TaxTMI 
TaxTMI 
2021 (8) TMI 388
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....nsolidation of the entire authorised, issued, subscribed and paid-up equity share of Rs. 10 each in the share capital of the applicant-company by increasing the nominal value of such consolidating 250 equity shares of Rs. 10 to Rs. 2,500 each ; (b) Such other and/or further orders as are deemed necessary by this hon'ble Tribunal in the facts and circumstances of the case." 2. C. P. No. 1408 of 2019 filed under section 66 of the Companies Act, 2013 read with the National Company Law Tribunal (Procedure for reduction of share capital of Company) Rules, 2016 by M/s. Simpson and Co. Ltd. (hereinafter referred to as "applicant/petitioner-company") for confirming the reduction of share capital of the applicant-company seeking the following prayers : (a) That the special resolution for reduction of capital resolved in the extraordinary general meeting held on November 7, 2019 set out in paragraph 21 of the application be confirmed. (b) That to this end, all the directions necessary and proper be made and given. (c) That the minutes to be proposed and filed be approved. (d) That such further or order/orders be made in the premises as to t....
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....eing used therewith or in the manufacture, maintenance and working thereof respectively or in the construction of any track or surface adapted for the use thereof, etc., and various similar objects as set out therein." 6. The details of the capital structure, viz., the authorised, issued, subscribed and paid-up share capital of the applicant-company as on March 31, 2019 are as follows : Authorised share capital Amount in Rs. 1,10,00,000 equity shares of Rs. 10 each 11,00,00,000 1,00,000 redeemable preference shares of Rs. 100 each 1,00,00,000 Total 12,00,00,000 Issued, subscribed and paid-up capital Amount in Rs. 73,77,500 equity shares of Rs. 10 each 7,37,50,000 Total 7,37,50,000 7. Learned counsel for the applicant has submitted that the shares of the petitioner-company have been dematerialised as per the relevant rules and demat account has been opened through a depository namely Central Depository Services Ltd. 8. Learned counsel for the applicant has submitted that clause 12(a) and (b) of the articles of association of the applicant-company provides for consolidation of shares and the same is extracted and reproduced her....
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....tional shares entitlement shall be reduced from the share capital by paying the shareholders a price pre-fractional share to be determined by the Board in accordance with law." 10. Learned counsel for the applicant has submitted that the applicant-company engaged the registered valuer Mr. T. V. Balasubramaniam, partner of M/s. PKF Sridhar and Santhanam LLP, Chartered Accountants (Registered under the IBBI) and RBSA Capital Advisors LLP, a SEBI Registered Category 1 Merchant Banker for valuations of shares. The registered valuers have arrived at the fair value of each share of face value of Rs. 10 at Rs. 14,860 per share. The said fair value and they have confirmed the fairness of the valuation arrived by the registered valuers and same was accepted by the board of directors in their meeting held on September 25, 2019. 11. Learned counsel for the applicant submitted that the board of directors of the applicant-company at the same meeting held on September 25, 2019 subject to the approval of the shareholders and this Tribunal, resolved that any fractions arising from such consolidation (both physical and demat mode) will be reduced under the provisions of section 66 of the Comp....
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....all parties involved. On the one hand, the small public share holders of the company would get an exit opportunity for shares which otherwise do not have a ready market ; while the company will benefit from significant savings in costs, reduction in administrative and procedural work and legal compliances, and general efficiency in corporate decision making. (d) The proposed consolidation would provide an option for the small shareholders to exit at a fair consideration as otherwise in view of non-availability of ready tradability, it will impair the value of such shares. 14. Learned counsel for the petitioners submitted that after approval of the shareholders for the consolidation of shares and consequent reduction was obtained through a special resolution passed at the extraordinary general meeting of the applicant-company held on November 7, 2019. At the meeting, the poll was ordered to be taken by the chairman of the meeting pursuant to section 109(1) of the Companies Act, 2013, wherein 63 share-holders holding 73,38,864 shares of face value of Rs. 10 each were present in person or proxy and out of which 12 shareholders holding 73,28,255 shares constituting 99.86 pe....
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....) states that subject to confirmation of this Tribunal, a company "may reduce the share capital in any manner". The emphasize is "in any manner". However, said provision, after any manner also states that such reduction "and in particular may" include the methods provided under section 66(1)(a) or (b). In the case on hand, the reduction of capital is only consequent to consolidation of shares, in respect of any fractions arising thereof and it does not involve any extinction or reduction of any liability in respect of any unpaid share capital or cancellation of a paid-up share capital which is lost or is unrepresented by available assets. It is further submitted that upon consolidation, the provisions of section 61 of the Act do not contemplate the manner in which the fractional shares are to be treated or paid off the capital. Hence it may not strictly fall under any of the methods specified under section 66(1)(a) or (b)(i) of the Act. In view of payment to shareholders holding fractional share capital which is in fraction and which is also in excess of the wants of the applicant (on account of consolidation), such reduction is also considered in excess of the wants of the company....
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....ectively before this Tribunal. In the said replies the petitioner has also extracted the replies furnished by registered valuer, who valued the shares for certain issues raised in the objections of Mr. M. A. A. Annamalai. In this regard, it is submitted that replies were furnished by registered valuer to the said objections of Mr. M. A. A. Annamalai as stated in reply dated November 5, 2020 to the said objections. 22. The other objections raised by Mr. Balu Sridhar is that valuation report has not been provided by the petitioner-company and in this regard it is submitted that the valuation report and fairness certificate are not documents placed for consideration at the shareholders meeting and as such there is no requirement for attaching the same to the notice. Section 102(3) of the Companies Act, 2013 only requires that where any item of business refers to any document, which is to be considered at the meeting, the time and place where such document can be inspected must be specified in the explanatory statement. In the instant case as the valuation report is not a document placed for consideration at the meeting the same was not attached to the notice of the extraordinary ge....
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....of Rs. 10 each. 25. It is further submitted that the interests of the creditors are not affected by virtue of the consolidation and consequential reduction of share capital. The creditors of the company would in no way be prejudiced by the reduction of capital, in respect of fractions if any arising out of consolidation of shares. The company has no secured creditors. In so far as the unsecured creditors are concerned the same aggregates to Rs. 151.14 crores (forming part of 10.59 per cent. of the total equity of the company of Rs. 1,631.91 crores) and occurs in the day-to-day business of the applicant-company. Furthermore, the applicant-company as stated supra is a profit-making company with sound financial position and assets. The petitioner-company has positive net worth of Rs. 1,631.91 crores. The income for the financial year 2018-19 is Rs. 1,652.03 crores and the corresponding profit after tax is Rs. 176.29 crores. Hence the said liabilities of unsecured creditors will be paid as and when the same is due and payable and, in any event, the said temporary debts are protected/secured, considering the financial position of the company. In any event, though wide advertisements ....
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....al v. Mafatlal Industries Ltd. [1996] 87 Comp Cas 792 (SC) has held as follows (page 836) : "It has also to be kept in view that which exchange ratio is better is in the realm of commercial decision of well-informed equity share holders. It is not the court to sit in appeal over this value judgment of equity shareholders who are supposed to be men of the world and reasonable persons who know their own benefit and interest underlying any proposed scheme. With open eyes they have okayed this ratio and the entire scheme. 40 per cent. of the majority share holders were financial institutions who were supposed to be well versed on the aspect of valuation of shares. They had no objection to the exchange of two shares of transferor company for five shares of the transferor company . . . In this connection we may also refer to a decision of Moughm J. in Hoare and Co., In re [1933] All ER 105 (Ch D), wherein it was laid down that where statutory majority had accepted the offer the onus must rest on the applicants to satisfy the court that the price offered is unfair . . . These observations in our view represent the correct legal position on this aspect. We may al....
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....y of the non-promoter public shareholders. Therefore, this contention is also not accepted." 32. Also in Chembra Peak Estates Ltd. v. Registrar of Companies, Karnataka [2020] 218 Comp Cas 10 (NCLAT), the hon'ble Appellate Tribunal held that (page 17) : "We are satisfied with the submission made by learned counsel for the appellant, the records submitted and the documents filed in its support. We are of the view that the apprehension as expressed by minority shareholders with regard to consolidation of shares is concerned, the company has well taken care of their concern. The company having complied with the statutory requirement, as con templated in the Act, we are of the view that the appeal deserves to be allowed. The reason taken for dismissal of company petition by the National Company Law Tribunal does not have any substance. As on the date of extraordinary general meeting, it is evident that the votes cast in favour of the resolution for consolidation of shares is more than 95 per cent. It is noteworthy to mention that during pendency of the appeal, most of the shareholders, who objected for consolidation of shares, have sold their shares to the direc....
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....mation of the resolution passed and consequential orders in relation thereto. (ii) It appears from paragraph 20 of the written submission filed by the applicant-company that 47 shareholders holding 10,492 shares consisting 0.14 per cent. had voted against the special resolution for consolidation and reduction. The majority of 99.86 per cent. shareholders of the applicant-company approved the resolution. (iii) Since the consolidation of shares of the applicant-company in the manner hereinabove described results infraction of holding of certain number of shareholders, majority of whom hold less than 250 shares of Rs. 10 each approached this Tribunal as objectors to the above course of action. (iv) Learned counsel Mr. H. Karthik Seshadri appeared for 20 objectors. The list of the objectors and shares held by the objectors are given below : Sl. No. Name of the objectors Folio No./Demat account No. No. of shares held 1. M. A. A. Annamalai and Ulagamman 1301740000003840 394 2. A. Meyyappan and A. Ulagammai 1301740000011100 84 3. A. Ulagammai and M. A. A. Annamalai 1301740000003830 1 4. M. Nachammai and A. Me....
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....ut a detailed "due diligence" based on full, fair and complete disclosure by Simpson on all matters that affect the valuation exercise. In this regard learned counsel for the petitioner submits that fore mostly provisions of section 247 would be made applicable, only if the valuation is required under the provisions of the Companies Act, 2013. It is an admitted fact that valuation has arisen only in respect of fractional entitlements that may be held by shareholders on consolidation, which are about 11,000 shares as of September 2019. The valuation has neither been stipulated under section 61 nor under section 66 of the Act. Hence the pro visions of section 247 would not apply to the facts of the case. The petitioner, in order to address the fractional shares that may arise, has carried out the valuation in the bona fide interests. (ix) It has been submitted by the applicant that the valuer should exercise due diligence while carrying out valuation, which is very vivid on plain reading of the whole valuation report. The statement of valuation analysis has been carried out without a detailed "due diligence" made by valuer in report cannot be equated with the exercise of due....
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.... to the company or the shareholders. The object of this exercise is evidently to only create fractional shareholding for a large number of minority shareholders. (iii) Secondly, as a direct consequence of such consolidation, the fractional shareholders are require to be paid off. The value arrived at by the company is arbitrary and abysmally low. The value fixed for one share at Rs. 14,860 is arbitrary and without basis. The objectors had shown that simply looking at handful of subsidiaries of the company the value ought to be in the range of Rs. 39,391. The fair value cannot be less than Rs. 50,000 per share. Yet the small minority shareholders were being offered a miniscule amount of Rs. 14,860 per share which is less than one-third the fair price. (iv) They have submitted that the valuation given by the company at INR 14,860 is grossly undervalued. One of the subsidiary companies of Simpson and Co., where the company holds 76 per cent. stake is TAFE with an EPS of 505 for year ended March 31, 2019. A comparable peer for TAFE in the listed market segment is Escorts which is currently trading at a PE multiple of 36 times. A peer valuation analysis translates to a....
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.... have been taken at book value and not fair value. -Valuation report has completely given a go by to the Companies (Registered Valuer and Valuation) Rules, 2017. -Lack of bona fides on the part of the petitioner. -Failure to exercise power for proper purpose. -Action amounts to expropriation of property belonging to shareholders. (c) This Tribunal examined all the succinct points, raised by all the objectors in common and specific. The poignant point is pertaining to the value arrived at Rs. 14,860 per equity share of Rs. 10 in the applicant-company by the registered valuers appointed for the purpose and the fairness of which had been confirmed by the SEBI Registered Category-I Merchant Banker. According to the objectors, the value arrived at and proffered by the applicant-company is only Rs. 14,860 which is abysmally low. One of the objectors has categorically stated that the value per share could be in the range of Rs. 50,000 to Rs. 5,00,000. (d) This Tribunal observes that the value of any investment particularly equity share is based on its ability to produce a return. Admittedly, investors of equity shares listed in the sto....
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....uture cash flows of any corporate entity is based on a series of assumptions about how the business will perform in future and then forecasting how this business performance translates into the cash flow generated by the business. Even this is also challengeable and according to the view of this Tribunal, by anyone who wants to challenge this. Further, by applying discounted cash flow method, the dis counting factor is based upon the weighted average cost of the capital which in the case of the applicant-company may be a theoretical weighted average cost owing to minimal borrowed fund having regard to the size of owned fund ; there can be only a notional weighted average cost of capital the ascertainment of which is also disputable by the objector. Therefore this Tribunal is unable to discern the contention of the objectors pertaining to disregarding of the discounted cash flow method. (h) This Tribunal is unable to observe any inappropriateness in the value arrived at Rs. 14,860 per equity share of Rs. 10 each which is 1,486 times of the nominal value of Rs. 10 per equity share gained over a period of time. The equity shares of the applicant-company being unlisted, do not....
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....ulting therefrom shall be held by the directors of the company (or by any person nominated by the board in this behalf), in trust for the members so entitled to the said fractions in proportion to their respective entitlements. The directors (or such person or persons, as the case may be) may, on behalf of those members, sell the shares resulting from the consolidation of the fractions at such price and on such terms as the Board may deem fit to any person as the Board may deem fit and distribute the net proceeds of the sale in due proportion among those members, and the directors may authorise such or some person to execute the instrument of transfer of the shares to, or in accordance with the directions of, the purchaser. The transferee shall not be bound to see the application of the purchase money nor shall his title to the shares be affected by any irregularity in or invalidity of the proceedings in reference to the sale." The verdict by the High Court upheld this arrangement and dismissed the challenge of the petitioner who is a minority shareholder. 36. We order that in order to safeguard the interest of those who are in the dissenting minority category, who woul....
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....isions if any, of the Companies Act, 2013 read with the National Company Law Tribunal (Procedure for reduction of share capital of Company) Rules, 2016 (including any statutory modification or reenactment thereof for the time being in force) and subject to the confirmation and conditions prescribed by the hon'ble Tribunal, any Government or other authority for reduction of capital of the company, consequent to such consolidation of shares in respect of any fractions arising from such consolidation (both physical and demat mode) and the consideration to be paid to the shareholders entitled for such fractional equity shares so reduced has been determined at the rate of Rs. 14,680 per share each fractional share of Rs. 10 each as existed prior to consolidation and will be distributed to all the eligible fraction holders who volunteers to offer their shares to the company for cancellation within 30 days of the record date to be determined for this purpose by the Board after approval of the Tribunal. Pursuant to the confirmation and payment by the company, the shares of the company held in physical and demat mode by such shareholders entitled to fractional shares, arising out of con....