Bombay High Court
Wartsila India Limited vs P.M. On Any Working Day Till The ... on 15 November, 2010
Bench: S. J. Kathawalla
1 CP-1037-09
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISIDICTION
COMPANY PETITION NO.1037 OF 2009
CONNECTED WITH
COMPANY APPLICATION NO. 1303 OF 2009.
In the Matter of Reduction of Equity Share
Capital of Wartsila India Limited.
Wartsila India Limited. ..Petitioner Company.
vs.
Janak Mathuradas & Others.
ig ..Intervenors/Opponents.
....
Mr. Hemant Sethi, a/w Ms. Kamlesh Rajwani, a/w. Mr. Bhavin Shah, i/b Vigil
Juris for the Petitioner.
Mr. Janak Dwarkadas, Senior Counsel, a/w Mr. Ashish Kamat, i/b RMG Law
Associates, for the Opponents/Intervenors.
....
CORAM: S. J. KATHAWALLA, J.
RESERVED ON: 25th September, 2010.
PRONOUNCED ON: 15th November, 2010.
JUDGMENT
By this Company Petition, Wartsila India Limited ("WIL") seeks
approval and confirmation by this Court in terms of the Special Resolution
passed by the shareholders of WIL in its "Extraordinary General
Meeting" ("EGM") held on 10th November, 2009 for the reduction of its equity
share capital.
2 CP-1037-09
2. The authorized, issued, subscribed and paid-up capital of WIL as
on 31st December 2008 is as under:-
Particulars Amount in Rs.
AUTHORISED
15,000,000 Equity Shares of Rs.10/- each 150,000,000
TOTAL 150,000,000
ISSUED & SUBSCRIBED & PAID-UP
12,034,000 Equity Shares of Rs.10/- each fully 1,20,340,000
paid-up
ig TOTAL 1,20,340,000
3. Of the above, 98.88% of the Paid-up Equity Share Capital of WIL
is held by 6 Promoter Shareholders and the balance of 1.12% of the Paid-up
Equity Share Capital of WIL is held by 1463 shareholders. There has been no
change in the shareholding from 31st December, 2008 till the date of filing the
present Petition.
4. WIL is engaged in the business of manufacture and sale of diesel
engines and diesel generating sets and providing solutions to the Power and
Shipping Industry. The equity shares of WIL were listed on the National Stock
Exchange (NSE) and the Bombay Stock Exchange (BSE). Subsequently, an
open offer was made by the Promoters under SEBI (Delisting of Securities)
Guidelines, 2003 for acquisition of Equity Shares at Rs.622/- per equity share.
3 CP-1037-09
Since the public shareholding of the Petitioner Company fell below the 10%
limit as provided under the Stock Exchange norms, the shares of WIL were
delisted from the NSE and the BSE in June 2007.
5. According to WIL, subsequent to the delisting of its equity shares,
there was no market to buy and sell the equity shares held by the holders of the
equity shares (other than the promoters). The investments made by the public
shareholders were locked up and they found it difficult to dispose off their
shareholding. Many shareholders for various reasons including change of
address, and expiry of offer date had missed the exit opportunity given by the
promoters of WIL. Therefore in May 2009, after obtaining a valuation report
from M/s. SSP and Company, Chartered Accountants, who valued the WIL
Shares at Rs.162 per share, the promoters of WIL namely, Wartsila Technology
Oy Ab had again made an offer to the holders of the equity shares (other than
the promoters) to purchase their shares at a price of Rs.622/- per share between
15th May 2009 to 31st July, 2009 and thereafter, at a price of Rs.162/- per equity
share, for the period 1st August to 15th August, 2009.
6. According to WIL, the holders of the equity shares (other than
promoters) continued to face a lot of hardship and inconvenience in the absence
of no liquidity/tradability to their shareholding. WIL was receiving requests
from time to time from certain non-promoter shareholders to provide them with
an exit opportunity. As an investor friendly gesture WIL decided to provide a
one-time exit opportunity to the holders of the equity shares (other than the
4 CP-1037-09
promoters) being the shareholders holding 1,34,769 shares representing 1.12%
of the total issued, subscribed and paid-up equity share capital of the company
by reducing the entire issued and paid-up equity share capital held by all the
shareholders other than the promoters, in accordance with Article 62 of the
Articles of Association of WIL and the provisions of Section 100 to 104 of the
Companies Act, 1956 ("the Act").
7. The Petitioner Company obtained Valuation Report from KPMG
India Private Limited (KPMG), an independent Valuer for determining the fair
value of the Equity Shares of WIL. As per the Report dated 30th September,
2009 of KPMG, the fair value of every one fully paid-up equity share of WIL is
Rs.377/- (Rupees Three Hundred and Seventy-seven only).
8. The Board of Directors of the Petitioner Company at the meeting
held on 6th October, 2009 inter alia passed the following Resolution:
"RESOLVED THAT pursuant to the provisions of Sections 100 to
104 and any other applicable provisions of the Companies Act, 1956
and Article 62 of the Article of Association of the Company and
subject to the confirmation of the Honourable High Court of
Judicature at Bombay and other appropriate authorities in this
regards, if any, and the approval of the Members at the General
Meeting, consent of the Board be and is hereby accorded to reduce
the Issued, Subscribed and Paid-up Equity Share Capital of the
Company from Rs.12,03,40,000/- (Rupees Twelve Crores Three Lacs
and Forty Thousand only) divided into 1,20,34,000 (One Crore
Twenty Lacs Thirty-four Thousand) equity shares of Rs.10/- each to
5 CP-1037-09
Rs.11,89,92,310/- (Rupees Eleven Crores Eighty-nine Lacs Ninety
Two Thousand and Three Hundred Ten only) divided into
1,18,99,231 (One Crore Eighteen Lacs Ninety-nine Thousand Two
Hundred and Thirty-one) equity shares of Rs.10/- each by
cancellation of 1,34,769 (One Lac Thirty Four Thousand Seven
Hundred and Sixty-nine) equity shares of Rs.10/- each and held by
the holders of the equity shares other than the promoters."
"RESOLVED FURTHER THAT the aforesaid reduction shall be
made by paying off /returning to the holders of the Equity Shares
other than the promoters a price of Rs.532/- per share (including a
premium of Rs.522/- per Equity Share), thereby extinguishing all
such shares."
9. Thus WIL sought to extinguish 1,34,769/- equity shares and
reduce its paid-up share capital to Rs.11,89,92,310/-. Though, the fair value of
a fully paid up equity share of WIL was valued at Rs.377/- by KPMG, WIL
deemed it appropriate to value the equity shares of Rs.10/- each, fully paid-up,
held by the holders of the equity shares (other than the promoters), at Rs.532/-
(including a premium of Rs.522/- per share), which is at a premium of 41%
over the fair value arrived at by KPMG.
10. The Board of Directors of WIL had sent a Notice and an
Explanatory Statement dated 6th October 2009 to its shareholders in due
compliance of the provisions of the Act, for convening an EGM of the Equity
Shareholders of WIL on 10th November, 2009 to consider, inter alia, the passing
of the Special Resolution, set out in Paragraph 8 above.
6 CP-1037-09
11. In the said explanatory statement, the reason for reduction of
share capital was explained as under:-
"Subsequent to the delisting of the Equity Shares of the Company,
there is no market to buy and sell the Equity Shares held by the
Equity shareholders other than the Promoters. The investments
made by these shareholders are locked up and they find it difficult to
dispose off their shareholding.
This has put the holders of the Equity Shares (other than the
Promoters) in a lot of hardship and inconvenience as there is no
liquidity /tradability to their shareholding. Further, the Company has
been receiving requests from certain non-promoter shareholders to
provide them with an exit opportunity. As an Investor friendly
gesture, the Company wants to provide an exit opportunity to the
holders of the Equity Shares (other than the Promoters), being the
shareholders holding 1,34,769 equity shares representing 1.12% of
the total issued, subscribed and paid-up equity capital of the
Company. As a result of reduction of share capital as mentioned in
the Resolution, the entire shareholding in the Company will be held
by the Promoters."
It is further provided in the Explanatory Statement as follows:-
"Further the Company in accordance with the applicable provisions
of the Income Tax Act, 1961 will be liable to pay Dividend
Distribution Tax (DDT) @ 16.995% on the amount paid to the
shareholders amounting to about Rs. 90/- per share at the above
price.
7 CP-1037-09
Accordingly the non promoting shareholders will receive a
consideration of Rs.532/- per equity share which may be tax free in
their hands."
12. The shareholders were further informed by the said Explanatory
Statement that a copy of the Memorandum of Association and Articles of
Association of the Company as amended from time to time and a copy of the
valuation of the independent valuer i.e. KPMG, was available for their
inspection and perusal at the registered office of WIL between 11.00 a.m. and
1.00 p.m. on any working day till the date of the meeting.
13.
Accordingly the EGM of the shareholders of WIL was held on
10th November, 2009. At the said meeting 76 equity shareholders of WIL
holding 11,903,307 equity shares of Rs.10/- each were present either in person
or through proxy or through authorized representative under section 187 of the
Act. Out of the 76 equity shareholders, 2 equity shareholders holding 30 equity
shares of Rs.10/- each abstained from voting at the meeting. Out of the 74
equity shareholders who exercised their voting rights, ballot papers of 2 equity
shareholders holding 125 equity shares of Rs.10/- each were found to be
invalid. The ballot papers of the other 72 equity shareholders holding
11,903,152 equity shares were found to be valid. Out of these 72 equity
shareholders who cast valid votes, 68 members holding 11,902,602 fully paid-
up equity shares of Rs.10/- each, constituting about 99.9954% of the total valid
votes cast, were in favour of the Special Resolution while 4 members holding
8 CP-1037-09
550 fully paid-up equity shares of Rs.10/- each constituting about 0.0046% of
the total valid votes cast voted against the Special Resolution.
14. The Minutes of the said EGM dated 10th November, 2009 show
that the Executive Director of M & A Tax KPMG India Private Limited was
present by invitation. The said minutes further record the views expressed
against the resolution by two of the shareholders, Mr. Arun Kejriwal and Mr.
Janak Mathuradas, who are two out of the four intervenors opposing the present
Petition. Their views are as follows:-
"Mr. Arun Kejriwal expressed his comments on valuation
based on book value and fair value. He requested for a
copy of the valuation report and expressed his
dissatisfaction on account of insufficiency of time for
evaluating the valuation report and expressed his
opposition for the proposed resolution. He stated that the
same was not in the interest of non-promoter shareholders
of the Company. He also referred to the earlier open offers
made by the Promoters of the Company.
Mr. Janak Mathuradas referred to the contents of the
explanatory statement to the Notice reasoning the exit
opportunity being offered to the minority shareholders. He
stated that the resolution was not in the interest of the
minority shareholders and the Company should buy the
shares only from such shareholders who are willing to
surrender their shares. In his opinion it did not necessitate
to have a special resolution which would result in exit of all
9 CP-1037-09
the non-promoter shareholders. He also expressed the view
that a separate meeting of the minority shareholders should
have been held to consider this resolution. He also referred
to the price of Rs.622/- per equity share being arrived at on
reverse book value at the time of delisting and the exit
opportunity provided by the promoters at the same price of
Rs.622/- per equity share for a specific period and
thereafter reducing to a much lower price and enquired
whether the price of Rs.532/- per equity share now offered
by the Company under the Resolution for reduction of
capital was justifiable. He also enquired on the rationality
of the Company treating the exit price as dividend for
Income Tax purpose and requested for a copy of the tax
opinion on which the Company was relying. He enquired
about the total number of shareholders of the Company. He
wanted to know whether Members other than Promoters
had given proxies.
He requested for inspection of the Proxy Register and
corporate authorization, copy of valuation report,
Memorandum & Articles and Annual Reports for last 3-4
years. He also requested the Chairman to record his
objection to the resolution and provide a copy of the
minutes of the meeting when recorded."
15. It is pointed out on behalf of WIL that as on 31st October, 2009,
WIL has five secured creditors and WIL has obtained written consent from all
the five secured creditors agreeing to the reduction of capital. It is further
pointed out that WIL has 405 unsecured creditors. The unsecured creditors,
10 CP-1037-09
comprise of statutory dues, trade creditors and advances received from
customers. As on 31st October 2009, the aggregate amount due to them is Rs.
3,27,202,083/-. It is submitted that the unsecured creditors shall be paid as and
when their dues become payable in the normal/ordinary course of business.
Attention of this court is drawn to the Minutes of the Order dated 18th
December, 2009, admitting the above Company Petition and passing of
directions to inter alia advertise the hearing of the Petition on 8th January 2010
in Free Press Journal (English Edition) and Maharashtra Times (Marathi
Edition) and also dispensing with the procedure prescribed by Section 101(ii) of
the Act. WIL has advertised the hearing of the above Petition as directed by
this Court. However, except for the four intervenors, none of the shareholders
or creditors of the Company have come forward to oppose the above Petition.
16. When this Company Petition was called out for hearing before
this Court on 15th January, 2010, this court had enquired as to what was the
main ground on which the said Petition was being opposed by the intervenors.
At that time, this Court was informed that the opposition mainly pertains to the
valuation of the shares of WIL and the price offered by WIL to its shareholders
(other than promoter shareholders) for their shares, which WIL proposed to
reduce. At that point of time without going into the merits of the matter or any
further details, this court had, in order to enable the parties to arrive at an
amicable figure for each equity share of WIL, suggested that the parties
approach one more independent valuer and obtain a second opinion in the
11 CP-1037-09
matter. WIL has therefore, subsequently obtained a valuation report also from
M/s. R.M. Raiji and Company, Chartered Accountants.
17. The details of the valuation reports placed before this Court are as
under:
(i) Report of KPMG, independent valuer, dated 30th September 2009 relied
upon by WIL :
The valuation methodology used by KPMG to arrive at a fair valuation of each
equity share of WIL is the Discounted Cash Flow Methodology ("DCF") and
Comparable Company's Method ("COCO"). It is a known fact that the Valuer
for the purpose of valuation of equity shares uses different approaches like
"Cost" Approach, "Market" Approach and "Income" Approach. KPMG for the
purpose of valuing the equity shares of WIL has used the Income Approach and
followed the DCF Method and the COCO Method. The rationale behind using
the DCF and COCO Methods are explained by KPMG at Page 18 of its Report:
"Income Approach
a. Discounted Cash Flows ("DCF")
Under a DCF approach, forecast cash flows are discounted back to the
present date, generating net present value for the cash flow stream of
the business. A terminal value at the end of the explicit forecast period
is then determined and that value is also discounted back to the
valuation date to give an overall value for the business.
12 CP-1037-09
A Discounted cash flow methodology typically requires the forecash
period to be of such a length to enable the business to achieve a
stabilized level of earnings, or to be reflective of an entire operation
cycle for more cyclical industries.
We have used the DCF approach in the valuation of the Company.
b. Comparable Companies ("Coco")
An earnings based approach estimates a sustainable level of future
earnings for a business ("Maintainable Earnings") and applies an
appropriate multiple to those earnings, capitalizing them into a value
for the business. The earnings bases to which a multiple is commonly
applied include Revenue, EBITDA and PAT (P/E).
The appropriate multiple is generally based on the performance of
listed companies with similar business models and size.
We have used the CoCos multiple (EBITDA and P/E) in our valuation
analysis."
KPMG has given its working based on DCF Analysis and COCO Analysis at
Pages 29 and 30 of its Report and has after considering an average of the
methodology used, at Page 33 valued the share price of common equity of WIL
at approximately INR 377/- per equity share.
(ii) Report of N.M. Raiji and Company, Chartered Accountants, dated 4th
March 2010 relied upon by WIL.
M/s. N. M. Raiji and Company has adopted the Net Asset Value and the
Earning Capitalization Method to arrive at a fair value of each equity share of
13 CP-1037-09
WIL. According to M/s. N.M. Raiji and Company, the value per share of WIL
on the valuation date as per the Net Asset Value Method comes to Rs.428/- and
as per the Earnings Capitalization Method to Rs.449/-. In their opinion,
therefore, the fair value of each equity share of WIL of the face value of Rs.10/-
would be Rs.444/- as on 30th June 2009. M/s. N.M. Raiji and Company have
also clarified that for an unquoted Company generally illiquidity discount of
10-20% is considered. However, they have not applied illiquidity discount for
calculating fair value in view of the offer of reduction of capital of WIL.
(iii) Report of A. Maheshwari and Company, Chartered Accountants, dated 1st
February 2010 relied upon by the intervenors:
The intervenors have relied on the Report of A. Maheshwari & Company,
Chartered Accountants dated 1st February 2010. The said Report follows 3
Methods namely, Price/Earning per Share (P/E) Method; Enterprise Value /
EBITDA (EV/EBITDA) Method and Price/Book Value (P/BV) Method.
According to the said Report of A. Maheshwari & Company, the average price
of each equity share of WIL would be Rs.1,033/- per share.
(iv) Report of Shailesh Haribhakti, Chairman, BDO Consulting Private
Limited (BDO), dated 17th March 2010, relied upon by WIL for analyzing the
report of A. Maheshwari and Company, relied upon by the intervenors:
WIL has relied upon a report of BDO dated 17th March, 2010 setting out the
observations/ comments of Shri Shailesh Haribhakti, Chairman of BDO on the
14 CP-1037-09
valuation methodology used by A. Maheshwari and Company (valuer). In his
report, Mr. Haribhakti has observed that the valuer has in his report relied upon
only one approach i.e. "Relative Valuation Approach". The valuer in the
present case has used comparable company multiples instead of using
comparable companies multiples for valuation method to value the equity shares
of WIL viz., Price/Earning Per Share, Enterprise Value/EBITDA and Price/Book
Value. The valuer has totally ignored other three generally accepted approaches
to valuation i.e. "Cost" Approach, "Market" Approach and "Income" Approach.
Mr. Haribhakti has pointed out that the Valuer has relied upon only one
Company i.e. Cummins India Limited (CIL) for deriving the different multiples.
The right approach would be to consider the comparable companies engaged in
similar businesses. The comparable companies should be selected based on the
size of the business, nature of business, products manufactured by the Company,
stage in the business life cycle, etc. Considering only one company to derive at
the multiples would mean comparing the company with another company's
management style for managing the business and company affairs, which can
give skewed results. Also suitable discounts/premiums should be considered to
adjust the size of the company, technology used, etc. of the comparable
companies. Although CIL can be considered as a remotely comparable
company, it cannot be considered as a close comparable company for the
following reasons:-
15 CP-1037-09
(1) Size of the Company : Last two years average revenues of WIL are around
1/15 times that of CIL and the asset base of WIL is 1/6 times that of CIL.
(2) Capital Structure : WIL is not levered company, whereas CIL is levered
nominally.
(3) Earning Before Interest, Depreciation, Tax and Amortization (EBIDTA)
Margin : Last two years average EBIDTA Margins of WIL are nearly half
that of CIL.
(4) Return on Net Worth (RONW) : Last two years of RONW of WIL is less
than half that of CIL.
Mr. Haribhakti has therefore observed that the Valuer should have
considered other comparable companies to reduce the 'skewness effect'
associated with considering only one company and should have also applied
suitable discounts to adjust to the size of the Company.
(5) The observations of Shri Haribhakti on the multiple used by the valuer Shri
A. Maheshewari and Company are reproduced hereunder:
"Observations on Multiple Used
Valuation as per P/E
The valuer has not mentioned in the report the basis considered for
deriving the Price and P/E ratio of CIL. Also, the basis for considering
the forward P/E multiple by valuer is not clear.
Earning Per Share (EPS): EPS should ideally be considered for
Trailing Twelve Months (TTM) period to reflect the normalized EPS
(EV).
16 CP-1037-09
As the above parameters were ignored while arriving the P/E multiple,
in our view, P/E multiple derived by the valuer is higher than the ideal
calculation of P/E.
Valuation as per Enterprise Value (EBITDA (EV/EBITDA)
The valuer has not mentioned in the report the basis considered for
deriving the Enterprise Value (EV) and EBITDA of CIL.
In deriving the EV of a Company, an average market capitalization of
the company should be considered and thereafter add net debt (debt
less cash & surplus investments) as per the last audited financial
statements of the company. TTM EBITDA should be considered to
reflect the normalized EBITDA. In our view, EV/EBITDA derived by
the valuer is higher than the ideal calculation of EV/EBITDA as the
market capitalization of particular day is considered.
Valuation as per Price/Book Value (P/BV)
WIL, being engaged in manufacturing sector, can be valued on an
approach which considers asset base of the companies. However,
while applying P/BV multiple of one company to another, suitable
adjustments on account of difference in return on net worth needs to be
considered.
As mentioned earlier WIL's RONW is around half of CIL, a suitable
discount to P/BV multiple needs to be considered."
Mr. Haribhakti has in his analysis also observed that the valuer A. Maheshwari
and Company has not referred to a valuation date in his report, which is the
essence of any valuation report.
17 CP-1037-09
18. Mr. Sethi, the learned Advocate appearing for WIL, has submitted
that although the reduction of share capital of WIL by payment to the holders of
equity shares (other than promoters) as embodied in the Special Resolution
involves return of paid-up capital and payment of premium out of reserves and
surplus, it will not in any manner adversely affect or prejudice the interests of
the shareholders, creditors or the public at large. Mr. Sethi has further
submitted that during the previous financial years i.e. 2007 and 2008 open
offers were made by the promoters of WIL in accordance with SEBI Delisting
Regulations. The said price of Rs.622/- was paid by the promoters/acquirers
having regard to the discovered price as per Reverse Book Building Method
under the then applicable regulations of the SEBI and the same was not on the
basis of Valuation of Shares which is normally followed for reduction of
capital. The offer by the Promoters is on a different basis and under the
regulations which govern the delisting process. The reduction of capital under
Section 100 of the Act cannot be equated with the promoters offer. As there
were many requests received by the promoters/acquirers in various forms, the
promoters/acquirers provided further opportunity through offers in 2008 and
2009 at the same price that was earlier discovered under the delisting
regulations. According to KPMG's report, the fair value of the equity shares of
WIL was Rs.377/- per share. However, as per the Special Resolution, WIL
proposed to pay the price of Rs.532/- per share upon cancellation of the said
shares. It was mentioned in the Explanatory Statement that the said Valuation
18 CP-1037-09
Report of KPMG was available for inspection at the Registered Office of WIL.
However, none of the intervenors bothered to inspect the said Valuation Report
prior to the EGM. In fact, they have at no place stated when the notice of the
meeting was received by them, since that would show that they did have enough
time to inspect the valuation report prior to the EGM. Moreover, Mr. Raichura
and Mr. Zaveri have not even attended the meeting. The submissions made by
the intervenors that the Report of KPMG is purely based on WIL's version and
is not an independent analysis by KPMG or that the said report is unreliable and
cannot form the basis of any valuation of shares of WIL are false and incorrect.
It is submitted that the price being offered by WIL is fair and has been approved
by a significant majority of the shareholders. It is further submitted that the
KPMG Report has also considered the Capitalized Earning Method, which as
admitted by the intervenors themselves, is akin to the Earnings per Share
Method. Mr. Sethi has also drawn the attention of this Court to a
communication of the Reserve Bank of India, dated 4th May 2010, forwarding
the revised provisions applicable to transfer of shares of an Indian Company in
all sectors. It is inter alia provided in the revised provision 2.2 of A.P. (DIR
Series) Circular No. 16, dated 4th October 2004 as follows :
"Where the shares of an Indian Company are not listed on a recognized
stock exchange in India, the transfer of shares shall be at a price not
less than the fair value to be determined by a SEBI registered category -
19 CP-1037-09
I- Merchant Banker or a Chartered Accountant as per the discounted
free cash flow method."
It is therefore submitted by Mr. Sethi that the methods adopted by KPMG to
value the shares of WIL are widely accepted methods for valuing the shares of a
Company.
19. Mr. Sethi has further submitted that the Valuation Report of
SSPA & Co. was obtained by the Promoters and the Valuation done by SSPA &
Co. was on the basis of CCI Guidelines. The valuation report obtained by the
promoters of WIL from SSPA & Co. was to comply with the requirements laid
down by the Reserve Bank of India. SSPA & Co. has valued the shares of WIL
based on the pricing guidelines prescribed by RBI for acquisition of shares by
non-residents from resident shareholders in accordance with the 'Guidelines for
Valuation of Equity Shares of Company and the Business and the Net Assets of
the Branches' issued by the Ministry of Finance, Department of Economic
Affairs, vide File No. S.11(21)CCI(11)/90, dated 13th July 1990, popularly
known as the "CCI Guidelines". The price of Rs. 162/- per share was the price
arrived at by SSPA & Co. based on the said pricing guidelines prescribed by
RBI for acquisition of shares by a non-resident from resident shareholders. It is
submitted that the defects in the report submitted by A. Maheshwari and
Company, are clearly brought out in the report of Mr. Shailesh Haribhakti,
Chairman of BDO. It is submitted that though M/s. Raiji and Company have
used the Net Asset Value and the Earning Capitalization Method, the fair value
20 CP-1037-09
of one equity share of WIL determined by them is Rs. 444/- i.e. less than what
is offered by WIL for cancellation of shares held by its non-promoter
shareholders.
20. The Learned Advocate appearing for WIL has further submitted
that the position in law is well settled that while exercising the jurisdiction and
power to sanction a scheme, the court is required to ensure that the statutory
provisions have been complied with; that the class of persons who attended the
meeting were fairly represented; that the statutory majority was acting bonafide;
and that the arrangement or the scheme was such which an intelligent and
honest man, acting in respect of his interest might reasonably approve. It is
submitted that the Court is not required to differ from the decision of the
majority arrived at the meeting unless any of the above factors are found to be
wanting. It is further submitted that it is a settled legal position that the court
has neither the expertise nor the jurisdiction to delve deep into the commercial
wisdom exercised by the creditors and members of the company who have
ratified the scheme by the requisite majority. The Learned Advocate has in
support of his above submission relied on the decision of this Court in
ALSTOM Power Boilers Ltd. v. State Bank of India, [2002] 112 Comp Cas
674, and the decision of the Gujarat High Court in Reliance Petroleum, In re,
[2004] 119 Comp. Cas 566. The Learned Advocate has also strongly relied on
the following observation of the Division Bench of the Andhra Pradesh High
Court in V. Ramarao v. Asian Coffee Limited, [2002] 109 Comp. Cas 337:
21 CP-1037-09
"In the absence of inherent defects or other vitiating factors in the
valuation got done by the management of transferor and transferee
companies, it is not permissible for the court to suspect the correctness
or bonafides of those reports in the light of the subsequent valuation
reports which the Appellant produced at the time of hearing of the
Company Application."
Mr. Sethi has therefore submitted that the Company Petition filed by WIL be
allowed.
21. Mr. J. D. Dwarkadas, the Learned Senior Advocate appearing for
the Intervenors has submitted that though the Intervenors have in their Affidavit
contended that the proposed reduction of share capital by WIL amounts to
forceful acquisition of shares held by them and such action on the part of WIL
is against the principles of natural justice, corporate democracy and corporate
governance, he is presently not pressing the said contention, in view of the
decision of the Hon'ble Division Bench of this court in Sandvik Asia Ltd. v.
Bharat Kumar Padamsee, 2009 (3) Bom CR 57, from which an SLP was
preferred to the Hon'ble Supreme Court and was dismissed. However, he seeks
to keep the said issue open, to enable the Intervenors to raise the same before
the Hon'ble Division Bench of this Court or before the Hon'ble Apex Court if
so advised.
22. Mr. Dwarkadas has further submitted that though the Intervenors
have raised several issues in their Affidavits, he will be restricting his
submissions to only two issues. The first main submission advanced by Mr.
22 CP-1037-09
Dwarkadas is that WIL had earlier made open offers to acquire the shares held
by individual shareholders at the rate of Rs.622/- per share. Such open offers
issued by WIL were obviously based on WIL's assumption of the then fair
value. The profit before tax of WIL has doubled from the year 2007 to the year
2009. WIL has declared dividends of 25% and 30% for the years 2007 and
2008, respectively, and it is therefore, apparent that the earnings which accrue
on the shares of WIL have increased. It is therefore obvious that the intrinsic
and/or fair value of the shares of WIL has increased and/or appreciated. Mr.
Dwarkadas submits that valuation is only one of the many methods of
ascertaining the fair value of the shares of a Company but not the only
mode/method. He submits that in a matter like the present one, the fair value of
the share is to be ascertained on the facts that he has just narrated and not on the
valuation by any valuer. Despite WIL having offered Rs.622/- per share prior to
the company's profits being doubled, WIL is now offering a paltry sum of Rs.
532/- per share which is an unfair value and/or an undervalue of the said shares.
Mr. Dwarkadas therefore submits that irrespective of any valuation report
produced by WIL or by the Intervenors, this court should reject the Petition on
the sole ground that the offer of WIL to reduce its share capital at a value of Rs.
532/- per share is totally unjust, unfair and not bonafide.
23. It would be appropriate to deal with this submission of Mr.
Dwarkadas at this stage itself. As can be seen from the Affidavit filed by the
Intervenors, the foreign promoters of WIL made its first open offer in or about
23 CP-1037-09
October 2001 at a price of Rs.120/- per share. They received roughly 33.7%
shares in the open offer and the promoter shareholding went upto approximately
84.7%. The foreign promoters made a second open offer in or about April 2002
to acquire the balance 15.24% shares at Rs.120/- per share. In or about June
2007 the foreign promoters made a public offer and as per the reverse book
building prescribed under the SEBI Guidelines the discovered price of Rs.622/-
was accepted. The foreign promoters were able to acquire 6.89% equity shares
in the open offer at the reverse book building price of Rs.622/-. The price of
Rs.622/- per share paid by the promoters in the year 2007 was therefore not as
per any valuation but rather, as per the reverse book building prescribed under
the SEBI Guidelines. Two years thereafter i.e. after the profits of WIL doubled
as alleged by the Intervenors, the foreign promoters, despite the valuation report
of SSPA & Co. valuing each equity share of WIL at Rs.162/-, offered to
purchase shares from the non-promoter shareholders at the same discovered
price of Rs.622/- offered in the year 2007. The said offer was valid from 15th
May 2009 upto 31st July 2009. It was mentioned in the said offer that for the
period 1st July 2009 to 15th August 2009 the offer price would be revised
downwards to Rs.162/- and would remain valid till 15th August 2009. In my
view, the offer of the foreign promoters of WIL of Rs.622/- per share, despite
the valuation of SSPA and Co. at Rs.162/- per share, for the period of 10 weeks
i.e. from 15th May 2009 to 31st July 2009 is a business/commercial call of the
foreign promoters of WIL at that point of time. What business/commercial
24 CP-1037-09
plans the promoters of WIL had in mind at that point of time are known only to
them and in my view, the Court cannot and should not attempt to speculate or
read into the mind of the promoters. The court also cannot embark upon an
exercise of speculating as to why the promoters later offered to pay only Rs.
162/- per share from 1st August 2009 to 15th August 2009. The said offer at Rs.
622/- per share was only for a period of ten weeks and it was for the non-
promoter shareholders of WIL to accept or reject the same. The action of the
promoter shareholders in choosing to value the shares first at Rs. 622/- for a
limited period of ten weeks and thereafter reducing the valuation is legal and
within their authority. The question of why they chose to do so is one that
transcends the supervisory jurisdiction of the Company Court and concerns only
the commercial wisdom of the promoters.
24. A simple illustration here would further help to explain this
situation. When the court fixes a reserve bid for sale of property through the
Court Receiver or the Official Liquidator on the basis of a valuation report,
there are numerous instances where no purchaser comes forward to buy a
property even at the reserved price but a lone buyer comes forward with an
offer which is much higher than the reserved price fixed by the Court. This is
because a business/commercial offer solely depends on particular factors taken
into consideration by an offeror at the time he makes his offer, which in the long
run may turn out to be profitable or otherwise for him. Therefore, such offer of
an offeror cannot be held to be binding on him for all times to come and cannot
25 CP-1037-09
be used as a yardstick for the subsequent offer made by him or by any other
offeror. In the instant case, WIL has moved a Special Resolution for reducing
its share capital by compensating its equity shareholders (other than promoters)
by paying them Rs.532/- per share after following the correct mode of obtaining
the valuation report from an independent valuer. This submission of Mr.
Dwarkadas, which though on the face of it may sound attractive, must therefore
be rejected.
25. Mr. Dwarkadas, without prejudice to his earlier submission, has
further submitted that in factual circumstances such as that of the present case,
where the shares are not quoted on a Stock Exchange, the value of the shares
should be determined on the Earning Method or the Yield Method i.e. after
considering the profits which the company has been making and should be
making. In support of his contention, Mr. Dwarkadas has relied on the decision
of the Hon'ble Apex Court in Commissioner of Wealth Tax v. Mahadeo
Jalan, (1973) 3 SSC 15. Here the question raised for determination of the
Hon'ble Apex Court was as to what would be the basis of valuation of shares in
private limited companies for the purpose of Section 7 of the Wealth Tax Act,
1957 (27 of 1957). The Hon'ble Apex Court examined various aspects of
valuation of shares in a limited company as well as a private limited company
and set out its conclusion in Paragraph 12 of the Judgment. However, the
Hon'ble Court is also quick in immediately recording the following in the
subsequent paragraph of its Judgment (also numbered Paragraph 12):
26 CP-1037-09
"In setting out the above principles we have not tried to
lay down any hard and fast rule because ultimately the facts and
circumstances of each case, the nature of the business, the prospects of
profitability and such other considerations will have to be taken into
account as will be applicable to the facts of each case..."
26. In my view KPMG has used the widely accepted methodologies
i.e. the Discounted Cash Flows Methodology and the Comparable Companies
Methodology which inter alia includes the P/E multiple analysis for valuation of
WIL's shares. One of the valuation methodologies, which was adopted by M/s.
Raiji and Co., is the one suggested by the Intervenors, but even in this
valuation, the valuation of each equity share of WIL would be Rs. 444/-. Mr.
Shailesh Haribhakti, Chairman of BDO, has given cogent reasons explaining
the defects in the valuation of WIL shares by A. Maheshwari and Co. As held
in several decisions of the Hon'ble Apex Court and other High Courts
including this Court, the role of the court whilst approving such schemes is
limited to the extent of ensuring that the scheme is not unconscionable or illegal
or unfair or unjust. Merely because the determination of the share exchange
ratio or the valuation is done by a different method which might result in a
different conclusion, it alone would not justify interference, unless found to be
unfair. The Hon'ble Division Bench of the Gujarat High Court in the case of
Kiritbhai Hiralal Patel [2001] 107 COMP CAS 232, has aptly recorded as
follows:
27 CP-1037-09
"...... In the book Study on Share Valuation, which has been published
by the Institute of Chartered Accountants of India, and on which
reliance has been placed by the Learned Advocate for the Appellants,
the following observations has been made in its foreword to the first
edition ...
'The subject of valuation of shares has always been controversial in
the accounting profession. No two accountants have ever agreed in
the past or will ever agree in the future on the valuation of shares of
a company, as inevitably they involve the use of the personal
judgment on which professional men will necessarily differ'..."
In the case of Sidhpur Mills Company Limited, In re, AIR 1962 Gujrat 305, the
learned Single Judge observed thus :
"... it is not for the court to scrutinise the scheme in the manner of 'a
carping critic, a hair-splitting expert, a meticulous accountant or a
fastidious counsel' for the effort is not to emhasise the loopholes,
technical mistakes and the accounting errors. The perspective to be
that of the ordinary shareholder exercising his discretion in a
reasonable and businesslike manner."
27. In the case of Sidhpur Mills Company Limited, In re, AIR 1962
Gujrat 305, the learned Single Judge observed thus :
"... it is not for the court to scrutinise the scheme in the manner of 'a
carping critic, a hair-splitting expert, a meticulous accountant or a
fastidious counsel' for the effort is not to emhasise the loopholes,
technical mistakes and the accounting errors. The perspective has to
be that of the ordinary shareholder exercising his discretion in a
reasonable and businesslike manner."
28 CP-1037-09
28. That the Courts should not sit in judgment over the commercial
wisdom of parties is a regularly acknowledged principle. In the landmark case
of Miheer H. Mafatlal v. Mafatlal Industries Ltd., (AIR 1997 SC 506), the
Hon'ble Apex Court stated:
"The court does not have the expertise nor the jurisdiction to delve
into the deep commercial wisdom exercised by the creditors and
members of the company who have ratified the scheme by the requisite
majority. Consequently, the Company Court's jurisdiction to that
extent is peripheral and supervisory and not appellate. The Court acts
like an umpire in a game of cricket who has to see that both teams play
their game according to the rules and do not overstep the limits. But,
subject to that, how best the game is to be played is left to the players
and not the umpire"
29. In Hindustan Lever Employees Union v. Hindustan Lever
Limited, AIR 1995 SC 470, the Hon'ble Apex Court rejected the argument of
the Petitioner therein, that if some other method was adopted, probably the
determination of valuation would have been more in favour of the shareholders.
Merely because some other method of valuation could be resorted to, which
would possibly be more favourable, that alone cannot militate against granting
approval to the scheme propounded by the Company. The Court's obligation is
to be satisfied that the valuation was in accordance with the law and it was
carried out by an independent body.
29 CP-1037-09
30. In the case of Re Tata Oil Mills Co. Ltd., (1994) 81 Comp
Cases 754 (Bom), this Court observed thus:
"... the exchange ratio arrived at by Mr. Malegam has received the
approval of shareholders holding more than 99 per cent (in number
and value) shares at the meetings. No one except the shareholders
holding the minimum percentage of shares has complained before me.
The valuation has been confirmed by two eminent firms of auditors. It
would be extremely difficult to hold that the same is unfair. In any
case, it has been approved by an overwhelming majority of persons
affected and there is no basis to doubt their judgment."
31.
Finally, the principle laid down in the landmark case of Gold
Coast Selection Trust Ltd. v. Humphey (30 TC 209) must be borne in mind:
"......Valuation is an art, not an exact science. Mathematical
certainty is not demanded nor indeed it is possible."
32. In the present case, even if only the non-promoter shareholders'
voting is taken into account, the resolution proposing reduction of the share
capital of WIL is approved by an overwhelming majority of 93.94 per cent of
non-promoter shareholders in number and 85.97 per cent in value in the said
EGM. All the secured creditors of WIL have given their consent to the
proposed scheme of reduction of capital. Not a single unsecured creditor has
raised any objection qua the said proposed scheme of reduction of capital. The
hearing of the Petition was advertised by WIL as directed by this Court in two
local newspapers. However, except for the four intervenors, no other person
has come forward to oppose the Petition. Among these intervenors, two of the
30 CP-1037-09
four did not even attend the EGM. As regards their position, the observations
of the Hon'ble Apex Court in Miheer H. Mafatlal v. Mafatlal Industries Ltd.
(supra), where a shareholder did not attend the meeting and vote against the
scheme, are most relevant:
"If he was feeling that the scheme was unfair to him or was not going
to protect his interest as a shareholder in the respondent-company,
nothing prevented him from remaining present and voicing his
grievance before the general body of equity shareholders and to
apprise them of the alleged pernicious effects of the scheme. It is,
therefore, too late in the day for him to contend that the scheme was
unfair to him..."
On the other hand, the other two intervenors, Mr. Mathuradas and Mr. Kejriwal,
have not deemed it fit to inspect the valuation report prior to the EGM though it
was categorically stated in the explanatory statement that the valuation report of
KPMG was available for inspection at the registered office of WIL between
11.00 a.m. and 1.00 p.m. on any working day till the date of the EGM i.e. 10th
November 2009. The only objection raised by the two intervenors at the EGM
was that earlier, the promoters had made an offer to purchase their shares at a
value of Rs.622/- per share. No questions were put by the two intervenors to
the representative of KPMG who was present at the EGM by invitation, even
after a copy of the valuation report was provided to them at the meeting. The
Report of KPMG sets out the basis for arriving at the final opinion. The Report
clearly mentions that valuation is done by following the much accepted Income
31 CP-1037-09
Approach, the Discounted Cash Flow Method and the Company Comparable
Method. Though M/s N.M. Raiji & Co. have followed the Net Asset Value
method and the Earnings method, their valuation of each share of WIL also does
not exceed the price actually being offered by WIL for purchase of its shares.
Moreover, the drawbacks of the report submitted by the Intervenors have been
clearly set out in the Report of Mr. Shailesh Haribhakti, Chairman of BDO. The
intervenors have not attributed any motives to KPMG, nor commented on its
independent professional status or competency, nor have they been able to point
out that the method adopted by them in valuing the shares was impermissible or
absurd.
33. Keeping in view the observations of the Hon'ble Apex Court as
well as the other High Courts including this Court and the reasons set out herein
above, I see no reason why the Valuation Report of KPMG, which I find to be
fair, reasonable and based on cogent reasoning, and which has also been
accepted by a majority of the non-promoter shareholders of WIL should not be
accepted by this Court.
34. Under the circumstances the Company Petition is allowed in
terms of prayer clauses (a) and (b).
Order Accordingly.
[ S. J. KATHAWALLA, J. ]
