In Re: Nicholas Piramal (India) ... vs Unknown
2003 Latest Caselaw 1240 Bom

JUDGMENT

D.Y. Chandrachud, J.

1. The sanction of the Court is sought under the provisions of Section 394(1) of the Companies Act, 1956 to a scheme of arrangement.

2. The petitioner ('NPIL') has an investment of 93 lakh equity shares each of the face value of Rs. 10 in a company by the name of Gujarat Glass Private Limited. ('GGPL'). This investment constitutes 53.76 per cent of the equity capital of the GGPL. Clause 4 of the proposed scheme provides that with effect from 1-7-2003, the appointed date, the investment of NPIL in GGPL shall stand transferred to and vested in a company known by the name of Kojam Fininvest Ltd. ('Kojam'). As a consideration for the transfer, Clause 5 of the proposed scheme stipulates that Kojam shall issue and allot shares to every member of NPIL holding fully paid-up equity shares in NPIL and whose name appears in the Register of members of NPIL on the record date. Kojam is to allot for four equity shares held in NPIL, one equity share of Kojarn of the face value of Rs. 10 credited as fully paid-up. The scheme has also provided that NPIL Fininvest Pvt. Ltd., a wholly owned subsidiary of NPIL, shall subscribe for an additional 4,49,199 equity shares each of Rs. 10 of Kojam.

3. By an order dated 13-8-2003 passed by this Court a meeting of the equity shareholders of NPIL was directed to be convened and held on 19-9-2003. The secured creditors had given their consent to the proposed arrangement and the holding of their meeting was dispensed with. Similarly, the meeting of the preference shareholders was dispensed with in view of the fact that they have consented to the scheme. The holding of the meeting of unsecured creditors was dispensed with on the petitioners undertaking to issue a notice of hearing of the petition for sanctioning the scheme to the unsecured creditors as may be directed by this Court.

4. The Chairman of the meeting of the equity shareholders has filed an affidavit dated 22-9-2003 together with a report. The Chairman's report shows that at the meeting of the equity shareholders, which was attended by 191 shareholders, 171 shareholders representing in face value shares of the value of Rs. 2.50 crores voted in favour of the proposed arrangement; 13 shareholders of the value of Rs. 1.88 lakhs voted against the resolution. The resolution has been passed by the requisite majority as specified in Section 391.

5. An objection has been lodged before the Court to the proposed scheme of arrangement by Shri Ramdas Pandurang Tandel, a former employee of the company who is also an office bearer of the Union. The objector holds 274 shares representing 0.00071 per cent of the total share capital of the company.

6. The objections urged before the Court by Counsel appearing for the objector are thus:-

The petitioner, holds 93 lakh shares in GGPL, an unlisted Private Limited Company. GGPL is in the business of inter alia manufacturing glass bottles which are used in the pharmaceutical industry, GGPL has not declared dividend for the last two years. 53 per cent of the share capital of GGPL is held by the petitioner while 47 per cent is said to be held by Venture capitalists. The contentions of the objector are that (i) no valuation of the shares of GGPL was made before the scheme of arrangement was propounded and the ratio of 4:1 was arrived at, The shares of GGPL are actually worth Rs. 95 each; (ii) The petitioner ought to sell off its investment in GGPL in the open market and realize the sale price of the shares or, in the alternative given to the shareholders of the petitioner one share each in GGPL instead of share in Kojam as is now sought to be done; (iii) No benefit will accrue to the petitioner upon the transfer of 93 lakh equity shares held in GGPL to Kojam and the benefit that will accrue is to the promoters of the petitioner; (iv) At the meeting of the shareholders the votes cast by a large majority of the shareholders in favour of the scheme of arrangement were by the promoters, their associates and relatives. On the other hand, the opposition to the scheme by shareholders representing 1.88 lakh shares was by genuinely independent individual shareholders'; and (v) the shares of Kojam which is an investment company formed to hold the shares of GGPL will not yield an appropriate value in the stock market particularly because GGPL which is a capital intensive undertaking has not declared dividend for two years.

7. In considering the tenability of the objections which have been raised before the Court, it would be necessary to recapitulate the basic facts. The petitioner has an investment of 92 lakh shares in GGPL, representing 53 per cent of the total share capital of GGPL. GGPL as a result is a subsidiary of the petitioner. The scheme of arrangement contemplates that the investment of the petitioner in GGPL will vest in Kojam. Kojam will allot to all the existing shareholders of the petitioner one equity share for every four equity shares held in the petitioner. As a result of the scheme of arrangement, GGPL will cease to he a subsidiary of the petitioner since the holding of the petitioner in GGPL will vest in Kojam. The existing shareholders of the petitioner will continue to retain their share holding in the petitioner. In addition, each shareholder will be given one share of Kojam for every four equity shares held in the petitioner. The scheme which is before the Court is not a scheme of amalgamation but a scheme where the investment held by the petitioner in a subsidiary is to be transferred to another company in which the existing shareholders of the petitioner will hold shares pro rata to their holding in the petitioner. This background is the basis for considering the objections to the scheme.

8. Paragraph 15 of the Company Petition elucidates the benefits which will accrue to the petitioner under the scheme of arrangement:

"15. The substantial benefits and advantages which will be available to the petitioner Company and its shareholders after the transfer of its investment in GGPL by the petitioner Company to KOJAM are summarised in brief as under:--

(a) The petitioner Company will now be able to focus on its core pharma/healthcare business and achieve leadership in the domestic pharmaceuticals market and become a substantial player in the Export market.

(b) GGPL's being a capital intensive business, the consolidated financials of the petitioner company will improve with an enhanced investment capability to capitalise on opportunities in its core pharma business. If the results of the petitioner Company for the last financial year ended on 31-3-2003 were to be reworked excluding GGPL, the following are the significant indicators.

Sr. No. Petitioner Company Financial Year 31-3-2003

With GGPL Without GGPL

I.

Profit before Tax to net sales (%) 10.7 12.2

II.

Debt/Equity ratio 1.6 0.9

III.

Return on Capital employed (%) 21.7 31.2

IV.

Return on net worth 25.7 30.9

(b) The improved consolidated financials will enable the Petitioner Company to conserve its capital outlay for the intellectual-asset intensive business and thus provide the petitioner company an enhanced investment capability to capitalize on the opportunities and vigorously pursue its growth strategy in its core pharma business.

(c) Will provide opportunity to the shareholders of the petitioner Company to unlock the value component as the equity shares of KOJAM to be allotted to them will be listed with the Stock Exchanges while they would continue to hold the shares of the Petitioner Company with core pharma business."

9. The investment held by the petitioner in GGPL makes GGPL a subsidiary of the investing company. As part of the statutory obligations of the petitioner, the accounts of the petitioner have to reflect the financial health of its subsidiary. The financial position of the subsidiary has a significant bearing upon the fortunes of the petitioner. It is an admitted position that for a period of two years GGPL has not declared dividend. GGPL carries on capital intensive activities and its Board of Directors perhaps considered it appropriate to plough back the returns in the existing business. The commercial wisdom of the Directors of GGPL in not declaring dividend docs not fall for consideration in these proceedings. The benefit which the petitioner seeks to derive upon the transfer of its investment in GGPL to Kojam is to enable itself to focus on its core pharmaceutical business, improve its market position and enhance its own financial standing by divesting itself of the subsidiary whose financial position necessarily impinges upon the petitioner. From the Chart in paragraph 15 of the petition, it would appear that for the financial year ending 31-3-2003 the ratio of profit before tax to net sales would be 12.2 without GGPL and 10.7 with GGPL; the Debt/equity ratio would be 0.9 instead of 1.6; the return on the capital employed would be 31.2 per cent instead of 21.7 per cent and the return on net worth 30.9 instead of 25.7. These are commercial considerations which have weighed with the Board of Directors of the petitioner and its shareholders in support of the scheme of arrangement. This is ultimately a matter which lies within the wisdom of the Board of Directors and, in accepting that decision, in the commercial wisdom of the general body of shareholders,

10. The grievance of the objector that there ought to have been a valuation of the shares held in GGPL for determining the exchange ratio misses the point. This was not a scheme of amalgamation or merger. In a scheme of amalgamation the existence of the transferor is brought to an end for the transferor ceases to be a separate legal entity upon its becoming a part of the transferee. The shareholders of the transferor are allotted shares in the transferee in lieu of their existing shareholding. Hence, the existing holding has to be valued in order to arrive at a Swap or exchange ratio. In the present case NPIL, continues and will continue to exist even after the scheme is enforced. The existing shareholders of NPIL will continue as shareholders of NPIL. NPIL has an investment in GGPL but so long as NPIL continues to exist as a corporate body no share-holder has an identifiable share or right in the assets of NPIL. The holding of the petitioner in GGPL is to vest in Kojam under the scheme of arrangement. The existing shareholders of the petitioner will be allotted one equity share in Kojam for every four equity shares held in the petitioner. That is in addition to the existing holding in the petitioner. In reply to the objections it has been stated by the petitioner that the ratio was arrived at by taking into consideration that Kojam must have a minimum paid-up capital of Rs.10 crores to facilitate the listing of its shares on the stock exchange. After excluding the initial paid-up capital of Rs. 5 lakh (i.e. 50,000 shares of Rs. 10 each) of Kojam which is the minimum required for the purpose of incorporating Kojam as a public limited company the distribution of the balance 99.50 lakh shares (ie. 100 lakh shares minus 0.50 lakh shares required for incorporation) of Kojam against 380 lakh shares of NPIL gives a fractional ratio of 1:3.82 shares which ratio has been rounded off to 1:4. The shares of Kojam would be listed on the Stock Exchange and thus would provide an exit opportunity to a shareholder to sell his shares if he should choose to do so. The ratio of 1:4 in which the shares of Kojam would be issued to the shareholders of the petitioner would consume 95,00,801 shares. There would be a shortfall of 4,49,199 shares to make up the capital of Rs. 10 cores required for the listing of Kojam. The scheme provides that NPIL Fininvest (P) Ltd. which is a wholly owned subsidiary of NPIL would subscribe for these 4,49,199 shares for cash at par.

11. There is no reason to discard the explanation which has been furnished in the affidavit in reply filed on behalf of the petitioner to the objections. An overwhelmingly large body of shareholders has voted for the scheme sharing the perception of the petitioner that the transfer of the existing investment of the petitioner in GGPL will yield substantial benefits to the petitioner by enabling it to focus on its core pharmaceutical business and by improving the financial position of the petitioner. The benefit which accrues to the petitioner is that as a result of the scheme of arrangement it will no longer be affected by the fluctuating fortunes of its subsidiary. The petitioner seeks to focus, in a rapidly growing market economy, on its core business and to obviate the necessity of a financial commitment towards a subsidiary. The Court cannot sit in judgment on those reasons or substitute its own notions of economic policy for the practical considerations which must weigh with business. A construction which restricts the power of a company to adapt to a rapidly changing business environment must be eschewed. The Court as interpreter of legislation must be conscious of the need for law to be responsive to the legitimate needs of business and industry.

12. So far as the shareholders of the petitioner are concerned they are to be allotted one equity share of Kojam for every four equity shares held in the petitioner. The proposed scheme of arrangement cannot be regarded as an attempt to coerce a minority of shareholders. All shareholders of the petitioner are entitled to the allotment of one equity share of Kojam for four equity shares held in the petitioner. Each of those shares will be tradable in the market on the listing of the transferee company. The objector contends that shareholders of the petitioner should be allotted shares directly in GGPL. The objector does not object to the divestment of the investment in GGPL per se but contends on the contrary that shares be allotted in lieu thereof in GGPL. That being the contention the objector cannot be heard to complain if, instead of allotting to the existing shareholders of the petitioner shares in GGPL, the majority of shareholders has chosen to allot shares in the transferee company, Kojam. Such a decision must necessarily enure to the benefit of all the shareholders.

13. In proceedings of the nature before the Court the governing principles of law are those which the Supreme Court has laid down in Miheer H. Mafatlal v. Mafatlal Industries Ltd. . The Supreme Court while formulating parameters of the jurisdiction under Sections 391 and 394 noted that the sanctioning Court must ensure that all the requisite statutory formalities have been duly observed; that the scheme which is put up for sanction of the Court is backed up by the requisite majority; that the concerned meeting 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 proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy and; that the members or class of members or creditors or class of creditors were acting 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 of the same class whom they purported to represent.

14. In this case there is no dispute about the position that the requisite statutory procedure has been followed and that the resolution has been passed by a requisite majority. The Court has no material to come to the conclusion that the majority of the shareholders were coercing the minority of shareholders in order to promote any interest adverse to that of the minority. All the existing shareholders of the petitioner are being allotted shares in the transferee in the same proportion. The shareholders of the petitioner who claim to represent the minority will, therefore, have the same benefits as the other shareholders of the petitioner of the allotment of shares in the transferee company which would then be tradable in the market upon the listing of the transferee company. In the circumstances this is not a case where the court can hold, having regard to the objections which are placed before the Court that a reasonable man would say that he would not approve the scheme. The objector only holds 274 shares representing 0.0007 per cent of the share capital of the petitioner. The objector admittedly did not attend the meeting of the shareholders to raise his objection to the scheme. His Explanation is that he had to be present at the factory of the petitioner to supervise the removal of the machinery pursuant to judicial orders in a labour dispute and hence could not remain present. The fact does remain that the petitioner holds a miniscule proportion of the total share capital of the petitioner and that he had not remained present at the meeting of the shareholders.

15. In the circumstances I do not find any merit in the objections raised before the Court. The Company Petition is made absolute in terms of prayer Clause (a).