Madras High Court
M/S.Essar Telecommunications ... vs K.P.Jain And Another (Air 1978 Sc 734) To ... on 21 April, 2011
Author: Vinod K.Sharma
Bench: Vinod K.Sharma
IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 21.04.2011 CORAM THE HONOURABLE MR. JUSTICE VINOD K.SHARMA C.P.No.340 and 3410 of 2010 and C.A.Nos.310, 311, 312, 313 and 314 of 2011 M/s.Essar Telecommunications Holdings Private Ltd., Rep. By Mr.V.Parthasarathy Authorised Signatory New No.77/56, C.P.Ramasamy road, Abhiramapuram, Chennai 600 018. ... Petitioner/Transferor Company (C.P.No.340 of 2010) M/s.India Securities Limited, Rep. By Mr.V.Parthasarathy Authorised Signatory New No.77/56, C.P.Ramasamy road, Abhiramapuram, Chennai 600 018. ... Petitioner/Transferee Company (C.P.No.341 of 2010) Company petitions are filed under sections 391 and 394 of the Companies Act, 1956 to sanction the Scheme of Amalgamation. For petitioners : Mr.C.A.Sundaram, S.C. for M/s.P.H.Arvind Pandian For Official Liquidator : Mr.Jeyakumar Dy. Official Liquidator For Regional Director : Mr.B.Manoharan Ministry of Corporate Addl. Central Govt. affairs, Chennai Standing Counsel ***** C O M M O N O R D E R
M/s.Essar Telecommunication Holdings Private Ltd., Transferor Company and M/s.India Securities Limited, Transferee Company have filed these company petitions to sanction the Scheme of Amalgamation annexed to the petitions so as to be binding on all the shareholders and creditors of the Transferor and Transferee Companies and on the said Companies, with effect from 01.04.2010.
2 M/s.Essar Telecommunication Holdings Private Limited is a company registered under the Companies Act with its registered office at New No.77/56, C.P.Ramasamy road, Abhiramapuram, Chennai 600 018. This company was originally incorporated on 10.03.2008 in the State of Maharashtra. The registered office of the Transferor company was thereafter shifted to the State of Tamil Nadu.
3 The authorised capital of the Transferor company as on 31.03.2010 is Rs.2,00,00,000/- (Rupees two crores only) divided into 20,00,000 equity shares of Rs.10/- each. The issued, subscribed and paid up capital of the Transferor Company as on 31.03.2010 is Rs.1,54,10,000/- (Rupees one crore fifty four lakhs and ten thousand only) divided into 15,41,000 equity shares of Rs.10/- each.
4 M/s.India Securities Limited, Transferee Company is a company registered under the Companies Act with its registered office at New No.77/56, C.P.Ramasamy road, Abhiramapuram, Chennai 18.
5 The Transferee Company was incorporated under the name and style of "Dear Leasing and Finance Limited" on 28.06.1984 in the Union Territory of Delhi. The name of the Transferee Company changed to "India Securities Limited" on 01.05.1987. The registered office of the Transferee Company was shifted to the State of Tamil Nadu with effect from 28.11.1988.The name of the Transferee company was thereafter changed to "India Securities Limited on 23.05.1980 and its registered office was shifted to the State of Maharashtra with due approval with effect from 22.07.1988 and thereafter again finally shifted back to Tamil Nadu with effect from 14.05.2010.
6 The capital structure of the Transferee Company as on 31.03.2010 is as follows:
AUTHORISED 100,00,00,000 Equity shares of Rs.1/- each 5,00,000 Preference shares of Rs.2,000/- each (in Rs.) 100,00,00,000 100,00,00,000 ISSUED, SUBSCRIBED AND PAID UP 19,95,66,310 Equity shares of Rs.1/- each, fully paid up Add: 2,00,000 1% Non-Cumulative Compulsorily Convertible Preference shares of Rs.2,000/- each fully paid up TOTAL 19,95,66,310 40,00,00,000 59,95,66,310
7 The Board of Directors of Transferor and Transferee Company in their meeting held on 04.06.2010 approved and adopted the Scheme of Amalgamation, proposing to amalgamate the Transferor Company with the Transferee Company subject to confirmation by this Court. It was proposed that the entire undertaking of the Transferor Company would stand transferred to, and vested with the Transferee Company on and from the appointed date i.e. 1.4.2010. The Scheme of Amalgamation has been annexed with the petition as Annexure IV.
8 The object of Amalgamation as stated by the Transferee Company to ensure better management of the company as a single unit. The benefit of Amalgamation are stated as under:
(a) According to the plan of business restructuring undertaken by Transferee Company, it has been contemplated to diversify into infrastructure sector as stakeholder in leading telecom company in India.
(b) The amalgamation aims at unlocking value and market assessment of the telecom assets of Essar group.
(c) The amalgamation also results in value creation for shareholders of Transferee Company and liquidity for shareholders of transferor company.
(d) The amalgamation will result in creation of an entity with larger asset base, substantial networth and thus increased ability for promotion of business activities as well as fund raising for enhancement of future business.
(e) It will make available to the amalgamated company, the benefit of financial resources, managerial, technical and marketing expertise of both the company.
(f) A larger and growing company will mean enhanced financial and growth prospects for the people and organizations connected with the company, and will be in public interest.
(g) The shareholders, employees and other stakeholders of both the companies would benefit as a result of proposed amalgamation.
9 As per the Scheme, the equity shareholders of the transferor company as on date are to be alloted 330 equity shares of face value of Rs.1/- as fully paid up in the Transferee Company for everyone equity shares of face value of Rs.10/-.
10 It is also proposed the Transferee Company on sanction shall without any further application or deed, issue and allot to every member of the Transferor company, holding fully paid up equity shares 1 (one) 0.10% Non Cumulative preference share of Rs.2000/- each fully paid up by the Transferee company for every equity share held in the Transferee company redeemable at the end of 72 months at a price of Rs.4000/- per share from the date of allotment of each of such preferential share of Rs.2000/- each.
11 The Transferee Company is also to issued and allot to every debenture holder of Transferor company holding optionally convertible debenture of Rs.100/- each. One compulsorily convertible debentures of Rs.100/- each in lieu of optionally convertible debenture held in the transferor company. The valuation report has been attached as Annexure V with the Company petition.
12 According to the Scheme existing, 2,00,000 1% non cumulative compulsorily convertible preference shares of Rs.2000/- (Rupees two thousand only) each of Transferee company shall get converted into 16,77,00,000 equity shares of Rs.1/- each.
13 The equity shares of the Transferee Company issued in terms of Clauses 13 and 16 shall, subject to applicable regulations and payment of the appropriate fee and approval of the respective stock exchange(s), be listed and / or admitted to trading on the relevant stock exchanges in india, where the equity shares of the Transferee Company were listed and / or admitted to trading. The Non Cumulative Preference share of Rs.2000/- each (NPS) and compulsorily convertible debenture of Rs.100/- each (CCD) issued in terms of clauses 14 and 15 respectively shall not be listed in any of the Stock Exchanges. Equity shares of the Transferee Company to be issued and allotted under the Scheme or on conversion of CCDs shall be credited as fully paid up and shall in all respects, rank pari passu with the existing equity shares of the transferee company including listing on the stock exchanges and shall be entitled to any dividend declared by the Tranferee Company in respect of any financial year but after the respective allotment dates.
14 It is the stand of the petitioner companies that the Scheme of Amalgamation will be beneficial to both the companies and will result in better and more efficient operation of the company. It is also declared that the assets of both companies are more than sufficient to meet liabilities of the transferor and transferee companies and the Scheme will not adversely affect the rights of the creditors of the Transferee Companies in any manner whatsoever.
15 The Transferee Company as on date 30.11.2010 has no secured creditors. A certificate of Chartered Accountant in support thereto has been filed as Annexure VI to the petition. The equity shareholders of the Transferee Company are listed in the Bombay Stock Exchange. The said Stock Exchange accorded its consent to the Scheme vide letter dated 22.10.2010 (copy enclosed with petition as Annexure VII).
16 In C.A.No.1725 of 2010, this Court directed the Transferee Company to convene a meeting of equity shareholders of the Transferee Company for the purpose of considering and if thought fit, approving with or without modification of the Scheme of Amalgamation of the Transferor and Transferee Companies. Whereas in C.A.No.1724 of 2010 this Court was pleased to dispense with the convening, holding and conducting of meeting of equity shareholders of the Transferor company for approving the Scheme of Amalgamation.
17 Transferor Company also has no secured creditors. The certificate of Chartered Accountant in support of this petition has been placed on record. As per the Scheme of Amalgamation, the entire assets and liabilities of the Transferor Company is to be taken over by the Transferee company from the appointed date as a going concern.
18 There are no proceedings pending against either of the companies under Sec.235 to 251 of the Companies Act nor any proceedings under the Income Tax Act are pending against either of the companies.
19 Mr.P.J. Rishikesh, Chairman appointed by this Court in C.A.No.1726 of 2010 has filed his report dated 13.12.2010 as under:
"3 Based on the report of the Scrutineers, the said meeting was of the opinion that the Scheme of Amalgamation should be approved and agreed to. The result of the voting upon the said question was as follows:
The under mentioned Preference Shareholders of the Company voted in favour of the proposed Scheme of Amalgamation being adopted and carried into effect.
SHAREHOLDERS WHO ATTENDED IN PERSON S.No. Folio No./ Client ID Name and Address of preference shareholder No. of Prefernce shares held Ballot form S.No. 1 2 NIL Total (A) NIL SHAREHOLDERS WHO ATTENDED THROUGH PROXIES:
S.No. Folio No./ Client ID Name and Address of preference shareholder No. of Prefernce shares held Ballot form S.No. 1 IN300167 - 10038238 Prime India Investment Fund Ltd. C/o blue Arrow (Mauritius) Fund Management Ltd., Suite 2005, Level 2, Alexander House, 35 Cybercity, Ebene, Mauritius. 1,00,000 2 2 IN300167 - 10037760 Passage to India Master Fund Ltd. C/o Arcstone Capital LLC, Ebene House, 33 Cybercity, Ebene, Mauritius. 1,00,000 1 Total (B) 2,00,000 Total (C )= (A) + (B) 2,00,000 The under mentioned preference shareholders of the company voted against the proposed Scheme of Amalgamation being adopted and carried into effect.
SHAREHOLDERS WHO ATTENDED IN PERSON/PROXY S.No. Folio No./ Client ID Name and Address of preference shareholder No. of Prefernce shares held Ballot form S.No. NIL Total (A) NIL Votes cast by the following preference shareholders were invalid.
SHAREHOLDERS WHO ATTENDED IN PERSON/PROXY S.No. Folio No./ Client ID Name and Address of preference shareholder No. of Prefernce shares held Ballot form S.No. 1 2 NIL 3 Total NIL 4 The report of the Scrutineers is annexed herewith and marked as Annexure 1.
5 I declared the Resolution passed and the Scheme of Amalgamation of Essar Telecommunication Holdings Private Limited with India Securities Limited as placed before the meeting, was approved by the requisite majority without any modification. The said Resolution is given hereunder:
"RESOLVED that the Scheme of Amalgmation of Essar Telecommunication Holding Private Limited with India Securities Limited, placed before the meeting and initiated by the Chairman for the purpose of identification, be and is hereby approved.
FURTHER RESOLVED that the Board of Directors of the Company be and is hereby authorised to make and/ or consent to any modifications, alterations or amendments in the scheme, which may be deemed to be necessary by them or which are desired, directed or imposed by this Court or any other authority and to take all such steps as may be necessary and desirable to implement the Scheme and to give effect to this reslolution."
20 In pursuance to the notice of this petitions issued, the Regional Director, Ministry of Corporate affairs, Chennai has filed an affidavit on behalf of the Central Government in terms of the provisions of Sec.394A of the Companies Act which read as under:
"I, K. Pandian, S/o Shri S.Krishnan, Indian, Hindu, aged about 58 years having my office at Shastri Bhavan, Vth floor, 26, Haddows road, Chennai 600 006, do hereby solemnly affirm and sincerely state as follows:
1 I am the Regional Director, Southern Region, Ministry of Corporate Affairs, Chennai and I am authorized to file this affidavit on behalf of the central Government for due consideration of this Court. 2 I respectfully submit that the Regional Director, Southern Region, Ministry of Corporate Affairs, Chennai had been served with copy of the petitions pursuant to Section 394A of the Companies Act, 1956 in C.P.No.340 & 341 of 2010 and the same have been examined in detail. 3 I submit that the transferor company and the transferee company hve their registered offices at Chennai within the jurisdiction of this Court. 4 I further submit that a complaint has been received from an investor Shri S.Narayanasamy making allegations against M/s.India Securities Limited, Transferee Company as reported by the Registrar of Companies, Chennai. The gist of the complaint is as under:
"I have been trying to contact this compnay, for almost one decade, in their old address as well at the Haddlows Road, Chennai address, not received any annual reports, dividends, details about the working of the company, notice of AGM etc, for over a 10 plus years and never get any communication from this company, no idea, whether this company has my folio, still with them, though, many original certificates are with me, I am a shareholder from 26 November 1994 on wards. Shares are in my name."
The Registrar of Companies has informed that the matter has been taken up with the company for comments/explanation. However, this office has received a letter from India Securities Limited vide their letter dated 1.2.2011 stating that the above complainant was holding one share of the company vide Folio No.S 100725 as mentioned by him. The company has been regularly sending Annual reports as well as other communications to his registered address. The company had not declared any dividend till April 2009. Pursuant to Scheme of arrangement in the nature of demerger approved by High Court, for every 5 shares held in the company as on April 13, 2009, company had issued 3 new equity shares of Rs.10/- each of the company and 2 equity shares of Rs.10/- each of Essar Securities Limited. Since the shareholder was holding only one share, he was sent DD No.525902 dated 10.2.2010 towards his share of fractional entitlement which was duly encashed by him on 5.4.2010.
5 I further submit that a news item appeared in Business Line dated 21.1.2011 focussed on the objections raised by Vodafone regarding amalgamation of Essar Telecommunication Holdings Private limited with India Securities Limited. On 24.1.2011, the Times of India reported that Essar did not give information on merger claimed by Vodafone. Copies of newspaper extracts are enclosed with Affidavit (Annexure A and B) to enable this court to decide the Scheme.
6 I further submit that this office has received an e-mail from Securities and Exchange Board of India forwarding a letter received from Vodafone International Holdings BV (Vodafone) complaining on the proposed amalgamation. A copy of the said complaint is enclosed as Annexure 'C'. In this connection, comments have been called for from the Registrar of Companies, Chennai and he has furnished the following comments.
(a) With regard to inadequate disclosures alleged in the notice to the shareholders, the notice to the shareholders of Tranferor company is not available as this Court has dispensed with the meeting of the shareholders of the Transferor company and with regard to the Transferee Company, the notice does not contain any information aout the shareholding of M/s.ETHL Communication Holdings Limited and Vodanfone.
(b) With regard to inadequances alleged in the valuation report, the valuation report does not contain any information about encumbrance of shares in Vodafone Essar Limited.
(c ) With regard to sudden increase in Share price of ISL, ROC has commented that it may be perhaps due to market conditions and that it comes under the purview of Secuirties and Exchange board of India.
(d) Finally, on examination of Annual returns of both Transferor and Transferee Companies, it is found that "Vodafone" is not a shareholder.
In view of the above, "Vodafone" has no locus standi as it was neither a shareholder nor a creditor in these companies.
7 I further submit that the transferor company vide letter dated 8.2.11 has furnished copy of the petition filed by M/s.Vodafone international Holdings B.V. (complainant) impleading themselves as a party to the petition. As the complainant has filed a petition before the Court raising the same allegations mentioned in the complaint, this Court may taken cognizance of the complaint and pass such order.
8 I further submit that the Registrar of Companies, Chennai has received a letter from Assistant Commissioner of Income Tax, Circle 5(1), Mumbai (Annexure D) stating that the assessment in the case of Essar Teleholdings Limited for the Assessment year 2008-09 was completed and the demand of Rs.487.46 crores has been raised against the company and stated that entire transaction appears to have been structured in such a fashion that payment of taxes due to the Income tax department are avoided thus adversely affecting the interest of the revenue. Further, it has been stated that before any approval is given to the merger of these two companies, an opportunity may plese be given to the Assistant Commissioner of Income Tax, Circle 5(1) Mumbai to submit the objections of the Income tax department to these transactions so as to protect the interest of the revenue.
9 I further submit that clause 10 of the scheme protects the interest of the employees of the transferor company and clause 6.1 of the scheme provides for dissolution of the transferor company without winding up, upon amalgamation.
10 In view of the observtions made above, it is prayed that this Court may take the above submissions into consideration and pass such order or orders as this Court may deem fit and proper in the circumstances."
21 The Official Liquidator has also filed his report which reads as under:
"The Official Liquidator begs to submit that M/s.Essar Telecommunications Holdings Pvt. Ltd. (hereinafter referred to as "Transferor company") preferred a petition before the Hight Court, Madras in C.P.No.340/2010 for (a) sanctioning the Scheme of Amalgamation with M/s.India Securities Ltd. (hereinafter referred to as "Transferee Company") and (b) for dissolution of the Transferor company without the process of winding up. By its order dated 22.12.2010 in C.P.No.340 of 2010 this Court directed the official liquidator, High Court, Madras to file his report on the affairs of the Transferor Company in terms of the second proviso to sec.394(1) of the Companies act, 1956. Hence this report is submitted.
2 That as per the said order, the Official Liquidator was permitted to engage services of M/s.K.S.Jaganathan and Co., Chartered Accountants to assist him the investigation of the affairs of the Transferor Company on a consolidated remuneration of Rs.10,000/-. The Transferor Company has duly deposited a amount on 27.01.2011.
3 That as per the aforesaid orders of this Court M/s.K.S.Jaganathan & Co., Chartered Accountants have completed their work and given their report to this office on 31.01.2011.
4 That the scrutiny by the Chartered Accountants was confined to the Profit and Loss account, Balance sheet, and other relevant books and statutory records maintained by the Transferor Company for the last 3 years from 31.3.2008, 31.3.2009 and 31.3.2010 and the minutes of the meetings of the members and the Directors of the Transferor Company since the date of incorproration and the statutory books and registers viz.,
a) Register of Members
b) Register of Directors
c) Register of Directors Shareholdings
d) Register of Contracts.
e) Register of Share Transfer.
f) Register of Investments
g) Minutes of the Board and General Body meetings.
5 That the Chartered Accountants have observed that the Transferor Company is maintaining proper books of accounts as per requirements of the Companies Act, 1956 and in accordance with normally accepted accounting principles. All entries have been made in the statutory registers in accordance with the requirements of the Companies Act, 1956 well within the statutory time prescribed under the Act and no discrepancies were noted.
6 That it is reported by the auditors that on a perusal of the records maintained at the office of the Registrar of Companies, Chennai the Company has filed all the returns and no case was pending against the company or any of its Directors/officers and found nothing prejudicial to the interest of the shareholders, creditors and others. That the company has not accepted any deposits from the public. Hence the question of commenting on compliance of the requirements of the Act relating to deposits does not arise. That the Company has no unpaid/unclaimed dividend and hence the question of commenting on compliance of Sec.205(A) of the Companies Act, 1956 does not arise.
7 That the Chartered Accountants have observed and reported as under on the share valuation report dated 14.7.2010 given by M/s.Bansi S.Mehta & Co., Chartered Accountants, Mumbai.
i) The said share valuation report is dated 14.7.2010, whereas the Board has adopted the Scheme of amalgamation on 4.6.2010, how could the scheme have been adopted by the board without the share valuation report in place.
ii ) The share valuation report is dated 14.7.2010 & is based on unaccounted accounts as at 31.3.2010. The accounts of the Transferor Company were audited immediately thereafter on 15.7.2010 & its subsidiary ETHL Communications Holdings Limited which holds shares in Vodafone Essar Limited was audited on 28.7.2010. Thus, the share valuation report was based on unaudited financial statements of both the companies. The effect of audit on the share valuation remains unknown.
iii) Workings forming part of the valuation report (financial numbers to arive at the swap ratio) have not been provided to us, hence we are not able to comment on the share value of the transferor and transferee companies.
iv) We hope the folliwng values attributable to the equity shares of the transferor and transferee company culled out from various records are considered in the valuation report in order to determine the exchange ratio:
a) As per the Scheme, on the appointed date preference shares of total nominal value of Rs.360 crores in the books of the transferee company are proposed to be converted into 16.77 crores equity shares of Rs.1/- each, thus imputing a value of Rs.21.47 to a equity share.
b) The share of Vodafone Essar Limited held by a subsidary company of the transferor company have been valued at Rs.5229.32 crores as on 31.3.2010 (vide the audited balance sheet of ETHL Communications Holdings Ltd. as at 31.3.2010). However the cost of the same is Rs.1260.59 crores. Note B (i) (b) of schedule 8 to the said accounts specifically mentions that these shares are held under "Investments" in the category of "Available for sale financial assets" have been valued at their fair value. Further, it also adds that the put option held by this subsidiary company has been valued at its fair value of NIL based on its valuation from an independent valuer.
c) Vodafone had acquired 67% stake from hutchisonin the joint venture between Hutchison and Essor during 2007. At the time of its acquisition in february 2007, the enterprise (presently known as Vodafone Essar Limited) was valued at 19 billion USD (about Rs.85,500 crores). One of the subsidiary companies of the Transferor company (ETHL Communications Holdings ltd.) holds 10.97% stake in this company which translates to Rs.9,379 crores based on the valuationo prevailing at the time of its acquisition.
d) The transferor company has made 2 allotments of shares on 9.4.2008 and on 20.3.2009. Both these allotments have been made at a premium of Rs.90/= to a share. These investments have been made after the acquisition of shares in Vodafone Essar Ltd. By the transferor company's subsidiary, thus the valuation of the Vodafone Essar ltd. Should have translated into these two allotments.
v) On 11.10.2010 the shareholders of the transferee company have given permission for sale of the "finance division" of the transferee company to another company. "Frontier Leasing and Finance Limited" in which Essar group owns 72.08% stake. The share valuation report of M/s.Bansi S.mehta & Co. has excluded the finance divison from the workings for computation of share value of the transferee company. Since this is only a sale of the undertaking at fair value, such exclusion need not have been done as the transferee company would have received money or money equivalent for the transfer of this division.
vi) Page 7 of the valuation report mentions that "Pursuant to the Scheme of arrangement under section 391 r.w.s.394 of the Companies Act, 1956, the Board of ISL has proposed to transfer its finance division, which is mainly engaged in hire purchase business. The appointed date for the proposed transfer is April 1, 2010.
However, it looks like the transferee company has not gone through the above process, instead has chosen to go through section 293(1) (d) of the Companies Act, 1956 and its shareholders have passed a resolution by postal ballot on 11.10.2010. We do not know whether this would have a bearing on the valuation done by the professional.
vii ) In page 11 of the valuation report, in para 3.4.1.2, a multiple of market value to book value has been used & the resultant vlue seems to have been increased by the realizable value of investments, properties and surplus cash to arrive at the value of shares of the transferee company. Why has this been done after using the multiple ?
The usage off multiple is to discover the value of assets.
viii) At page 13 of the report under weighted average method in clause (iv) it is mentioned that the price has been adjusted for sale of finance division, such adjustment need not have been done since the company would have received money equivalent for sale of this division.
ix) In the same page inSEBI pricing formula, no adjustment seems to have been made for the finance division, which is inconsistent with the valuation methodology adopted by the valuer.
x) In page 16, para 3.5.2.2.1.9 of the valuation report, an arbitrary figure of 25% has been considered as dividend that may be payable and has been reduced from the valuation. This has no basis. Further the learned Valuer has not mentioned whether this dividend in the hands of the shareholders has been considered for valuation of the equity shares.
xi) the value of shares in Vodafone Essar Ltd., held by the transferor company's subsidiary have been valued on the assumption that Essar would exercise its put option under its agreement with Vodafone, its Joint Venture partner in the said company. As per information from various recent news items inleading financial dailies Essar has two options, one is to exercise put option on its entire holdings, which is valued at USD 5 bin, the other situationbeing that if Essar does not exercise this option, then the value of part shares tendered in the put option has to be done by bankers. The same dailies also carry news item that Essar will not tender its entire holding of 33% in Vodafone Essar Ltd. This being the case, we fail to understand how the Valuer could have arrived at a value of shares of VE based on this put option price.
xii) We wish to draw your attention to the balance sheet of ETHL Communications Holdings Ltd. (subsidary of the Trasferor company) as at 31st March 2010 Schedule 3 Secured Loans. It is clearly mentioned that its 10.97% stake in Vodafone Essar Limited have been pledged to raise the debentures of Rs.3,707.54 crores. This fact of pledge of the shares has not been discussed / considered in the share valuation to determine the swap ratio. The money raised from these debentures has been invested in a subsidiary company ETHL Communications (Mauritius) Limited, end use of the funds has not been disclosed in the financials.
xiii) There are a number of companies in the listed space in India doing business quite similar / identical to that of Vodafone Essar Limited. We do not know why the share value of these companies has not been considered / benchmarked for valuation of shares of Vodafone Essar Limited.
xiv) The meeting of the equity share holders of the Transferor Company was dispensed with. However the Honble High Court, Madras directed that a meeting of the equity share holders of the Transferee be held. Such meeting was held on 13th December 2010 after serving due notice to the share holders.
The highlight of the merger is the tacit transfer of shares held by Essar group in Vodafone Essar Limited through a subsidiary company of the Transferor Company to the Transferee Company. Vodafone Essar Limited is an unlisted company; hence valuing the shares of this company poses a challenge and has been a highly contentious issue. Further this merger is ALL ABOUT TRANSFER OF ESSARS 10.97% stake in Vodafone Essar Limited. Neither the scheme, not the notice or explanatory statement to the notice speaks or even mentions about this huge asset held by the Transferor Company.
Along with the notice, an explanatory statement pursuant to section 393 of the Companies Act, 1956 and the Scheme of Amalgamation were also circulated. As part of the explanatory statement there is a statement containing Disclosure to the share holders for merger through scheme of amalgamation under section 391 to 394 of the Companies Act, 1956 as prescribed by Securities and Exchange Board of India.
This disclosure contains an item no.20 Any other details which deemed necessary for information to share holders enabling them to make an informed decision about the proposed scheme including those required under section 393 of the Companies Act, 1956 to which the reply marked is NIL.
Not disclosure of this material fact to the share holders of the Transferee Company would have prevented its share holders from taking an informed decision.
xv) As part of the scheme and as part of the consideration, persons holding Optionally convertible debentures in the Transferor Company are being allotted Compulsorily convertible Debentures and such debentures would be converted into 4 equity shares in the Transferee Company within 18 months from the date of transfer. We are not aware whether this dilution in share holding has been factored in the share valuation report.
xvi) There has been opposition to the merger from Vodafone and this has been reported in almost all leading dailies. We are enclosing herewith copies of the same which may be relevant to the merger.
8 The matter was taken up with the Transferor Company vide their office letter No.11/2011/Amal dated 28th February, 2011 requesting it to give its explanation on the abovementioned observations of the Chartered Accountant.
9 The Transferor Company in its letter dated 28.2.2011 has replied with reference to the observations of M/s K.S.Jagannathan and Co., Chartered Accountant as under : -
Second proviso to section 394(1) of the Companies Act, 1956, requires that no order for the dissolution of any transferor company shall be made by the Court unless official liquidator has on scrutiny of books and papers of the Company, made a report to the Court that the affairs of the Company have not been conducted in a manner prejudicial to the interest of its members or to public interest. For this prescribed objective, M/s K.S.Jagannathan & Co., Chartered Accountants (auditor) were appointed by your office to conduct the scrutiny of books and papers of the our company. In our opinion observations/ remarks made by the auditor regarding valuation methodology of India Securities Limited, disclosures made to the shareholders of India Securities Limited are not connected with the opinion on whether affairs of transferor company were conducted in a manner prejudicial to the interest of their members, or their creditors or to the public. Notwithstanding the above, we are submitting our point wise explanations to the points raised for the sake of clarity
i) reply to query at point 1 of the letter - At the Board meeting held on 4th June, 2006, the Board approved the amalgamation of the Company with India Securities Limited and appointed of experts for advice on fair ratio of exchange and delegated the authority to finalize the scheme. The scheme was finalized after receipt of report on fair ratio of exchange by M/s Bansi S Mehta and fairness opinion on the same by M/s Edelweiss Capital Limited. This is a commonly followed practice by corporate groups. A copy of the letter by ISL, to Bombay Stock Exchange is enclosed with the report.
ii) reply to query at point 2 of the letter it may be noted that there has been no significant change in the unaudited financials of the Company as on March 31, 2010 and the last audited balance sheet of the Company as on December, 31, 2009. As far as India Securities Limited is concerned, unaudited financials published by the Company on April 29, 2010 were subjected to limited review by the Statutory auditors as per clause 41(1)(c) (i) of the Listing Agreement. It may also be noted that Statutory auditors of both the Companies have not expressed any qualification or adverse remark on the accounts of the Company.
iii) reply to query at point 3 of the letter As the auditor appointed under second proviso to section 394(I) of the Companies Act, 1956 are not required to conduct a fair valuation of the assets of Company, working papers were not submitted to the auditor.
iv) reply to query at point 4(a) of the letter As per the scheme, on appointed date preference shares of total nominal value of Rs.360 crores in the books of transferee company are proposed to be converted into 16.77 crores equity shares of Rs.1/- each. The conversion price is determined in accordance with chapter VII of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 and terms of issue.
v) reply to query at point 4(b) of the letter value of investments in shares of Vodafone Essar Limited (VEL) by ETHL Communications Holdings Limited (ETHL CHL) is shown as per Accounting Standards AS 30 and fair value of put option is as per valuation report from an independent valuer M/s Keynote Corporate Services, Category I Merchant Banker.
vi) reply to query at point 4(c) of the letter - the auditor has not given any basis for his assumption of enterprise value of Vodafone Essar Limited in 2007. However, it may be noted that value of equity is arrived at after deducting debt from enterprise value. In any case, acquisition value by Vodafone Group in March 2007 is not relevant in this exercise.
vii) reply to query at point 4(d) of the letter regarding issue of shares on premium by the Company, it may be noted that both these allotments are made to the holding Company holding 100% share capital of the Company and as such reflection of underlying assets is not a prerequisite for the same as the pre and post shareholding pattern of the Company remains the same after these allotments.
viii) reply to query at point 5 of the letter - regarding exclusion of finance division ISL, auditor is contradicting his statement in point no. 8 which is self explanatory.
ix) reply to query at point 6 of the letter it is clarified that it was proposed to transfer the finance undertaking of ISL through scheme of arrangement under section 391 of the Companies Act, 1956, however as a matter of procedural convenience and flexibility, with due approval from shareholders as per section 293 (1) (a) of the Companies Act, 1956, finance division of ISL was sold to Frontier Leasing & Finance Limited.
x) reply to query at point 7 of the letter - it is submitted that point no.3.4.1.3 of the valuation report refers to addition of realizable value of investments properties and surplus cash to the book value arrived after application of multiple of market value to book value because the same was excluded from book value in terms of para 3.4.1.1 of the valuation report.
xi) reply to query at point 8 of the letter as explained in point no.8 of this reply.
xii) reply to query at point 9 of the letter the pricing formula as prescribed in SEBI (Substantial Acquisition of shares and Takeovers) Regulations 1997 is linked to market value of the shares and not linked to book value / intrinsic value.
xiii) reply to query at point 10 of the letter an overall discount of 25% on value of investments has been considered instead of separately calculating tax on capital gains at the rate of 22.66% and dividend distribution tax at the rate of 16.99%.
xiv) reply to query at point 12 of the letter as the amount borrowed by ETHL CHL by pledge of VEL shares is utilized for making investments, the said pledge has no impact on valuation. Further information of end use of funds was well within the public domain as it was part of information Memorandum available on the website of stock exchange which was issued for said borrowings.
xv) reply to query at point 11 and 13 of the letter USD 5 billion is minimum assured value as per the underwritten put option agreement entered by the subsidiary of the Company with Vodafone. Hence based on the principle of conservatism, it is considered for valuation of stake in Vodafone Essar Limited. In the light of this minimum assured value, comparative values of other listed telecom companies doing similar business to that of Vodafone Essar Limited is immaterial for the purpose of valuation.
xvi) reply to query at point 14 of the letter attention is drawn to the point no.14.3 and 14.4 of the explanatory statement of notice of court convened meetings of ISL where market assessment of Telecom Assets of Essar Group and stakeholder in leading telecom Company in India are mentioned as objects of the scheme. It is well known public information that Essar Group holds stake in only one leading Telecom Companies In India and i.e. Vodafone Essar Limited. Mere omission to mention the name of the Company in which stake is held can not be construed as suppression of the facts especially when it was clearly mentioned in consolidated balance sheet of the Company and valuation report which was available for inspection of members till the time of conclusion of court convened meeting. A copy of the valuation report as well copy of notice send to shareholders (page 8 specifies documents available for inspection) is enclosed herewith. Further it is stated that Put option agreement is merely an option available with Essar Group which may or may not be exercised and hence has no bearing on proposed scheme of amalgamation. Thus as rightly specified in point no.20 of the Disclosures as prescribed by SEBI, there is no other information required to be disclosed to the shareholders under section 393 of the Companies Act, 1956 which is necessary for enabling them to make an informed decision. It is also submitted that the said observation is on disclosures by the transferee company and is not connected to conduct of affairs of the Company.
xvii) reply to query at point 15 of the letter as specified in clause 8 of the scheme of amalgamation, conversion of compulsorily convertible debentures (CCD) into equity shares cannot be made in terms of existing listing requirements. Therefore conversion has been prescribed subject to compliance with continuous listing requirements as per clause 40 A of the Listing Agreement and terms therefore provide that in case of non allotment of equity shares, CCDs shall get converted into preference shares as stipulated in clause 8.3 of the scheme. Therefore, this has not been factored in the share valuation report.
xviii) reply to query at point 16 of the letter Vodafone PLC has opposed the demerger by filing objections before the Madras High Court. The various News Articles are based on those objections filed by Vodafone PLC. The matter is before the Madras High Court for consideration.
10. A copy of the letter of Transferor Company dated 28.2.2011 is enclosed with report as Annexure B.
11. However, the Official Liquidator submits that the contention of the Transferor Company that the observations / remarks made by the Chartered Accountant in his report are not connected with the opinion on whether the affairs of Transferor Company were conducted in a manner prejudicial to the interest of their members, or their conditions or to the public, is acceptable.
12. That Official Liquidator further submits that as per the report, the Chartered Accountants are of opinion that the affairs of the Transferor Company was not conducted in a manner which was prejudicial to the interest of their members, or their creditors, or to the public, nor were any transactions which would attract the provisions of the sections 542/543 of the Companies Act, 1956.
13. That on the scrutiny of the Balance Sheet as on 31.03.2009 it is observed that the Transferor Company M/s. Essar Telecommunications Holdings India Pvt Ltd does not have any secured loans; and unsecured loans are the three series of optionally convertible debentures Viz. the First Series 134,987,909 Convertible Debentures of Rs.100/- each fully paid up, the Second Series 20,120,540 Convertible Debentures of Rs.100/- each fully paid up and the Third Series 197,328 Convertible Debentures of Rs.100/- each fully paid up. It is also seen that under the Head Current Liabilities and Provisions, Dues to Sundry Creditors for other than micro, small and medium enterprises is shown as Rs.56,562/- and for Other Liabilities is shown as Rs.20,144/-.
14. Subject to the above observation, the Official Liquidator has not got any material to come to a conclusion that the affairs of the Transferor Company have been conducted in a manner which was prejudicial to the interest of their members or their creditors or to the public, or there were any transactions to attract the provisions of Section 542 and 543 of the Companies Act, 1956.
15. In view of the above, suitable order or orders as this Honble Court may deem fit and proper may kindly be passed."
22 The reading of the affidavit filed by the Regional Director, Ministry of Corporate Affairs, Chennai would show that a positive report is submitted that Vodafone, has no locus standi to object to the Scheme, whereas suggestion has been made to give an opportunity of hearing to the Assistant Commissioner Income tax to file objection to protect the interest of the revenue.
23 The Official Liquidator's report also shows that on detailed consideration of the points raised, it is reported that the affairs of the Transferor company were not conducted in the manner prejudicial to the interest of the members or their creditors or to the public.
24 It has also been reported that the transaction would not attract the provisions of Sec.542/543 of the Companies Act. Thus, prima facie, there is no objection by the Official Liquidator or the Regional Director to the Scheme of Amalgamation.
25 However, report of the Regional Director leads to consider the objections, filed by revenue department.
26 The Assistant Commissioner, Income tax Circle 5(1), Mumbai has filed this C.A.No.314 of 2010 for condoning the delay in filing objection on the ground that due to administrative reason, there was delay in engaging counsel.
27 Keeping in view of the fact that the Regional Director in his report has also recommended, this Court to consider the objection by the Income tax department, this application is ordered and delay of 71 days in filing the objection is condoned. The objection raised by revenue department is that as per the assessment for the year 2008-09 completed on 31.12.2010 a demand of 487.46 Crores is raised against M/s.Essar Telecommunication Holding Ltd. (ETHL).
28 It is also stated that Transferor Company is wholly owned subsidiary company of M/s.Essar Teleholdings Ltd. and therefore because of the demand on M/s.Essar Teleholdings Ltd., for the assessment year 2008-09 , the Scheme be not approved. The objection is also raised that the Scheme is being objected to by M/s.Vodafone International B.V. 29 The reading of the objection only shows that there are certain claims against ETHL, the Assistant Commissioner of Income tax department has not disclosed that the demand has been stayed by the Appellate Authority nor it is disclosed as to how the demand on the holding company, can be a subsidiary company to adopt the Scheme of Amalgamation which otherwise satisfies the provisions of the Companies Act. It is not in dispute that there is no claim against Transferor or Transferee Company and the demand against the holding company, has also stayed by the Appellate Authority.
30 The objections of the Income tax department to the Scheme Amalgamation are therefore rejected.
31 The objections have also been raised by M/s.Vodafone International B.V.. A number of company applications have been filed by M/s.Vodafone International Holdings Ltd. which, are as under:
32 C.A.No.310 of 2011 has been filed, to implead the Securities Exchange Board of India as party to the proceedings in respect of C.P.No.340 of 2010. This application on the face of it misconceived. M/s.Vodafone International Holdings has no locus standi to request to implead a party especially when the SEBI has already filed no objection stating that it has no concern or locus standi in the matter.
33 Even otherwise, it is not for Vodafone International Holdings to request for impleading of the parties by invoking provisions of order I Rule 8A and Rule 10(2) of C.P.C. Read with Rule 6,9,11 and 19 of Companies Court Rules.
34 C.A.No.311 of 2011 has been filed directing the respondent to provide copies of the documents enumerated in the schedule to the Judges Summons to the to the application. This application is again misconceived. Vodafone International Holdings, admittedly is not a party to the petition and is objector to the Scheme of Amalgamation. The documents are required to be claimed from the counsel for the petitioner in pursuance to public notice. No company application is competent to claim documents if absence of request to the counsel.
35 C.A.No.312 of 2011 is also for directing the respondent to supply documents in C.P.No.341 of 2010. For the reasons stated in rejecting C.A.No.311 of 2011, this application is also dismissed.
36 M/s.Vodafone International Holdings B.V. has also filed objections to C.P.No.340 and 341 of 2010, thereafter without seeking permission of the Court, additional common affidavits are also been filed without making out ground as to why additional common affidavits have been filed. The objections raised are that the Transferor company held 100% equity shares of ETHL Communication Holding Ltd. and objection in turn holds 10.97% equity interest in M/s.Vodafone Essar Ltd. and Indian Telecommunication company. The objector therefore holds majority indirect equity interest in Vodafone Essar Ltd., further that certain companies of M/s.Essar Group including Transferor company holds directly or indirectly approximately 33% equity interest in Vodafone Essar Ltd. The proposed Amalgamation of Transferor and Transferee companies therefore would result in transfer of 10.97% indirect equity interest in M/s.B.Vodafone Essar ltd. which will have impact on the objector.
37 The objection is also raised that the valuation report adopted for the Scheme is not in accordance with law and the settled principle applicable to valuation of shares specially when allotment/ exchange ratio is not only for equity shares but also for non cumulative preference shares.
38 It is pertinent to mention here that these very objections qua valuation have dealt with in detail in the report of the Official Liquidator reproduced above. The other objection raised is thatf the Scheme is misinterpreted to public, as certain material facts were suppressed.
39 The objection has also been raised that the Scheme to be void, under SEBI Regulations and that the Scheme is to influence the determination of the Fair Market Value under "FMV Put Option" agreement which is likely to adversely affect M/s.Vodafone Essar Ltd.
40 By way of additional common objection, it is pleaded that the clarification issued on 19th January, the deals with selected issues, and fails to address various other issues raised by the Objectors.
41 The objection is raised that shareholders of the Transferor Company were required to furnish relevant material to entitle them to arrive at the decision regarding the Scheme, therefore this Court should taken into consideration whether there was sufficient materials furnished to the equity shareholders.
42 It is not in dispute that the shareholders of the Transferee Company in the meeting held under the Chairman appointed by this Court, have considered the scheme and approved it.
43 The objections filed by Vodafone International Private Ltd. are objected to by the petitioner companies by raising preliminary objection, that it has no locus standi to file objections.
44 The locus standi of M/s.Vodafone International Holding B.V. is questioned, on the ground that the Scheme of Amalgamation is Arrangement between the shareholders and creditors of the transferor and transferee companies.
45 This Court while considering the Scheme of Amalgamation under Sec.391 to 394 of the Companies Act is to ascertain that the Scheme in question as a whole, to be just fair and reasonable from the point of view of men of business taking commerical decision which is not detriment to the interest of the shareholders and creditors. The only parties who can object to the Scheme are either the shareholders or the creditors.
46 In support of this contention, the learned counsel for the petitioner placed reliance on the judgment of the Hon'ble Bombay High Court in the case of Sequent Scientific Ltd., In re P.I. Drugs and Pharmaceuticals Ltd., in re ([2009]151 Comp Cas 1 (Bom) wherein the Hon'ble Bombay High Court was pleased to lay down as under:
"11. Having considered the rival submissions, the first question that needs to be addressed is; whether the intervenor has locus to appear in the present proceedings and in any case to object to the proposed scheme. There is force in the stand taken by the petitioner companies that section 391 plainly recognises that it is only the creditors and shareholders who are expected to participate in consideration of the proposed scheme of amalgamation. The intervenor is neither a shareholder nor the creditor of the transferor company. Thus understood, the intervenor cannot be heard to raise any objection with regard to the proposed scheme.
12 Assuming that the intervenor has locus, having regard to the fact that it has executed supply agreement with the transferor company under which the transferor company is obliged to discharge its obligation specified therein. Even so, the question is whether the objection of the intervenor can be addressed at this stage of the proceedings. The objection essentially is in the nature of grievance about breach of or likelihood of breach of conditions of supply agreement operating between the intervenor and the transferor company. Counsel appearing for the transferor company has rightly pressed into service the decision of the Delhi High Court as well as of the Calcutta High Court to contend that the intervenor company as of now has no cause of action to resist the proposed scheme. The fact that on account of the scheme coming into force, there is likelihood of breach of some contractual terms between the intervenor company and the transferor company cannot be the basis to consider the efficacy and the justification for introducing the proposed scheme of amalgmation. In the case of Telesound India ltd., In re reported in (1983) 53 Comp Cas 926 (Delhi) in paragraph 16 of the said decision, while considering similar grievance the court observed thus (page 947):
"This court is however, not concerned at this stage if the transfer by or consequent on amalgamation by the order of the court would nevertheless by tantamount to the assignment of a tenancy and if without the consent of the landlord would render the company or the transferee company liable to eviction under section 14(1)(b0 of the Rent Control Act or otherwise be actionable in a regular civil action against them. Such a matter has to be examined and decided in accordance with the special jurisdiction created by that Act or on a regular civil action, if maintainable. No cause of action accrues to the landlord before the amalgamation and consequential vesting. Neither the amalgamation nor the vesting would deprive the landlord of any plea based on alleged assignment which may be open in law to the landlord. If there is any assignment in law, which may attract the provisions of the Delhi Rent Control Act, the landlord would be free to take recourse to the proceedings under that Act or in a regular civil action and such proceedings would be dealt with and decided by the appropriate authority in accordance with law.
47 The learned counsel for the petitioner also placed reliance on the judgment of the Hon'ble Supreme Court in the case of S.K.Gupta and another Vs K.P.Jain and another (AIR 1978 SC 734) to contend that a clear distinction was drawn by the Hon'ble Supreme Court while interpreting Sec.391, 392 of the Companies Act, to hold that it is only under Sec.392 of the Act any person can file objection. Therefore, by implication, the third party cannot file objection to the Scheme of Amalgamation. The Hon'ble Supreme Court in the case of S.K.Gupta and another Vs K.P.Jain and another (supra) was pleased to laid down as under:
"Sub-section (2) provides the legislative exposition as to who can move the Court for taking action under s. 392. Reference to s. 391 in sub-s. (2) of s. 392 merely indicates which compromise or arrangement can be brought before the Court for taking action under s. 392. The reference to s. 391 does not mean that all the limitations or restrictions on the right of an individual to move the Court while proposing a scheme of compromiseor arrangement have to be read in sub-s. (2) merely because s. 391 is referred to therein. Unlike section 391, s. 392 does not specify that a member or creditor or in the case of a company being wound up, its liquidator, can move the Court under s. 392. On the other hand, the legislature uses the expression 'any person interested in the affairs of the company' which has wider denotation than a member or creditor or liquidator of a company. In fact, the ambit of the power to act under s. 392(2) can be gauged from the fact that the Court can suo motu act to take action as contemplated by s. 392(1) or it may act on anapplication of any person interested in the affairs of the Company.
15 In this context the observations of the Gujarat High Court, extracted hereunder, in Mansukhlal v. M. V. Shah,(1) can be referred to with advantage as it precisely lays bare the ambit and width of Court's power under section 392: "The framers of the company law in India have conferred statutory powers on the High Court to make such modifications in the compromise or arrangement as the Court may consider necessary for the proper working of the compromise and arrangement. The power of the widest amplitude has been conferred on the court under section 392(1) (b) and the width and the magnitude of the power can be gauged from the language employed in section 392 (1) (a) which confers a sort of a supervisory role on the court during the period the scheme of compromise or arrangement is being implemented. Reading clauses (a) and (b) of sub-section (1) of section 392, it appears that Parliament did not want the court to be functus officio as soon as the scheme of compromise and arrangement is sanctioned by it. The Court has a continuing supervision over the implementation of compromise and arrangement. Unenvisaged, unanticipated, unforeseen or even unimaginable hitches,obstruction and impediments may arise in the course of implementation of a scheme of compromise and arrangement and if on every such occasion, sponsors have to go back to the parties concerned for seeking their approval for a modification and then seek the approval of the court, it would be a long-drawn out, protracted, time-consuming process with no guarantee of result and the whole scheme of compromise and arrangement may be mutilated in the process. Parliament has, therefore thought it fit to trust the wisdom of the court rather than go back to the interested parties. If the parties have several times to decide the modification with the democratic process, the good part of an election machinery apart, the dirt may step in, the conflicting interests may be bought and sold, and, in the process, the whole scheme of compromise and arrangement may be jettisoned. In order, therefore, to guard against this eventuality and situation, which is clearly envisageable, Parliament has conferred power on the court, not only to make modifications even at the time of sanctioning the scheme, but at any time thereafter during the period the scheme is being implemented. Conceding that, before the Court sanctions the scheme, it partakes the character of an emerging contract between the company and the creditors and members; once the court approves it, it becomes a statutorily enforceable contract even on dissidents, with power in the court to modify, amend or corrector revise the contract the outer periphery or the limit on the power being that, after testing it on this anvil of probabilities, surrounding circumstances and the prevalent state of affairs, it can be done for the proper working of the compromise and arrangement, and subject to this limit on the Court's power, the power seems to be absolute and of the widest amplitude and it would be unwise to curtail it by process of interpretation".
16. If the Court can suo motu act, it is immaterial as to who drew the attention of the Court to a situation which necessitated Court's intervention. Where the power is conferred on the Court to take action on its own motion the information emanating from whatever source which calls for Court's attention can as well be obtained from any person without questioning his credentials, moving an application drawing attention of the Court to a situation where it must act. Undoubtedly, the Court may decline to act at the instance of a busy body but if the action proposed to be taken is justified, valid, legal or called for, the capacity or credentials of the person who brought the situation calling for Court's intervention is hardly relevant nor would it invalidate the resultant action only on that ground. Therefore, when sub-s. (2) confers power on the Court to act on its own motion, the question of locus standi hardly arises. The High Court while examining the question of locus standi, after combing the provision contained in sub-s.(2), wholly overlooked the important provision therein contained that the High Court can act on its own motion. It was, however, said in passing that sub-s. (2) enables the Court to wind up the Company and, therefore, the Court may act on its own motion or on the application of any person interested in the affairs of the company not for modifying the scheme or for any directions but for winding up the company. But when the Court is required to act under s. 392(1), the limitations and restrictions imposed upon the Court under s. 391(1) must be read in section 392(1) because the sections are complimentary to each other. This submission overlooks the two different stages at which sections 391and 392 operate though they may be complimentary to each other. Two sub-sections of s. 392 have to be harmoniously read and sub-s. (2) clearly indicates the power of Court to take action suo motu while taking action under sub-s. (1). Again this approach is inconsistent with the language employed in s. 392(2) in that the Court can wind up the company. under s. 392(2) if and only it is satisfied that the compromise and/or arrangement sanctioned by it cannot be satisfactorily worked with orwithout modifications. The Court has to reach an affirmative conclusion before acting under s.392(2) that the compromise and/or arrangement cannot be worked satisfactorily with or without modification (see J. K. Bombay P. Ltd.) (supra). It follows as a corollary that if the compromise or arrangement can be worked as it is or by making modifications, the Court will have no power to wind up the Company under s. 392(2). Now, if the arrangement or compromise can be worked with or without modification, the Court must undertake the exercise to find out what modifications are necessary to make the compromise or arrangement workable and that it can do so on its own motion or on the application of any person interested in the affairs of the Company. If such be the power conferred on the Court, it is difficult to entertain the submission that an application for directions or modification cannot be entertained except when made by a member or creditor. It would whittle down the power of the Court in that it cannot do so on its own motion."
48 Mr.Arvind P.Dattar, Senior counsel on the other hand vehmently contended, that the judgment of the Hon'ble Bombay High Court does not laid down correct law, as it has not taken note of Companies Court Rules 1959.
49 As under Rule 24, the petition is required to be advertised in the official gazette, and one issue of each english daily and regional language daily having circulation in the State. Whereas, Rule 25 provides that the advertisement to in form 5. The reference was made to form 5, to contend that any person desirous of supporting or opposing such petition, is allowed to send to the petitioner's counsel, notice of intention to object to the petition. Under Rule 74, notice of meeting is required to be advertised in form 38 wherein notice is to be issued to debenture holders, unsecured creditors, secured creditors, preferential shareholders and equity shareholders, and the report of the meeting thereafter is to be filed in form 39.
50 The contention of the learned counsel for the petitioner therefore was that the legislature/Rule making authority in its wisdom has drawn a clear distinction between the person, who can participate in the meeting to approve the Scheme, and regarding the petition for sanction of Scheme after approval of the equity shareholders and creditors.
51 The learned Senior counsel for the objector contended was that use of word "any person in form 5 would entitle, any person to file objection against the scheme therefore it cannot be said, that the objector has no locus stand to file objection.
52 It is also the contention of the learned counsel for the petitioner that the Hon'ble Supreme Court in the case of National Textile workers' Union and others Vs P.R.Ramakrishnan and others (1983(53) Comp. Cas 184) while considering the objection filed by the workmen against winding up order, held that as the workmen will be directly affected by the order of winding up, they have right to be heard.
53 The contention of the learned Senior counsel for the objector therefore is that on the same principle, as the petition is advertised in Form 5, therefore any person would be entitled to file objection, but the Hon'ble High Court of Bombay while holding that third party cannot object to Scheme of amalgamation, completely overlooked the Company Court Rules and statutory forms.
54 It is also the contention of the learned Senior counsel for the objector that even in the case of S.K.Gupta and another Vs K.P.Jain and another (supra) the Hon'ble Supreme Court was pleased to lay down that this Court can exercise suo motto power to examine validity of the Scheme, which would entitle any person to bring to the notice of this Court, the illegality in the Scheme by filing objection.
55 On consideration, I find force in the contention raised by the learned counsel for the petitioner.
56 The legislature in drafting Sec.391 of the Companies Act, clearly stipulated that if majority in number representing 3/4th in the value of the creditors or class of creditors, or members or classes of members as the case may be, person voting either in person, or where proxies are allowed, by proxy at the meeting, agree to any compromise or arrangement, the compromise arrangement shall if sanctioned by the Court will be binding on all creditors or the class, of the members or the class as the case may be and also on the company or in the case of Company, which is being wound up on the Liquidator and contributory of the company.
57 The only restriction is that all the material facts relating to the company such as latest financial position of the company, latest auditor's report on the accounts of the company and the pendency of any investigation proceedings in relation to the company under Sec.235 to 251 of the Companies Act are required to be disclosed and considered. It does not envisages the filing of objection by the third party whose rights may be affected by the Scheme of Arrangement.
58 The Hon'ble Bombay High Court considered this aspect and rightly held that remedy with regard to enforcement of rights by the third party is to be independently availed, and cannot be a ground to object to the Scheme of Arrangement.
59 By way of Scheme of Amalgamation, by merger, the liabilities are taken over by the Transferee company, therefore it cannot be said that a right of party would be affected. The only objection which may be raised by any person in response to notice can be with respect to the legality of the Scheme or it being in violation of any law.
60 In the absence of violation of substantial law, merely because certain rights of third party are going to be affected, cannot be a ground to permit third party to file objection to the Scheme, once the Scheme is as per statutory provisions of Sec.391 to 394 of the Companies Act and approved by majority.
61 In case the provisions of Section 391 are interpreted as suggested by the learned Senior counsel for the petitioner, it will go against very object of Section 391, which makes a compromise or arrangement if approved to be binding even against unwilling member or creditor. Section 391 is a complete code by itself. Once a Scheme of compromise and arrangement squarely falls within four coners of section, it can be sanctioned.
62 The objection of the petitioner with regard to the locus standi of M/s.Vodafone International, to file objection is therefore upheld, and it is held that M/s.Vodafone International B.V. has no locus standi to file objection, against the Scheme of Amalgamation.
63 As already observed above, the Scheme of Amalgamation being beneficial to both the Tranferor and Transferee Companies, its shareholders and its creditors, these company petitions are ordered.
64 The remuneration to the Additional Central Government Standing Counsel is fixed at Rs.5,000/- (Rupees five thousand only) for each petition to be paid by the petitioner companies.
21.04.2011 Index: Yes/No Internet:Yes/No vaan VINOD K.SHARMA, J.
vaan Pre-Delivery Common order in C.P.No.340 and 3410 of 2010 and C.A.Nos.310, 311, 312, 313 and 314 of 2011 21.04.2011