TaxTMI 
TaxTMI 
2019 (8) TMI 974
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndent No.1; 2. Pass order declaring the Postal ballot Notice and PA of the respondent NO.2 as illegal and void; 3. Pass an order directing the respondent No.1 to initiate investigation into the breach of the MPS Norms by the respondent No.2 before any action may be taken by the respondent No.2 under the Exit Circular; 4. to direct the respondent No.1 to follow the mandate of the Section 11 of the Section 11 of the Securities and Exchange Board of India Act, 1992 and the circulars issued by respondent No.1 itself, and take appropriate actions accordingly; 5. pass any such other order or orders as this Hon'ble Court may deem and appropriate, in the interest of justice, in favour of the petitioners." 2. In substance the grievance of the petitioners is that the respondent No.2 Bharat Nidhi Limited ('BNL' in short) is proceeding to undertake buyback of shares at a grossly understated valuation in breach of the minimum public share holding requirement as specified in Rule 19(2) and Rule 19 (A) of the Securities Contracts (Regulations) Rule 1957 as well as various circulars issued by SEBI in respect of listed companies to be in compliance with the MPS norms and have r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d on the DB of the National Stock Exchange of India Ltd. (NSE) 5. A reference is made in the petitioners about various circulars issued by SEBI in respect to exit option to de-recognized stock exchanges; process of exit for exclusively listed companies on regional stock exchanges. These circulars being dated December 29, 2008; May 20, 2012; May 22, 2014; April 17, 2015; October 10, 2016. In the October 10, 2016 circular SEBI provided clarification on raising of further capital and the process of exit of ELCs from the DB. It is the case of the petitioners that the circular provided that all ELCs shall be required to ensure compliance with the procedure for exit and the oversee and monitoring of such exit mechanism shall be carried out by the designated stock exchange, which is the National Stock Exchanges hosting the ELC on its DB. It is also the case of the petitioners that the 2016 SEBI circular further provides the following: (i) the ELCs on the DB which are yet to indicate their intention to comply with listing or to provide exit shall submit their plan of action of Designated Exchanges latest within three months from the date of the said circular to the satisfaction....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is regard, the Designated Exchanges may obtain an undertaking from the investors who do not want exit and the exit obligation of the promoters will be reduced accordingly; (v) the ELCs which have requested further time to comply with the minimum public shareholding (MPS) requirement and have made representation to list, may not be considered; (vi) the cases of ELCs which have submitted High Court Order related to scheme of arrangement or were under the process of scheme of arrangement on or before October 10, 2016 may be kept on hold till such process is completed." 8. As stated above, the BNL was transferred to DB of the National Stock Exchange. On March 20, 2019 a clarification was issued with respect to transfer of companies from CSE to DB of NSE in the following manner: "(i) The Circulars / guidelines issued by SEBI from time to time for ELCs shall be applicable to companies transferred from CSE to the DB of NSE; (ii) Such Companies may be granted three months' time from the date of transfer to DB to submit the plan of action to NSE in terms of SEBI Circular dated October 10, 2016; and (iii) Once the company is transferred to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and not a partial exit. The aforementioned has been contemplated and demonstrated in Clause (vii) of Annexure A of the 2016 SEBI Circular, reproduced hereinbelow: "The exit offer shall remain open for a period of maximum five working days during which the public shareholders shall tender their shares. The promoter shall open an escrow account in favour of independent valuer / designated stock exchange and deposit therein the total estimated amount of consideration on the basis of exit price and number of outstanding public shareholders. The escrow account shall consist of either cash deposited with a scheduled commercial bank or a bank guarantee, or a combination of both. The account in the escrow account shall not be released to the promoter unless all the payments made in respect of shares tendered for the aforesaid period of one year." (Emphasis supplied) (ii) Under the said impugned SEBI clarification, the number of shares that can be bought back by a company are governed by the provisions of Section 68 of the Companies Act, 2013 (hereinafter referred to as "Companies Act"), which provides that a buy back offer can be made maximum for 10% or 25% o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the respondent No.1 has failed to initiate any action to identify the promoters and promoter group of the respondent No.2 even after various complaints have been filed in this regard and also despite directions of the Court in W.P. (C) 9846/2017 dated December 06, 2018. In the instance case, if the true disclosures would have been made regarding the promoters and promoter group, then such persons were obligated to give a full and fair exit to the public shareholders of the respondent No.2, under the Exit Circulars. He highlighted the relevant portion of the 2016 SEBI Circular, reproduced as below, which provided for penalties for failure to give exit by the promoters as per the provisions mentioned therein: "6. Action against companies remaining on the DB a. Any promoter or director whose company is on the DB and has failed to demonstrate adequacy of efforts for providing exit to their shareholders in conformity with the exit mechanism as provided in this circular shall be liable for the following actions: • The company, its directors, its promoters and the companies which are promoted by any of them shall not directly or indirectly associate with th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....passed, then the promoters of Respondent No.2 will not be allowed to vote on the proposed postal ballot resolution for buy back. As such, the Postal Ballot Notice for the proposed buy back wherein the promoter / promoter group have an ability to vote, pending the investigation by the Respondent No1., would be bad in law. 17. He also submitted that the true value of the Respondent No.2 has not been taken into consideration in the Postal Ballot Notice and public announcement issued by the Respondent no.2 dated June 15, 2019 and the price offered is not the fair value, and amongst other factors, market value of investments made by the Respondent No.2 in the listed and unlisted investments have not been considered. The valuation report dated June 6, 2019 issued by Corporate Professionals Capital Private Limited does not reveal the fair value of the shares of the Respondent No.2 and in place admits lack of information and documents. The Valuation Report in spite of observing that the Respondent No.2 holds investments in certain operating companies as well as certain nonoperating companies besides holding investments in mutual funds, quoted shares, corporate deposits, has failed to de....
X X X X Extracts X X X X
X X X X Extracts X X X X
....) 6 SCC 657 at para(s) 911, 29; Federal Bank v. Sagar Thomas, (2003) 10 SCC 733 at para(s) 18, 27, 31 and 32. 20. It was his submission that there cannot be an injunction on the holding of a meeting of the general body of shareholders in view of judgments in LIC v. Escorts, (1986) 1 SCC 264 at para(s) 95, 100; Anil Kumar Boddar v. Reliance Industries Ltd., (2016) SCC Online Del 1855 at para(s) 5 to 7; Ganesh Chakkarwar v. VRG Healthare, dated September 26, 2018 in W.P. (C) 6154/2018. Consequently, prayer 2 at page 113 of the writ petition cannot be granted. 21. He also stated that the petitioners holds miniscule shareholding (0.0007%) in respondent No.2 and cannot stall the entire process which is for the benefit of all shareholders. He submitted that the process of buyback is approved under law by the shareholders of respondent No.2. Shareholders holding miniscule shareholding (0.0007%) ought not to be allowed to keep the process on hold. This would be in the teeth of the principle of corporate democracy. In this regard, he relied upon the judgment in LIC v. Escorts, (1986) 1 SCC 264 at para(s) 95 and 100. 22. He stated that there is no cause of action. The petitioners ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Dissemination Board of NSE was the subject matter of the Jaspreet Aulakh matter and the High Court had relied on the fact that respondent No.2 had been transferred to the Dissemination Board and had accordingly decided that nothing survived in the petition. In light of the above, there cannot be any argument that the respondent No.2 should be listed back on a nationwide stock exchange. By corollary, respondent No.2 must be allowed to exit through the Dissemination Board and the only possible mechanism of exit for a promoter-less company is buyback of shares. He also stated that this Court has previously held that the process before the Dissemination Board cannot be stalled inasmuch as in the order passed on December 21, 2018 in Manish Mittal and Ors. v. SEBI and Ors. this Court has categorically held that the process of exit before the Dissemination Board cannot be stalled. The petitioners seek to raise the same issues raised earlier in the Manish Mittal matter and conclusively held against the shareholders in that case. 25. Mr. Sethi stated that buyback is an offer to a shareholder without any attendant obligation on any shareholder to sell shares. In other words, a sharehold....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f Section 430 of the Companies Act, 2013, the National Company Law Tribunal has exclusive jurisdiction in all matters pertaining to the Companies Act. Thus, in terms of the above, it is not appropriate for the petitioner to approach the writ court with such grievances. 28. He stated the valuation conducted is in accordance with law. In this regard, he stated that the following: a. In terms of the Circular dated October 10, 2016, the appointment of an 'independent valuer' is to be done from the panel of expert valuers of the designated stock exchange. b. In accordance with the above, a SEBI Registered Category I Merchant Banker, empanelled with NSE, was appointed. c. SEBI Circular dated October 10, 2016 does not specify any methodology to be adopted for arriving at the "fair valuation" of the shares of the Company. The valuation methodology is in accordance with internationally accepted valuation standards and customary valuation practices in India. d. He also stated that it is an established principle of law that the valuation should be left to the wisdom of valuers (GL Sultaniav. SEBI (2007) 5 SCC 133, Paras 33 and 37: Hindustan Unilever Empl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....IC v. Escorts, (1986) 1 SCC 264, Paras 95 and 100. 33. Insofar as the counsel for the SEBI is concerned, his only submission was that the investigation into be breach of MPS norms against respondent No.2 BNL is going on. CONCLUSION:- 34. Having heard the learned counsel for the parties, the first and foremost question that needs to be decided is whether the Circular dated July 25, 2017 issued by the SEBI is non-est in law. Vide the said circular SEBI permitted a Company to buy-back the shares so as to provide an exit to the public shareholders. At the outset, it must be stated that the circular has been challenged after two years of its coming into existence. Within these two years, it has been made operational / implemented. One such case i.e. noted during the course of arguments is that of T. Stanes and Company Limited as during the course of arguments reliance was placed by Mr. Sethi on the Judgment of Securities Appellate Tribunal, Mumbai, in Appeal No. 73/2019 wherein the challenge was with regard to an order passed by NSE removing the Company from Dissemination Board after it bought back the shares, which action was upheld by SAT by relying upon the Circular dated Ju....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ber of outstanding public shareholders shall be made. This is keeping in view, all the public shareholders shall be given option to sell their share but it is not necessary all the public shareholders shall opt to sell their shares. It was rightly pointed out by Mr. Sethi that shareholder is also free to reject the buy-back offer and continues to be a shareholder. So, it follows the circulars do not contemplate the exit of all public shareholders. This I also say, in view of the stipulation in the impugned SEBI Circular "investors who are willing to remain shareholders of a company and do not want to exit, should be allowed". I do not find any illegality in such a stipulation as it is not necessary for a shareholder to seek his exit. 37. The plea of Mr. Vashisht that the impugned circular does not give timelines and road map is concerned, the same is also without merit, inasmuch as the clarification dated March 20, 2019 issued by SEBI with respect to transfer of companies from CSE to DB of NSE clearly stipulates: (i) The circulars / guidelines issued by SEBI from time to time for ELCs shall be applicable to companies transferred from CSE to DB of NSE like the respondent....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gation, there is no question of penalties. 41. It must be stated here that circular of 2016 stipulates action against a company, its director on their failure to provide exit to the shareholders, which includes the action stated therein. It is not the case of the petitioner that respondent no.2 company has failed to provide exit to its shareholders. So, it follows, the postal ballot dated July 13, 2019 is in that direction, which cannot be faulted. 42. One of the pleas of Mr. Vashisht was that the price offered for share is not the fair value, and amongst other factors, market value of investments made by the respondent No.2 have not been considered and even the valuation report dated June 6, 2019 issued by Corporate Professionals Capital Private Limited does not reveal the fair value of the shares of the Respondent No.2 and in fact admits lack of information and documents, is concerned, if the petitioners are not satisfied with the valuation, they are within their right not to accept the offer of buy-back at that rate. I note, respondent no.2 has justified share value by stating that under Section 68 (2)(c) of the Companies Act, 2013, a company can buy-back 25% of the Compan....