getting sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the Court there could be a better scheme for the company and its members or creditors for whom the scheme is framed. The Court ....
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....te excesses and is intended to subserve public interest. Of late, the corporate world derives abundant sustained strength by State support which comes by way of direct/indirect financial partici-pation, subsidized infrastructural facilities, continuous flow of supplies of human resources and sovereign guarantees where international finances are involved. Therefore, even though the Court ought to view the Scheme of Arrangement submitted for approval with deference to the wishes of proposers and members, nevertheless the Court should be cautious not to be swayed by approval of imposing majority. All decisions of majority at all times cannot be presumed to be legal or legitimate, and corporate leadership cannot always be presumed to be correct in absolute terms. The Court when called upon to examine a scheme for the purpose of according sanction, must therefore keep in view not only the subject matter before it but also look to effect of its decision on the future corporate arrangements. Reduction of Share Capital vis-a-vis Capital Redemption Reserve 13. Capital includes 'share capital' which may again comprise equity share capital and preference share capital (Sections 85 and 8....
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....ities not exceeding 25 per cent or total paid-up equity capital in a financial year. It is now well accepted that the companies decision to purchase or buy-back its own shares from out of free reserves or share premium account is "an indirect method of reducing capital of the company" (See Traver v. Witworth [1887] 12 AC 409 (HL) and Ramesh B. Desai v. Bipin Wadilal Mehta [2006] 69 SCL 211 (SC). 16. In addition to reduction of capital by buy-back of shares, law also contemplates yet another method of reduction of share capital. This is by way of a deemed provision, which creates a fiction as if it amounts to reduction of share capital. Here it is necessary to refer to power of the company to issue redeemable preference shares and method of redeeming such preference shares. For ready reference, section 80 of the Companies Act to the extent relevant [comitting sub-sections (2), (4), (5A) and (6)], is extracted below : "80. Power to issue redeemable Preference Shares.-(1) Subject to the provisions of this section, a company limited by shares may, if so authorized by its articles, issue preference shares which are, or at the option of the company are to be liable, to be redeemed ....
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....share capital. So to say, if fresh issue of shares is made even if such proceeds of fresh issue of shares are utilized for redemption of preference shares, it shall not be treated as reducing the authorized share capital. However, if the company redeems fully paid-up preference shares from out of the profits, it is required to follow the procedure applicable for reduction of share capital. 18. Section 80(1) read with its proviso, especially clauses (a) and (d) thereof is to the effect that when shares are redeemed out of distributable profits, the company is required to follow two things, namely, (i) to create and transfer to (from out of profits) Capital Redemption Reserve (CRR) and (ii) to do so, follow the provisions of the Companies Act relating to reduction of share capital. It may look little odd that when the proceeds of fresh issue of shares are utilized for redemption of preference shares, provisions relating to reduction of share capital are not applied but when distributable profits are utilized for reduction of the preference shares, the provisions relating to reduction of share capital are applied. The intention of Legislature appears to be the following. When the p....
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....shares, after approval of the Court, the question of further availability of CRR does not arise. 20. The fully paid preference shares issued by a company are always redeemed at the face value or at the issue price only. In a given case, if CRR created by the company exceed or far exceeds the face value of the redeemable fully paid preference shares, how this CRR Account has to be adjusted or used? Section 80(5) of the Companies Act deals with a situation which enables the company to apply CRR in paying up unissued shares of the company to be issued to the members of the company as fully paid bonus shares. Section 80(5A) of the Companies Act contains non obstante clause and indicates that CRR can be applied only for redeeming fully paid-up preference shares and/or for issuing bonus shares to the members. The same cannot be used for any other purpose. 21. The above view is also supported by the 'Textbook Writers', C.R. Datta, the learned Author "the Company Law" (sixth edition, 2008) elucidated the legal position as under : "Redemption [sub-section (1), proviso].-Redeemable preference shares can be redeemed only on the following conditions : (a)Such shares can be redeemed....
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....tracted herein. According to sub-section (1)(a ), redemption can be done only: (a) out of profits which could otherwise have been available for dividend, or (b) out of the proceeds of a fresh issue of shares made for the purpose of redemption. It should be noted that, balance of profits as appearing in the balance sheet cannot, strictly speaking, be called a source of funds to meet the requirement of funds (cash) for redemption of shares. If a company intends to redeem its preference shares out of profits, it must have not only profits sufficient to be reduced by a sum of the face value and of the premium payable on the redemption but also liquid cash sufficient to meet its obligation of payment to the shareholders whose securities are bought. Thus, free reserves or securities premium are not the sources of funds for buying back securities. A company intending to buy its shares/other securities must have at the time of buy-back, balance in any one or more of these accounts which is sufficient to accommodate the total value of the buy-back. The sanction of the Court under section 100 of the Act would be necessary even where preference shares are to be redeemed out of capital r....
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....nce shares are to be redeemed out of the proceeds of a fresh issue of shares made for the purpose of redemption, there is no reduction in the capital of the company for an amount equivalent to or more than the amount to be utilised for the purpose of redemption is raised by the company out of fresh issue of shares. Thus, the capital of the company is maintained and the creditors are not affected. In the latter case, where shares are to be redeemed out of profits of the company which would otherwise be available for dividend, the creditors can be affected because existing money goes out of the company. It is for this reason that proviso (d) to sub-section (1) of section 80 of the Act requires the company to create a capital redemption reserve account and transfer thereto a sum equivalent to the nominal amount of the shares to be redeemed. The proviso further provides that the provisions of the Act relating to the reduction of the share capital of the company shall except as provided in the section, apply as if the capital redemption reserve account were the paid-up capital of the company. Thus, the sanction of the Court under section 100 of the Act would be necessary even where pref....
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....tors of Aurobindo Pharma Limited held at 12.30 p.m. on Friday the 26-12-1997 at the Registered Office of the Company at Plot No. 2, Maithrivihar, behind Maithrivanam, Ameerpet, Hyderabad - 500 038. Allotment of Redeemable Non-Convertible Preference Shares of Rs. 50.00 lakhs in favour of Canara Bank. The Board was informed that the Company had received Rs. 50.00 lakhs from Canara Bank towards Preference Share Application Money for allotment of 50,000 (Dividend 12.50 per cent p.a. payable annually) Redeemable Non-Convertible Preference Shares of Rs. 100 each per share. The Board was approved for allotting 50,000 Redeemable Non-Convertible Preference Shares of Rs. 100 each per share to Canara Bank and passed the following resolution : "RESOLVED THAT 50,000 (Dividend 12.50 per cent p.a.) Redeemable Non-Convertible Preference Shares of Rs. 100 each per share aggregating to Rs. 50.00 lakhs be and are hereby allotted in the Preference Share Capital of the Company to Canara Bank, Treasury & Investments Division, Treasury & Intl., Operations Wing, HO. 112, J.C. Road, Bangalore-2. FURTHER RESOLVED THAT the Preference Share Certificate be signed by Sri P.V. Ramaprasad Reddy, Ma....
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....ri A.N. Sarma, Company Secretary on behalf of the Company." The issue of 4,00,000 preference shares to Global Trust Bank was authorised by resolution, dated 24-11-1998. Minutes of the Meeting of the Board of Directors of the Company held at 11.00 a.m. on 24th November, 1998 at the Registered Office of the Company at plot No. 2, Maithrivihar, behind Maithrivanam, Ameerpet, Hyderabad-500 038. Allotment of Redeemable Convertible Preference Shares of Rs. 400.00 lakhs in favour of Global Trust Bank : The Board was informed that the Company has received a sum of Rs. 400.00 lakhs from Global Trust Bank as Share Application Money for allotment of 4,00,000 Redeemable Cumulative Preference Shares of Rs. 100 each per share carrying dividend at the rate of 12.00 per cent p.a. payable annually. After discussion, the Board has approved for allotment of 4,00,000 Redeemable Convertible Preference Shares of Rs. 100 each per share to Global Trust Bank and passed the following resolution : "RESOLVED THAT 4,00,000 Redeemable Convertible Preference Shares of Rs. 100 each per share carrying dividend at the rate of 12.00 per cent p.a. payable annually, aggregating to Rs. 400.00 lakhs be an....
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....R and during that year, an amount of Rs. 6,54,75,000 was transferred from P&L Account. During 2000-01, an amount of Rs. 1,10,90,000 was transferred to CRR and as noted supra, the total amount in CRR, which was Rs. 9,00,00,000 was utilised for redeeming 9,00,000 preference shares. This is reflected in Schedule I to Balance Sheet for the year ending 31-3-2001 and issued subscribed paid-up preference share capital was shown as Nil because the amount of Rs. 9,00,00,000 in CRR by the end of financial year 2000-01 was utilised for redeeming preference shares by that year end. During next financial year i.e., 2001-02 in the Balance Sheet, CRR was shown as Nil and only issued, subscribed and paid-up equity capital was shown as share capital. This shows that by 31-3-2001, no preference shares were required to be redeemed and nil amount was available in CRR. Therefore, the question of again utilising CRR towards adjusting expenses does not arise. 29. Whether the company acted in compliance with the provisions of the law while redeeming preference shares during 2000-01? The answer must be in the negative. As noticed supra, for creation and transfer from out of the profit to CRR, the sancti....
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....gh in the Balance Sheet for 2000-01, the amount of preference shares forming part of share capital was shown as Nil and in Balance Sheet for 2001-02, CRR was shown as Nil, in subsequent years from 2002-03 again the balance available under CRR was shown as Rs. 9,00,00,000. When during 2001-02, CRR was shown as Nil, how Aurobindo has shown Rs. 9,00,00,000 as CRR in subsequent Balance Sheets. It is not their case that after redeeming preference shares issued during 1997-98 and 1998-99, they again issued preference shares and created another CRR. The explanation for this is not forthcoming. Furthermore, when the preference shares were redeemed in 2000-01 from out of the CRR created, Aurobindo chose to file present petition long thereafter on 10-6-2009, and therefore, this Court cannot grant any order approving such reduction as it would amount to approving illegal and ultra vires transaction of Aurobindo. Reconstruction Reserve Account 31. Aurobindo proposes to undertake financial restructuring by creating "Reconstruction Reserve Account" (RRA). It is proposed to create such RRA (i) by transferring Capital Reserve Account (CRA) of Rs. 9,30,00,000 as on 31-3-2008 to RRA; and (ii) ....
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.... conditions set out above, the following additional conditions shall be applicable for the proposals both under the automatic and approval routes : (i)the FCCB should have been issued in compliance with the extant guidelines. (ii)The FCCB should have been registered with the Reserve Bank, the LRN number obtained and ECB 2 returns submitted up to date. (iii)No proceedings for contravention of FEMA are pending against the company. (iv)The right for buy-back is vested with the issuer of FCCBs. However, the actual buy-back is subject to the consent of the bond holders. (v)The FCCBs bought back/repurchased from the holders must be cancelled and should not be reissued or re-sold. (vi)The buy-back will not have any effect on the bond holders not opting for the buy-back or on the non-participating bond holders of companies opting for the buy-back. (vii)The Indian company shall open an escrow account with the branch or subsidiary of an Indian Bank Overseas or an International Bank for buying back the FCCBs to ensure that the funds are used only for the buy-back. 34. Under Circular No. 39, the last date was fixed as 31-3-2009. However, by issuing A.P. (DIR Series) Cir....
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....hall be used for the purpose for which ECB proceeds are permitted to be utilized under ECB schemes. The regulations are silent as to how the benefit that may accrue due to buy-back of FCCBs at discounted price can be utilized by the company. If the FCCBs are liabilities of the company shown in the Balance Sheet, the premium on conversion of FCCBs and the amounts realized by issue of such FCCBs shall have to be shown in the Balance Sheet. What would happen when FCCBs are bought back from out of the Foreign Currency Reserves parked in escrow account with a bank as mentioned in general condition (vii) of Circular No. 39 referred to hereinabove? Whether Aurobindo has complied with all these conditions? 37. The petition does not disclose whether the payment under the buy-back has been completed, and whether resources have been created by opening escrow account for such purpose. The Board of Directors of Aurobindo passed resolution on 30-7-2008 for purchase of FCCBs from open market at a price not exceeding face value of the bonds and for consequential cancellation up to and aggregate of US$ 100 million out of the outstanding three FCCB series. Except these particulars, no details are....
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....by the company for the purposes authorized in law and in such a case, no permission of the Court is required. It is a matter of good corporate practices and business prudence whether or not capital reserve be utilized for meeting a particular contingency. But when the CRA is directly or indirectly used in a manner that it results in reduction of share capital, the permission of the Court is required. The purposes for which RRA is sought to be used are certainly not the purpose for which CRA can be utilized as noticed infra. 40. The terms 'reserve', 'capital reserve' and 'reconstruction reserve' are not defined in the Companies Act. Section 211 of the Companies Act requires every company to prepare the Balance Sheet containing the true and fair view of the state of affairs of the company at the end of the financial year in the form set out in Part I of Schedule VI or as near thereto as circumstances admit. Schedule VI contains horizontal form as well as vertical form of Balance Sheet in Part I. Part II contains provisions to be applied to income and expenditure account referred to in section 210(2) of the Companies Act. Part III contains Rules 7 and 8. For our purpose, Rule 7(1) ....
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....Act, the reserve shall not include any amount written off or retained by way of providing depreciation, renewals or diminution in value of assets or retained by way of providing for any unknown liability, which cannot be determined with substantial accuracy. From this, it becomes clear that capital reserve cannot be used for writing off loss or for adjusting towards diminution of value of assets etc. 42. In CIT v. Century Spg. & Mfg. Co. AIR 1953 SC 501, Constitution Bench of the Supreme Court considered the term 'reserve'. It was held that the term reserve 'should be given the ordinary natural meaning as understood in the common parlance and that profits lying unutilized and not specifically set apart for any purpose would not constitute reserves.' It was also held that the reserve may be a general reserve or a specific reserve but there must be clear indication to show that whether it is a reserve either of the one or other kind. When once capital reserve is created, the company had no power to distribute the same as dividend, but the same should be set apart for investment in the company and not to write off the losses of a company or its subsidiaries. 'Capital reserve' there....
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....inar's case (supra) was approved by Supreme Court in Indian Overseas Bank v. CIT AIR 1970 SC 1530, wherein it was held : "The reserve contemplated by that provision is a separate reserve. The amount transreferred to that reserve cannot be utilized for business purposes. The reserve contemplated by proviso (b) to section 10(2)(vib) of the Act is an independent reserve. The amount to be transferred to that reserve is debited before the profit and loss account is made up. That amount is required to be credited to a reserve account to be utilized by the assessee during a period of ten years for the purposes of the business of the undertaking. The nature of the two reserves are different. They are intended to serve two different purposes. As observed by the Madras High Court in Veeraswami Nainar (supra) that the object of the Legislature in allowing a development of the assessee's business from out of the reserve fund is apparent from the terms of the proviso. The entries in the account books required by the proviso are not an idle formality. The assessee being obliged to credit the reserve fund for a specific purpose, he cannot draw upon the same for purposes other than those of the....