TaxTMI 
TaxTMI 
2016 (4) TMI 965
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.... upon notice, no creditor has come forward to oppose the scheme. Neither the Regional Director nor the Registrar of Companies has any significant objection to the Scheme. The transferor and transferee companies pray for sanction of the Scheme. 3. The only opposition to the Scheme is by Securities and Exchange Board of India ("SEBI"). The objections of SEBI are two-fold. It is firstly submitted that the Scheme is aimed at evading the provisions of the Securities and Exchange Board of India Regulations ("SEBI Regulations") and the Issue of Capital and Disclosure Requirements, Regulations, 2009 ("ICDR") inasmuch as what is sought to be achieved through the expedient of the proposed amalgamation is conversion of shareholding in an unlisted company (the transferor company) into shareholding of a listed company (the transferee company) without having to go through any of the rigorous requirements including mandatory disclosures under the regulatory framework including the Act, SEBI Regulations and ICDR. Secondly, it is submitted that the consideration contemplated under the Scheme is arrived at by manipulating the financials of the transferor and transferee companies and the share swap ....
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.... since effectively the shareholders of the transferor company have their shares listed in the process as a matter of initial allotment. Alternatively, it envisages preferential allotment of shares of a listed company (i.e. the transferee company) without complying with the ICDR. Either way, the Scheme, in its very conception, falls foul of one or the other of the regulatory frameworks. I feel it is somewhat far-fetched to suggest that there is any listing of unlisted shares in the present case. Shareholders of the transferor company (an unlisted company) get shares of the transferee company (a listed company) at a particular swap ratio. That could, if at all, be likened to a preferential allotment, if we were to treat the Scheme as a strategy originally devised to see that allotment of listed shares is made to certain entities, who were initially asked to invest in the shares of an unlisted company only to get the listed shares by way of the Scheme through a share swap ratio later. Accordingly, in the following discussion, I have considered the effect of the ICDR qua the Scheme and not the aspect of listing requirements under the SEBI Regulations for an I.P.O. 6. Let us first see ....
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....nd undertaking for continued lock-in of the securities till payment of the re-computed price. Regulation 73 also requires a certificate of statutory auditor of the issuer to be placed before the general meeting of shareholders certifying that preferential issue of capital was being made in accordance with the requirements of the ICDR. A special resolution to be passed in terms of these requirements is required to specify the relevant date on the basis of which price of the equity shares to be allotted on conversion or exchange of convertible securities shall be calculated. The allotment is required to be completed within a period of 15 days from the date of passing of the special resolution. As for the pricing of the equity shares to be allotted preferentially, the requirement contained in Regulation 76 is to the effect that if the equity shares of the issuer have been listed on a recognised stock exchange for a period of twenty six weeks or more as on the relevant date, the equity shares shall be allotted at a price not less than higher of the following : (a) The average of the weekly high and low of the closing prices of the related equity shares quoted on the recognised stock ....
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....ion letter on the draft scheme along with the scheme and the documents referred to above to SEBI. SEBI thereupon issues its comments, which are passed on by the stock exchanges to the listed company in the form of an observation letter. All these requirements are insisted upon under the regulatory framework even before a scheme is placed for sanction before the company court. (A separate scrutiny then takes place in the company court in the presence of various stakeholders including the shareholders, creditors, department of company affairs, stock exchanges / SEBI, etc.) 9. A comparison of the two sets of provisions and the gamut of regulatory provisions which the Scheme in the present case has gone through, show that there is no ducking of the regulatory scrutiny such as the one contemplated in the case of preferential allotment of listed shares under the ICDR in the Scheme herein. The whole substance of the regulatory requirements of the ICDR is clearly captured in the scrutiny contemplated in the sanction of the Scheme insofar as allotment of shares of the transferee company to the shareholders of the transferor company is concerned. The Scheme has gone through these milestones....
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....r share of Rs. 10 each. The NAV of the transferor company was worked out at Rs. 10.06. Other methods of valuation being inapplicable, as explained above, the composite valuation was worked out at Rs. 10.06 per share of Rs. 10. Based on the respective weighted averages of the two companies, the share swap ratio of three equity shares of Rs. 10 of the transferee company for every five equity shares of Rs. 10 of the transferor company was arrived at as a fair consideration. 12. The valuation exercise, noted above, only involves two questions which admit of a debate. One, whether the methods of valuation and their employment for arriving at individual values of shares of the two companies were conducive to a fair assessment and two, whether the relevant date for determining the MV (by taking a high low closing average of the shares of the transferee company) chosen as 28 June 2013 was appropriate and fair. Indeed, these were the only points urged by Mr.Rustomjee for SEBI in support of his case that the share swap ratio determined by the valuer was not fair. 13. There is no exception taken by Mr.Rustomjee to the methods employed by the valuers per se. The objection was about there bei....
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....013 is chosen as the relevant date, since the board of directors of the transferee company considered the proposal of merger at their meeting of 28 June 2013. They would have considered the pricing of shares as of that date. The date has a natural claim to being an appropriate candidate for choice of the relevant date for considering the MV of the shares. Mr.Rustomjee suggests that ICDR requires the date of 30 days prior to the meeting of shareholders to consider the Scheme as the relevant date. By its vary nature, it is impossible to set that date as the relevant date for any scheme of arrangement. The board of directors of a company prepares a scheme; whilst preparing it, the board takes into account MV as reckoned with reference to a particular date; after considering such date, the board arrives at the MV and then recommends a particular share price as part of the scheme; then the draft scheme goes through the regulatory gamut; and finally a scheme comes before the company court, which orders a meeting of shareholders to consider the scheme or dispenses with it. It is impossible in this scenario to fix the date 30 days prior to the shareholders' meeting as a relevant date f....
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....deration. 16. Mr.Rustomjee submits that SEBI must intervene in a matter like this to ensure market integrity and investor protection. He relies upon observations in the cases of N. Narayanan vs. Adjudicating Officer, Securities and Exchange Board of India (2013) 12 SCC 152 and Securities and Exchange Board of India vs. Pan Asia Advisors Ltd. 2015 SCC OnLine SC 626 in this behalf. In Narayanan's case (supra), the Supreme Court whilst dealing with SEBI's role vis-a-vis prevention of market abuse and preservation of market integrity, held as follows : "35. Prevention of market abuse and preservation of market integrity is the hallmark of Securities Law. Section 12A read with Regulations 3 and 4 of the Regulations 2003 essentially intended to preserve 'market integrity' and to prevent 'Market abuse'. The object of the SEBI Act is to protect the interest of investors in securities and to promote the development and to regulate the securities market, so as to promote orderly, healthy growth of securities market and to promote investors' protection. Securities market is based on free and open access to information, the integrity of the market is predicated on the quality an....
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....isors Ltd. 2015 SCC OnLine SC 626, whilst dealing with the SEBI's role in the security market, the Supreme Court observed as follows : "On a reading of the above statutory provisions, we find under Section 11(1) of the SEBI Act, 1992, a duty has been cast on the SEBI to protect the interest of investors in securities and also to promote the development of the securities market as well as for regulating the same by taking such measures as it thinks fit. The paramount purpose has been shown as protection of interest of investors on the one hand and also simultaneously for promoting the development as well as orderly regulation of the security market. By way of elaboration under Section 11(2)(a) to (e) it is stipulated that the duty of SEBI would include regulating the business in the stock exchanges and any other securities market which would include the working of stock brokers, share transfer agents and similarly placed other functionaries associated with securities market in any manner, registering and regulating the working of the depositories, participants of securities including foreign institutional investors in particular to ensure that fraudulent and unfair trade pract....
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....by merging of the companies which are under the same management. Be that as it may, even if everything mentioned in the avowed rationale behind the amalgamation is not correct, such purpose, as it sought to be achieved, so long as the same cannot be shown as an illegitimate purpose, cannot be questioned by SEBI whilst opposing the scheme. The amalgamation in the present case cannot be shown as a device seeking to achieve any illegitimate purpose or design. 19. As mentioned in the case of Miheer H. Mafatlal vs. Mafatlal Industries Ltd (1997) 1 SCC 579, the jurisdiction of the company court under Sections 391 to 394 of the Act is a limited jurisdiction. The Supreme Court explained the contours of that jurisdiction in the following words : "29. However further question remains whether the Court has jurisdiction like an appellate authority to minutely scrutinize the scheme and to arrive at an independent conclusion whether the scheme should be permitted to go through or not when the majority of the creditors or members or their respective classes have approved the scheme as required by Section 391 Sub-section (2). On this aspect the nature of compromise or arrangement between the co....
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....y procedure for supporting such a scheme has been complied with and that the requisite meetings as contemplated by Section 391(1)(a) have been held. 2. That the scheme put up for sanction of the Court is backed up by the requisite majority vote as required by Section 391 Sub-Section (2). 3. That the meetings concerned of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class. 4. That all necessary material indicated by Section 393(1)(a) is placed before the voters at the concerned meetings as contemplated by Section 391 Sub-section (1). 5. That all the requisite material contemplated by the proviso of Subsection (2) of Section 391 of the Act is placed before the Court by the concerned applicant seeking sanction for such a scheme and the Court gets satisfied about the same. 6. That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not cont....
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....le, at the same time emphasizing that it is not for the Court to examine the Scheme as if it were an appellate authority over the commercial wisdom of the majority." 20. The real questions, which, on the basis of the above analysis, arise in the matter are : (a) Whether the scheme is designed to violate any provision of law or contravene any public policy; (b) Whether the scheme displays any bad faith vis-a-vis any of the stakeholders including the minority shareholders or creditors who have not voted on the scheme; (c) Whether the scheme is, on the whole, just, fair and reasonable; and (d) Whether the scheme prejudicially affects public interest in any way. 21. The Scheme does not falter on any of the above touchstones. As I have observed above, there is no merit in SEBI's contention that the Scheme violates the provisions of ICDR or the public policy behind ICDR or the related regulatory machinery. There is, as I have noted above, no bad faith vis-a-vis any stakeholder. On the whole, the scheme is not such as a prudent man of business would not accept as just, fair or reasonable. And lastly, there is no market abuse, wrongful artificiality or fraud, deceit or unfair....