AI Drafter 
TaxTMI 
TaxTMI 
2021 (3) TMI 943
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....egional Director (Western Region), Ministry of Corporate Affairs, Mumbai and the Official Liquidator. No objector has come before the Tribunal to oppose the Scheme and nor any party has controverted any averments made in the Petition. 3. The Board of Directors of the Petitioner Companies in their respective board meetings held on 17th September 2019 approved the Scheme. On 3rd June 2020 the respective boards approved certain modifications thereto on the bases of which the present Petition is moved. The Appointed Date fixed under the Scheme is 1st April, 2019. 4. The First Petitioner Company is engaged in the business of investing in other companies. The Second Petitioner Company is engaged in the construction business as builders, contractors, erectors, constructors of buildings, houses, apartments, structures for residential, industrial, commercials, institutional or developments of Co-operative Housing societies etc. 5. The proposed Scheme of Merger will be beneficial to the Petitioner Companies and their respective shareholders, creditors, employees and other stakeholders with the following benefits: (a) The Transferor Company has been a loss-making entity. Its....
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....d with the Rules would therefore enable the Parties to utilize the financial resources as well as the managerial, technical, distribution and marketing resources of each other and it would be beneficial for the effective management and controlled supervision of the Transferee Company, thereby protecting the interest of the Transferor Company. (e) Further, as on date, there is no outstanding liability in the books of Transferor Company. Thus, its merger with the Transferee Company, would not have any adverse effect on the Transferee Company. (f) The merger under this Scheme will be beneficial to the Petitioner Companies, in the following manner: (i) facilities such as manpower, office space and other infrastructure could be better utilized by the Transferee Company and duplication of facilities could be avoided resulting in optimum use of facilities to the advantage of the Transferee Company; (ii) employees of the Transferor Company would be provided an opportunity to be gainfully employed by the Transferee Company; (iii) pursuant to the Scheme, the liabilities of the Transferor Company would be duly discharged by the Transferee Company; ....
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....terest of shareholders and public. In response to the observations made by the Regional Director, the Petitioner Companies have given necessary undertakings and clarification vide their Affidavit dated 11th November, 2020. The observations made by the Regional Director and the clarifications and undertakings given by the Petitioner Companies are summarized below: Sr. No. Para (IV) RD Report / Observation dated 31st August, 2020 Response of the Petitioner Companies (a) In compliance of AS-14 (IND AS-103), the Petitioner Companies shall pass such accounting entries which are necessary in connection with the scheme to comply with other applicable Accounting Standards such as AS-5(IND AS8) etc. As far as observations made in paragraph IV (a) of the Report of Regional Director is concerned, the Petitioner Companies through its Counsel undertake that it shall pass necessary accounting entries in connection with the Scheme as per AS -14 (IND AS-103) as well as comply with other applicable Accounting Standards such as AS-5 (IND AS-8), etc., to the extent applicable. (b) As per Definition of the Scheme, "Appointed Date" means April 1, 2019 or such other date as may b....
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....mpany on its authorised capital shall be set-off against any fees payable by the transferee company on its authorised capital subsequent to the amalgamation and therefore, petitioners to affirm that they comply the provisions of the section. As far as observations made in paragraph IV (d) of the Report of Regional Director is concerned, the Petitioner Companies through its Counsel undertake to comply with the provisions of Section 232(3)(i) of the Companies Act, 2013 as regards to Combination of the Authorised Share Capital. (e) The Hon'ble Tribunal may kindly seek the undertaking that this Scheme is approved by the requisite majority of members and creditors as per Section 230(6) of the Act in meetings duly held in terms of Section 230(1) read with subsection (3) to (5) of Section 230 of the Act and the Minutes thereof are duly placed before the Tribunal. As far as observations made in paragraph IV (e) of the Report of Regional Director is concerned, the Petitioner Companies through its Counsel state that by the order delivered on 14th July, 2020 in C.A. (CAA) 1017/MB/2020, scheme was approved by the majority of equity shareholders as per Section 230(6) of the Act ....
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.... 2016 with Maharashtra Rules and Regulation, 2017 does not arise. (h) The Transferee Company have non- resident equity shareholders, accordingly, the Share Exchange price and price per share arrived should be minimum of fair price determined as per FEMA guidelines. Hence, valuer should certify that the price per share is as per FEMA guidelines. As far as observations made in paragraph IV (h) of the Report of Regional Director is concerned, the Transferee Company through its Counsel submits that it doesn't have any non-resident equity shareholders. Hence, FEMA guidelines are not applicable to the Transferee Company. (i) As the Transferor Company is listed with BSE, hence, the petitioner be directed to file an affidavit to the extent that it has complied with the standard directions issued by BSE vide letter No. DCS/AMAL/AJ/R37/1060/2017-18 dated 08.03.2018. As far as observations made in paragraph IV (i) of the Report of Regional Director is concerned, the First Petitioner Company which is a listed company through its Counsel submits that it has complied with the directions issued vide letter No. DCS/AMAL/JR/R37/1681/2019-20 dated 17.02.2020. In the RD report the c....
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.... has not been entertained as yet. The Audit Report of PTIL is also silent about this demand. It has also filed its TDS returns during these periods. Demand status report under TRACES has not been provided by Company. ii. Company has not provided any explanation in Financial Statement regarding outstanding liability towards income tax pertaining to AY: 2007- 08 under notes to the accounts or contingent liabilities. Also the Auditor Report mainly CARO point on statutory dues is silent about this outstanding demand." Clarification given by the First Petitioner/Transferor Company. The Petitioners through their Counsel undertake to comply with all applicable provisions of the Income Tax Act and all issues arising out of the same will be met and answered in accordance with law and tax liabilities, if any, would be borne by the Transferee Company. The Income Tax Authorities are at liberty to examine tax implications. B. Para 7 of the Report Relevant Extract from the Chartered Accountant's Report: i. "As observed under Secretarial Auditor's Report of March 31, 2019, Company has not filed various E-forms as applicable under Companies Act, 2013 and u....
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....d the result thereof. It has since filed an application with the Central Government in e-Form CG-1 vide SRN R74112822 and e-Form CG-1 vide SRN R74116823 for condonation of delay in filing Forms MGT-14 for approval of Director's Report and consolidated financial statement at the Board meeting held on 4th September, 2018 and for approval of the limits for the loans/guarantee/security by the Company in terms of the provision of Section 185 of the Act at the Annual General Meeting held on 29th September, 2018 respectively. iii. The non-compliance was with respect to the last quarter of financial year 2018-19. The NRC Committee was reconstituted subsequently and the First Petitioner Company is in compliance with the provisions of Section 178 of the Act. iv. There was a delay in submission of annual report under Regulation 34 of SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015. However, the same was submitted by the First Petitioner Company after paying necessary penalty to BSE for the same. v. Inadvertently, there was a delay in disclosure of information to the BSE. However, the requisite information was duly disseminated by the First Pet....
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....concern status of an investing entity like the First Petitioner Company, merely on basis of non-existence of annual profits or reporting of small operating losses. The going concern status of First Petitioner Company cannot be questioned with sufficient short-term liquidity and long-term appreciated assets. Besides, in all previous Annual General Meetings its shareholders have approved accounts unanimously without any concern on the 'going concern status' of the First Petitioner Company. D. Sub-para (f) and (g) of Para 8.2.6 of the Report Relevant Extract from the Chartered Accountant's Report: i. "The exercise of valuation is generally undertaken by adopting Income Approach, Market Approach and Net Assets Approach. The Income Approach includes a number of models on valuation, namely, Discounted Cash-flow Basis (DCF), Maintainable Profits Basis and Dividend Discount Model. The captioned valuation of shares has been made on the Discounted Cash flow basis only. The rejection of other methods has not been clarified by the learned Valuers. ii. Valuation aspects: Terms of Preference Share redemption of Sheth Shelters Private Limited (SSPL) was not availa....
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.... of investments made by First Petitioner Company is determined on the following basis as can be discerned from the relevant extract of the report of the valuer. "1. Sheth Developers and Realtors (P) Ltd is an associate company of PTIL. I have been informed that SDRIL has filed an application for Capital Reduction and same is pending before Hon'ble Mumbai NCLT. The fair value of investment in equity shares of SDRIL has not been valued by the registered valuer as on the valuation date. However, SDRIL has obtained a valuation report dated 19.01.2019 on the fair value of its equity shares from R V Shah and Associates, Chartered Accountants as on 31.12.2018. Valuation is based on DCF method of valuation which seems reasonable. Said valuation report was issued for the purpose of capital reduction and considering this fact, investment in SDR1L has been valued at the same value i.e., Rs. 207.29, as provided in the above-referred valuation report. 2. Since the investment is of only 1 equity share in SSPL, the same is considered as immaterial and is valued at cost. 3. PTIL has invested in 4,38,400 6% Redeemable Non-Cumulative Non-Participating Preference shares....
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.... Non- Cumulative Preference Shares of M/s Sheth Shelter Pvt Ltd (SSPL) having coupon rate of 6%. However, in past five years SSPL had-not earned any profit and hence not distributed any dividend. Moreover, being a non-cumulative in nature the Company has no-right to receive dividends of any past years. 3. The Company had invested a sum of Rs. 76.88 Lakhs into equity shares of M/s Sheth Developers & Realtors (I) Ltd [SDRIL]. Since, the SDRIL had not declared any dividend on equity shares in past 5 years the Company has not earned any revenue income from the said investment. Accordingly, Company's resources were invested in to an assets not generating regular revenue income. On the other hand Company continued to incur administrative expenditure which resulted in to losses in past five years". ii. Further in Point 2 of Para 9.11 of the report in arriving at the prima facie opinion that the affairs of the Company have been carried out in a manner prejudicial to the interest of the Company or its Member or public interest, the CA has considered as under: "The Board of Directors of the Company made an investment in preference shares and equity shares ....
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.... report is Rs. 285.43 crores. Thus, though no dividend has been received from this investment, there is huge return on capital invested of more than 370 times. Even the shortfall in cash flow has in fact, been made good in 2019-20 when the capital reduction by SDRIL yielded a huge amount of Rs. 147.90 crore to the Company. This more than makes up for all the past losses. F. Paras 9.2, 9.7, 9.10 and 9.11 of the Report Relevant Extract from the Chartered Accountant's Report: i. The CA has stated in Para 9.11 his prima facie opinion drawn from the investigation as under: "Due to the following extra ordinary circumstances: (i) Investing the resources of the Company in non performing Companies. And (ii) Prejudicial loan transactions with related parties We are prima facie of the view that the affairs of the Company have been carried out in a manner prejudicial to the Company or its Member or public interest." Clarification given by the First Petitioner/Transferor Company 1. With regard to the observations made in Para 9.2, 9.7, 9.10 and 9.11 of the Official Liquidator, the Petitioners through their Counsel sub....
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.... that the investment in preference shares of SSPL was made far back in 2004. One cannot examine the viability of an investment in hindsight. One ought to consider the same at the time when investments made. c. Investment in the preference shares of SSPL in 2004 is outside the scope of the audit/review. In any case, the investment was made in compliance with relevant provisions of the Company Law applicable at that time. The proposal of investment in the preference shares was considered in the interest of the First Petitioner Company based on the proposed projects of SSPL. Thus, the investment was bona fide one made with the objective of furtherance of business of the First Petitioner Company. Any investment with opportunity of return also has associated risk of loss in value. In any case, as mentioned above, no provision of impairment has been made on investment in preference shares of SSPL. d. Therefore, the Petitioners submit that the observation on the merits of decision to invest in associated Companies ought to be examined is wrong and unjustified. The investment has yielded appreciation in the net worth by 29 times. It could not be questioned. II. Loans g....
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....econd Petitioner Company in instalments. As observed by the CA in his report, the loan outstanding as on 31st March, 2019 was Rs. 1.26 crore. The said loan was further repaid during FY 2019-20 and the balance outstanding as on 31st January, 2020 was only 0.29 crore. f. It is submitted that as both investments and loans are fully explained. As the making of the investment and the grant of loans has been carried out in full compliance of all statutory provisions and there is no finding to the contrary, the CA was unjustified in observing in para 9.10 that "In view of our comments in the preceding questions and paragraphs, on the basis of our examination and explanations submitted to us by the Transferor Company from time to time and on the basis of our scrutiny of the books of account for the periods under review, question of misapplication, misappropriation and breach of trust on the part of the management of the Transferor company ought to be examined/investigated." It is clear that there is no misapplication, (all transactions are fully compliant and transparently disclosed), no misappropriation (loans have been repaid and there is no loss of value in any investment, rath....
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....e. With regard to the objection of the CA that the funds of First Petitioner/Transferor Company were invested into the Associate Companies and the affairs of the First Petitioner/Transferor Company are managed in a manner prejudicial to the interest of the company or its members or to the public interest, we find that there being no violation of any statutory provisions or such investments/loans being neither uncommon nor per se illegal, the objections of the CA cannot be sustained. f. The prima facie opinion of the CA that the affairs of the First Petitioner/Transferor Company have been carried out in a manner prejudicial to the interest of the company or its members or to the public interest, does not stand legal scrutiny. We are of the view that the observations of the CA are wholly misdirected and deserve to be ignored. They would not hinder approval of the Scheme. g. The approval of the Scheme is without prejudice to the liability, if any, of the First Petitioner/Transferor Company which upon amalgamation would stand transferred to the Transferee Company. 12. From the material on record, the Scheme appears to be fair and reasonable and does not violate any....