Company Law Board
Rakita Overseas Pvt. Ltd. vs Salter India Pvt. Ltd. And Ors. on 13 September, 2005
Equivalent citations: [2007]139COMPCAS760(CLB), [2006]68SCL336(CLB)
ORDER
S. Balasubramanian, Chairman
1. When this petition was mentioned on 29.10.2004, it was reported that . the parties had already agreed that the petitioner would go out of the company on receipt of fair consideration for the shares to be determined by M/S Price Waterhouse. Accordingly, I passed an order on that date noting the above submissions and directed that the valuation should be completed by 30.12.2004 i.e. within six weeks from the date of the AGM on 25.11.2004.
2. Thereafter, the respondents filed CA 11 of 2005 seeking for appointment of some other valuer for reasons stated in that application. Considering to the request of the respondents, I appointed M/S Earnest & Young to determine the fair value of the shares on the basis of the balance sheet as on 31st March, 2004. Accordingly, M/S Ernst & Young have determined the fair value of the shares at Rs.91.58 per share. When the valuation report was considered in the hearing on 11.7.2005, the counsel for the petitioner submitted that the petitioner was agreeable to the fair value determined while the counsel for the respondents sought to file an application challenging the valuation. Thereafter, the respondents filed CA 200/05 raising various objections on the valuation and also for seeking for dismissal of the petition on various grounds.
3. Shri Choudhary arguing for the respondents submitted: The valuation done by the valuer is not fair and reasonable. This report was analysed by one Shri Deepak Kapoor of M/S Alok Deepak & Co., Chartered Accountants. According to this analyses, M/S Ernst & Young have not taken into account several factors which have impact on the valuation. Further, M/S Price Waterhouse had earlier determined the fair value of the shares as on 31st January, 2003 at Rs.40/- per share and as on 31st March, 2003, the fair value was determined at Rs.44/-per share by the same valuer. As a matter of fact, Avery India Limited, the 2nd respondent, purchased 2,50,000 shares from M/S S.W.T Holdings BV, Netherlands at Rs.27/- per share in March, 2004. Therefore, the fair value determined by M/s Ernst & Young, within a period of one year cannot be Rs 91.58 per shares. Further, even though, these shares were offered to the petitioner at the first instance at the same price of Rs.27/-, it did not purchase the same, perhaps because according to it, the price was high. Therefore, it is inconceivable that as against Rs.27/- at which the petitioner was not interested in purchasing the shares, now it should demand Rs 91.58 per share as computed by M/S Ernst & Young.
4. The learned counsel impugned the valuation mainly on the following grounds: (1) The valuer has taken into account the business projections made by the petitioner as against the business projections given by the company. (2) The company being a private company, the shares have no marketability and as such the valuer should have discounted the fair value by a suitable percentage. (3) The valuer has not adopted Discounted Cash Flow Method which is one of the most important methods of determining the fair value. (4)The valuer has not taken into consideration that the products manufactured by the company are low technology items, that the trade mark user agreement is non exclusive and non transferable and that the company does not have exclusive contract with any of the customers and the existing arrangements with main customers are not likely to continue for a long period. To substantiate the above arguments, Shri Choudhary referred to the analyses made by Shri Deepak Kapoor, the study made by the Institute of Chartered Accountants of India on share valuation and also on "The valuation of company shares and businesses" by Mr. Adamson.
5. Shri Sarkar, Senior Advocate, appearing for the petitioner submitted Even though the petitioner has accepted the valuation done by M/S Ernst & Young, the fair value of the shares should be much more than Rs.91.5S per share. When M/S Price Waterhouse determined the fair value of the shares in 2004, it was based on the balance sheet as on 31st March, 2003. During the year, 2004-2005, the profit of the company went up substantially which itself would increase the fair value of the shares. Further, the determination of fair price by M/S Price Waterhouse was for the purpose of acquiring the shares of a non resident shareholder by a resident shareholder. Therefore, the fair value calculated by M/S Price Waterhouse as on 31.1.2003 of Rs.40/-reflected only 60% of the real fair value. Likewise, the fair value of Rs.44/- as on 31.3.2003 reflected only 60% of the real fair value on that date. The real fair value for transfer to a resident would have been Rs.54/- and Rs.59/- as on 31.1.2003 and 31.3.2003 respectively. If the fair value as on 31.3.2004 is computed in the same manner as was done by M/S Price Waterhouse without any discounting, the transfer being from a resident to a resident, the fair value would come to Rs.l 137- which is much higher than the fair value computed by M/S Ernst & Young. Further, the price of Rs.277- can never be considered to be a fair price as the transfer was an inter-group transfer. The petitioner did not accept the offer at Rs.277- not because the price was high but because the petitioner could have used the trade mark "Salter" only for a period ot 4 years and that too on payment of royalty not only on domestic sales but also on export sales. Therefore, it was not advantageous for him to acquire the shares. In so far as the analyses made by Alok Deepak & Co. is concerned, it is a completely biased report. While finding fault with various aspects of the report, M/S Alok Deepak & Co. did not even bother to indicate the fair price of the shares other than suggesting that Rs27/- could be kept as a basis for negotiations. Since, M/S Ernst & Young have been appointed by this Board and since there is no apparent deficiency in the report, the fair value computed by M/S Ernst & Young should be confirmed and the 2nd respondent should be directed to purchase the shares of the petitioner at Rs.91.58 per share.
6. Before I deal with the application, it is necessary to record that after the hearing was concluded, the 2nd respondent filed an application CA 204/2005 stating that the 2nd respondent was willing to sell its entire holding of 2.5 lakh shares to the petitioner at Rs.91.58/- per share or in the alternative, without prejudice, to buy peace and to keep harmony of relationship, the 2nd respondent was willing to purchase the shares of the petitioner at Rs.557- per share. Neither of the suggestions was acceptable to the petitioner.
7. As far as CA 200/2005 is concerned, even though in the application, the main prayer is for dismissal of the petition on the ground that it has been filed on flimsy grounds in order to pressurize the 2nd respondent to pay exorbitant price for the shareholding of the petitioner, yet, no arguments were advanced by the learned counsel for the respondents to substantiate the grounds on which the said prayer for dismissal of the petition has been sought. It is to be noted that the question of dismissal of the petition at this stage would not arise in as much as both the parties had consented before this Bench that the 2nd respondent would purchase the shares of the petitioner on a fair valuation determined by a valuer. In other words, the question of adjudicating on the merits of the case cannot arise after a consent order had been passed.
8. As far as the fair valuation of the shares is concerned, I find from the report of M/S Ernst & Young that the valuers have arrived the enterprise value on the basis of Net Assets Value (20% weightage) Comparable Companies Multiple (40% weightage) and Profit Earning Capacity Value (40% weightage). Thereafter, they have discounted the same at 15% for illliquidity. They have not given any weightage for Discounted Cash Flow Method on the ground that the petitioner had expressed reservations on the financial projections given by the company. The fair value determined is Rs.91.58 per share.
9. The various objections raised by the respondents on the valuation are based on a critical analyses made by M/S Alok Deepak & Co. of the valuation report of M/S Ernst & Young. At the out set I would like to point out that while making the analysis and observing that the valuation done by Ms Ernst & Young is biased and unreasonable, M/s Alok Deepak & Co have not bothered to indicate the value of the shares which according to them would have been fair on the basis of the analysis done by them. Instead, they have only concluded by stating that Rs 27 could be kept as basis for negotiation, without realizing that this amount was much lower than Rs 40 determined by M/s Price Water House, that too at 60% of the fair value. It is well known that valuation of shares is a complex exercise and that valuation of the shares of the same company by two different experts could never be the same. As long as the valuer is unbiased and has followed the accepted principles of valuation on proper materials and justifiable assumptions, the same cannot be questioned. In the present case, both the parties were given opportunities to make both oral and written submissions before the valuer but in respect of the analysis done by M/s Alok Deepak & Co, the petitioner was not given any opportunity.
10. Since Shri Chaudhary raised some specific issues relating to the valuation, I shall consider the same. He vehemently argued that since the valuation has been done on the basis of projections given by the petitioner and not on the basis of the one given by the company, the valuation report should be rejected. I find from the report of Ernst & Young, that the entire valuation has been done on the basis of last 4 years balance sheets and also the financial projections given by the company for the year up to 2009. There is nothing in the report to indicate that the report is based on the projection given by the petitioner and as a matter of fact, since M/s Ernst& Young have not considered DCF method for which the future projections would have been material, this objection has no relevance. Shri Chaudhary argued that the company being a private company, the valuer should have discounted the shares by an appropriate percentage. During the hearing it was pointed out to him that the valuer has, in fact, discounted the fair value by 15% for ill-liquidity and as such this objection also does not survive.
11. As far as non adoption of DCF Method is concerned, M/S Ernst & Young have indicated that the petitioner had raised some reservations on the financial "projections given by the management and therefore they have not considered this method. In this connection, I may relevantly refer to the judgment of the Supreme Court in Dr. Mrs. Renuka Datla v. Solvay Pharmacuticals BV (117 CC 585, In that case, the 'fair value of the shares was determined on Asset based Method and Earnings Based method. The percentage of shares involved was 4.91%. The valuer had not considered DCF Method on the ground that the projections given by the parties differed substantially. This valuation was challenged by the petitioner therein before the Apex Court on the ground that no control premium had been added and that DCF Method should also have been adopted. On the objection on DCF Method, the Court, while noting that the valuer had not adopted DCF Method on the ground that both the parties had provided projections which differed substantially, observed "The other objection is about DCF Method of valuation which the valuer has described as commonly accepted method in adopting "future earning based valuation". This involves "discounting the net free cash flow of a business at an appropriate discount rate". We have already adverted to the reasons given by the valuer for not adopting this method of valuation. Those reasons cannot be set to be irrelevant.... It is not the case of the petitioners that the future earning based valuation is the only reliable method of " earning based valuation". Moreover, the petitioners have not placed any facts and figures to show that such method of valuation would result in a definite increase in the share value going by independent projections. When there are vast discrepancies between the projections given by the parties and independent projections have not been provided, the valuer has chosen the best possible method of valuation by capitalizing the past earnings. In doing so, the future maintainable profits based on past performance is also an element that has gone into the calculations. No prejudice whatsoever is shown to have been caused to the petitioners by the earnings based valuation". This observation would indicate that valuation can be made even without considering DCF method, if other methods adopted are fair and reasonable. Further, in the present case, the respondents have not shown as to what prejudice has caused to them in non adoption of DCF Method, when the valuers have specifically given the reason for not adopting the said method. Another objection on the valuation is that the valuers have not taken into consideration factors like low technology, trade mark/user license, customer continuity etc. I find from the projections given by the company that these aspects have been taken into consideration by the company itself in its projection, which any way has not mattered as the valuers have not adopted DCF Method. Shri Chaudhary also contended that when the fair value as computed at Rs 40 as at 31st January 2003 and at Rs 44 as at 31st March 2003, it cannot be Rs 91 as at 31st March 2004. It is seen that the profit for the year 2003-04 had gone up substantially which has had an impact on the valuation as at 31st March 2004.
12. Thus I do not find much substance in the objections raised by the respondents on the valuation done by M/s Ernst & Young. In the critical analysis, M/s Alok Deepak & Co have commented on the valuation methods adopted by M/s Ernst & Young. While there are no specific comments on the Net Assets Value Method and Profit Earning Capacity Value Method, in respect of Comparable Companies Multiple Method, M/S Alok Deepak & Co. have made some specific comments - Salter India and Every India are not comparable companies for various reasons and that Every India went for a buyback of its shares at a price of Rs.35/- in April, 2004, while M/S Ernst & Young have taken the share price of M/S Every India at Rs.54.46 on the basis of average of the transacted share price for the last six months ended 6th April, 2005 and has also revised upward the market capitalization by 15% to eliminate retail discount inbuilt in trading of small lot shares. According to M/s Alok Deepak & Co, since the average price of A very India during the last five years had been only Rs 20, Comparative Price Multiple would be only 1/3rd what M/s Ernst & Young have computed. I find some substance in this objection. Therefore, I am of the view that to be equitable to both the sides, it would be appropriate omit this method and compute the fair price of the shares on the basis of the other two methods adopted by M/S Ernst &Young. Computation of fair value on the basis of these two methods has also been approved by the Supreme Court in Solvay Pharmacuticals BV case (supra).
13.In line with the above case, by giving l/3rd weight to Net Asset Value (NAV) Method and 2/3rd weight to Profit Earning Capacity Value (PECV) Method, both on the basis of the equity value computed by M/s Ernst & Young, the fair price for the shares of S alter India would come to Rs 76.83 per share as computed below:
Equity Value Weight Weighted equity value NAV Method 214 l/3rd 71.33 PECV Method 571 2/3rd 380.66 ____________________________________________________________ Equity Value 451.99 ____________________________________________________________ Less: Discount for illiquidity (15%) (67.80) ____________________________________________________________ Adjusted Equity Value (in lakhs) 384.19 Number of equity shares (in lakhs') 5.00 ____________________________________________________________ Value per share 76.83 ____________________________________________________________
14.Accordingly, I determine the fair value of the shares of M/s Salter India Private Limited as Rs 76.38 per share. The petitioner holds 1.25 lakhs shares in the company and the total fair value for these shares comes to Rs 95,47,500. This amount should be paid by the 2nd respondent to the petitioner on or before 10th October 2005 and simultaneously, the petitioner will hand over the share scripts in respect of the above shares together with instruments of transfer in favour of the 2nd respondent.
15.The petition is disposed of in the above terms with no order as to cost.