Calcutta High Court
J. K. Agri Genetics Ltd vs Florence Alumina Ltd on 20 May, 2010
Author: Patherya
Bench: Patherya
1
F.J(2)
IN THE HIGH COURT AT CALCUTTA
ORDINARY ORIGINAL CIVIL JURISDICTION
ORIGINAL SIDE
PRESENT :
THE HON'BLE JUSTICE PATHERYA
C. P. NO. 361 OF 2006
C. A. NO. 402 OF 2006
J. K. AGRI GENETICS LTD.
VERSUS
FLORENCE ALUMINA LTD.
For the Petitioner : Mr. S. B. Mukherjee, Sr. Adv.,
Mr. S. N. Mukherjee, Adv.,
Mrs. Manju Bhutoria, Adv.,
Ms. Neelina Chatterjee, Adv.
For the Respondent : Mr. Ranjan Deb, Sr. Adv.,
Mr. S. N. Mitra, Adv.,
Mr. Asish Chakraborty, Adv.,
Mr. Amitava Ghosh, Adv.,
Mr. Rohitendra Deb, Adv..
For the Objectors : Mr. Ratnanko Banerjee, Adv.,
Mr. Reetobrata Mitra, Adv.,
Mr. Rajesh Singh, Adv.
Heard on : 16-01-08, 21-01-08, 30-01-08, 07-02-08, 20-02-08,
25-02-08, 27-02-08, 29-02-08, 07-03-08, 10-03-08,
14-03-08, 26-03-08, 31-03-08, 02-04-08, 04-04-08,
09-04-08 and 18-04-08.
Judgement on : 20th May, 2010.
PATHERYA, J. :
1. PETITIONER'S CASE 1.1 This is an application for sanction of a Scheme of Arrangement by demerger. The formalities have been complied with and meetings of shareholders and creditors have been held. The Scheme has been approved at 2 the Board meetings and such meetings were chaired by Chairpersons appointed by Court. The Explanatory Statement also placed the documents for inspection of the shareholders. The Stock Exchange both BSE and CSE have approved the Scheme and issued a No Objection. Employees also have raised no objection and therefore in view of 87 Company Cases 792, 83 Company Cases 30 and 87 Company Cases 689 the Scheme be sanctioned.
1.2. The Scheme has been objected by a shareholder who has affirmed an affidavit for himself and 99 shareholders. The veracity of the Attendance Slip has been disputed and the inspection sought though given was not taken. An adjournment was sought of the meeting by the said objector and the same was disallowed and meeting was held on 13th September, 2006. The BSE raised objections to the first Scheme and the same was modified by making the relevant changes. The first objection relates to the appointed date for undervaluing the shares. The financial results are declared every six months. The Attendance Slip was not spacious enough for the notings made.
1.3. Two scrutineers are to be appointed, one is to be a shareholder and the other can be anyone. In the instant case a shareholder and the Company Secretary were appointed as scrutineers.
1.4. The objector - Krishnagopal Motilal - Chandak (Chandak) has increased his shareholding inspite of objecting to the Scheme from the time the first 3 Scheme was formulated and the matter is pending before the Company Law Board. The second objector, Ramesh Kr. Fofalia (Fofalia) holds 0.28% shares. The reasons for objecting to the Scheme is that inspection was not given but no application was filed to Court though a complaint was made to the Company Law Board. He has objected to the appointed date and to non-maintenance of Attendance Register and has admitted that an Attendance Slip was given. If there was any one aggrieved by the Scheme of Arrangement it should be J. K. Industries Ltd. (JKIL) the parent company but no objection has been raised by it. The only reason for rejecting the proxies is non-receipt, 48 hours prior to the meeting. Principles for approving the Scheme have been laid down in (1960)1 AER 772 and AIR 1995 SC 470 which holds that unfairness must appear to the meanest intelligence. It is not so in the instant case.
1.5. The Scheme postulates demerger of the investment and seed division. Value of the shares has been determined by the directors and Ernst &-Young, reputed chartered accountants. The Valuation Report has not been challenged and as held in AIR 1997 SC 506, 87 Company Cases 689, 50 Company Cases 95, 121 Company Cases 861, 57 Company Cases 12 and 88 Company Cases 528, in absence of challenge to Valuation Report and no allegation of fraud levelled against the chartered accountants, the share valuation ought not to be rejected.
41.6. Even assuming that the Valuation Report has been challenged by both the objectors - Fofalia and Chandak. The allegations made by Chandak are vague and lacking in particulars. Fofalia's allegation postulates a fairness report and then a Scheme. None of the objectors have disclosed what will be a fair Scheme. Therefore the onus has not been discharged. A fairness report is not mandatory under the 1956 Act and Rules framed thereunder. For the said proposition reliance has been placed on an unreported decision in the case of Associated Packaging.
1.7. The single window clearance is permitted as held in 40 Company Cases 819, 50 Company Cases 219, 80 Company Cases 89, 117 Company Cases
718. Therefore, the Scheme ought to be sanctioned. The first Scheme has been modified by the existing Scheme. All correspondence exchanged between the Stock Exchange and the petitioners has been disclosed in the supplementary affidavit. Such modification was made in view of the directives issued by the Stock Exchange. Non-Clearance of the Stock Exchange caused the modifications to be made.
1.8. The Exchange ratio under the first Scheme was 100 : 128 which has not been objected to by Fofalia. Therefore the objection regarding Exchange ratio cannot be sustained. In the affidavit filed by Chandak in October, 2007 he has admitted that the price of shares is fair and that the valuation of the seed 5 division is 600 crores. If from the demerger Chandak benefits as will appear from the chart handed to court, the question of raising any objection cannot arise. 1.9. The conversion creates a new majority. In the transferee company the objectors are getting a stake, which they did not have before. 1.10. The Scheme of Arrangement is as per the Take-over Regulations, 1977 and in view of Regulation 3(j)(ii) there is no question of open offer being made. Therefore the Scheme be sanctioned by this Court.
2. Case of Objector Chandak 2.1 Counsel for this objector submits that the Court must examine whether the Scheme is fair, procedure has been followed, provisions have been complied with and the Chairperson's report reflects truthfully the events at the meeting.
2.2 It is an admitted position that 2,53,077 shares = 7.22% was held by Chandak on 13th September, 2007. Chandak besides representing himself also represented 172 shareholders and was holding proxy forms in respect of 4,70,239 shares which is 10% of the issued share capital. Therefore 26.28% = 7,23,316 shares were represented through Chandak and were present and voting. At the meeting this was reduced to 13%.
62.3 The transferor company has two divisions - investment and seed division. The share holding of the objector in the transferor company has been reduced which unfairly prejudices the shareholders of the transferor company. Non- convertible preferential shares and bonds will also be converted to equity shares although the first Scheme did not allow conversion of debt into shares. Therefore in effect by this conversion the parent Scheme of 1983 is sought to be modified in the absence of JKIL. The Scheme approved does not comply with the SEBI guidelines, Section 391 and fairness of the report is questionable. 2.4 There has been Non-compliance of Section 391(2) 2.4.1 The Chairman's report records attendance of 797 equity shareholders having 25,71,582 shares and 498 shareholders having 21,20,070 voted and approved the said Scheme. 128 shareholders having 2,82,882 shares voted against the Scheme while 125 ballots aggregating to 2,20,037 shares were declared invalid. Therefore on a calculation there should have been 751 shareholders holding 2622989 shares who should have cast ballots. Some of the shareholders wanted an adjournment but the same was turned down. The conduct of the poll must be examined. Ballot papers were given against Attendance Slips. Ballots cast as per the Chairperson's report is 751. There is no dispute that the meeting was attended by Mr. Chandak. The scrutineer's report also evidences that 751 ballots were cast. This differs from the Attendance Slips which is part of the record. The report of the Chairman and minutes of the 7 meeting have recorded 797 ballots. The Attendance Register also records attendance of 797 shareholders. In paragraph 5(h) of Chandak's affidavit affirmed on 5th February, 2007 it has been categorically stated that 173 admission slips were given and therefore 173 ballot papers ought to be there. This has been admitted in the affidavit-in-reply by Pawan Kumar Rastogi (Rastogi) on 11th April, 2007. On the basis of the attendance slips given, ballots were cast but have not been found. The objectors were prevented from casting their votes. Therefore, the meeting under Section 391 (1) of the 1956 Act was not conducted fairly. These are factors which Court is to consider while sanctioning a Scheme and 3/4th majority should not be the only guiding criteria. Although the ballots cast were 751, the attendance slips were 619 in number therefore 178 are missing. On inspection taken the ballots of Chandak and his proxies have not been found. At page 463 a proxy form of 24+19 shareholders having 20,000 shares has been annexed. No corresponding ballot papers could be found. Although the attendance sheet records the name of all but the name of the proxy holder is missing. It is unbelievable that Chandak though present at the meeting did not cast his own vote but cast vote of the proxies. The story of Chandak though present but busy on the mobile is an afterthought and has been pleaded in a subsequent affidavit. The main affidavit-in-reply filed to the first affidavit-in- opposition by Chandak does not say so. In the application filed by the company before the Company Law Board under Section 111(A) for rectification of the share register prayer (d) is as follows :
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"d) Declaring the voting rights exercised by the Respondent Nos.1, 3 and 4 at the Court convened meeting of the Equity Share Holder of the Petitioner Company held on 13th September, 2007 as null and void;"
Therefore the company admits that voting rights have been exercised by Chandak. For the said reasons the procedure followed for holding the meeting under Section 391 has not been complied with.
2.5 Scheme is unfair 2.5.1 Florence Alumina Limited (FAL) is a 100% subsidiary of the transferor company. A mechanism was adopted to reduce the share holding of the shareholders in the transferor company including that of Chandak which from 7.28% will fall to 3.5%. The loan is sought to be converted to capital and the Scheme of 1983 is sought to be modified without any order or parties to earlier Scheme being present. By this mechanism shareholders such as Chandak will be reduced to a hopeless minority and therefore the Scheme is prejudicial to the interest of the shareholders. Under the Scheme of 1983 time to redeem the preferential shares and bonds has not expired. Part - IV of the Scheme will exhibit increase of capital and decrease of share holding. The consideration for investment division is 64.62 crores while that for the seed division is 20.38 crores aggregating in all to 85 crores. The explanatory statement has provided for inspection of the fairness report. The present Scheme is the third in order. Two earlier Schemes were proposed. In the first Scheme there was no change in the 9 share holding pattern and 81 crores was to go to the seed division i.e. the transferee company. The first Scheme is based on two reports of Ernst and Young. The first of such report deals with the shares to be given by the Transferee Company and the second report deals with the conversion pattern. By the second report the preferential shares and bonds of 85 crores would on demerger go to FAL. The report of Ernst and Young shows this to be a fair basis of valuation. The conversion proposed has also been accepted by Ernst and Young and FAL's own chartered accountants. Initially FAL was a shell company and steps were taken by allotment of shares to create it into a 100% subsidiary of the Transferor Company. This was done in February, 2006. The share holding of Chandak was known to the applicants. On 3rd March, 2006, however, the first Scheme was withdrawn.
2.5.2 From 31st May, 2006 the second chapter starts and once again a fairness report being the second fairness report from Ernst and Young is sought. In this second report the allotment ratio is worked out for the first time. In the first proposal the allotment ratio was 100:128 while in the second proposal the ratio was 60:40. There is an increase in the public holding and an application was made for approval of the second Scheme to the Bombay Stock Exchange. By the second Scheme the Scheme of 2003 was sought to be modified. The liability of the applicant no.1 in the form of bond and preferential shares of JKIL was to be transferred to FAL by conversion into equity shares and for the first time the conversion theory surfaced. The third report is related to allotment of shares. It 10 has nothing to do with conversion. The share holding is diluted by enlarging the shareholders. Therefore the conversion is to be made before the demerger, in order to reduce the shareholders holding. The liability is not to go to FAL and the only question that could have been put to the chartered accountants is whether the ratio is good or bad. But this is not the question put. In the third application the explanatory statement of Ernst and Young is given for inspection. No copy of 14th June, 2006 report (3rd report) was sent to BSE. The letter for approval to BSE was sent on 15th June, 2006 and approval was granted on 27th June, 2006. The undertakings given and the NOC issued by BSE can only be restricted to the listing agreement. The norms though changed by the report of Ernst & Young the ratio remains the same.
2.5.3 The requirements of law have not been complied with and therefore there has been violation. From the Supplementary Affidavit filed it will appear that initially no business was carried on by FAL. It became a 100% subsidiary of the transferor company on 20-2-2006, and therefore a public limited company. The 100% shareholder of FAL is the Transferor Company, and the equity shares are held by it. No business was commenced as the only member of the said public limited company is one in number and therefore under Section 433(c) and (d) of the Companies Act, 1956 FAL is liable to be wound up.
2.5.4 By this Scheme preferential payment is sought to be made. The transferee company has taken only the assets while the liabilities remain with the transferor 11 company. The conversion is to be effected by the transferor company. 41% share-holding of the Transferor Company is held by the parent company J.K. Corporation Ltd. By virtue of this scheme the promoter's share will increase to 70%. None of the guidelines provided by SEBI have been followed. The issuance of preferential shares is without compliance of Section 81(1A). Under Section 81(1A) issuance of preferential shares without safeguards would be impossible and therefore Section 391 has been resorted to. Section 81(1A) and the Takeover Regulation of 1997 will apply. Regulations 10, 11 & 13 are safeguards provided in addition to Section 81. Regulation 3(1)(c) of the Takeover Code of 1997 has been omitted therefore the SEBI guidelines are to apply to preferential allotments. If Section 81(1A) meeting was held then preferential allotment is to be shown in Books and Register of Share prospectively and not retrospectively. The preferential allotment in the instant case is dependant on sanction of Scheme and what cannot be permitted under Section 81, cannot be allowed under Section 391. Single window clearance is permitted only if it is legal. The objector Chandak had 7.21% shares and on sanction of Scheme his share holding will be reduced to 3.75%. In case of 7.28% share holding the offer can be accepted but not on the reduced holding. The Takeover Code of 1997 is under the 1992 Act, and any violation of rules and regulations will attract penalty. Section 81(1A) deals with allotment of preferential shares, this will attract the 1997 Code and violation thereof is an offence. Admittedly no meeting was held under Section 81(1A) of the Companies Act. The only meeting held is under Section 391. The Scheme is to apply retrospectively from the appointed date i.e. 12 1st April, 2005. This could not have been allowed by a meeting under Section 81(1A) as the Takeover Code of 1997 would apply. The conversion of bonds to equity shares will take effect immediately under the Scheme on happening of an event i.e. confirmation of Scheme by the High Court. The preferential allotment can only be made by following Section 81(1A) and not otherwise including Section
391. These provisions of law cannot be by-passed by invoking Section 391. Therefore there can be no preferential allotment of shares as the provisions of law have not been followed.
2.6 Conversion 2.6.1 Conversion is another method to avoid the application of Section 81(1A), which is unsupported by any expert opinion or report. The bonds are redeemable over a period of time. But without the time expiring they are being converted into equity shares and monies are received today. This should be discounted but no discounting factor has been provided for. The first proposal ended in withdrawal.
2.6.2 For this Scheme, which is the third Scheme, there is no report of Ernst & Young. Clauses 2 &3 cannot be made applicable as no meeting could have been held as preferential allotment is only upon sanction. Clause 4.1 of the Scheme postulates allotment of preference shares on sanction of Scheme. This is not possible in view of Section 81(1A) nor can the same take effect from the appointed date. The decision reported in AIR 1997 SC 506 lays down the 13 parameters to be examined before sanctioning a Scheme. Therefore the Court is empowered to consider the objections raised before sanctioning the Scheme. The decision reported in AIR 1959 Calcutta 679 was prior to the 1997 Code and the 1992 Act, therefore the same is distinguishable on facts. "Fairness" of the report must be examined in common law as accepted by the Supreme Court. Therefore the report must be such that it satisfies the Court's conscience. No report regarding conversion has been disclosed although other reports have been disclosed. In 1960 (l) AER 772 bad faith was alleged. In the instant case no such allegation of bad faith or intent to mislead has been alleged as the Scheme is unfair. The objector Chandak has been treated unfairly and by the injunction order of the CLB has not been allowed to participate in the Annual General Meeting. For all the said objections raised the Scheme ought not to be sanctioned.
3. Case of Second Objector FOFALIA 3.1 The Scheme is a complicated one. It not only seeks demerger but something else.
3.2 From a reading of Clause 1.1.3 of the Scheme it will appear that no business was done by FAL. From a reading of Clause 1.1.2 it will appear that the undertakings were not there and in fact, the investments were only of group companies. The business of the transferor company related to operations only in respect of the Seed division. The sanction of the Scheme will result in increase in 14 share holding, benefits whereof will be enjoyed by the promoters. The reasons for demerger have not been disclosed and the motive for sanction is ulterior and not for the reasons advocated. The explanatory statement has made an incorrect representation as in Clause 4, it says that it had only the hybrid undertaking. There is no justification in the Scheme for conversion. This is a totally separate issue unconnected with the Scheme and has been made a part of the demerger for converting the instruments into shares. Under the 2003 Scheme the bonds and preferential shares issued to the transferor company are sought to be varied by this Scheme without the consent of the shareholders of JKIL and this forms part of the consideration. By converting bonds and preferential shares into equity shares the transferor and transferee company get majority share holding and no reasons have been given for such conversion.
3.3 The bonds and preferential shares issued under the 2003 Scheme is to be redeemed over a period of time. Without allowing this event to happen, the bonds and the preferential shares are being converted into equity shares. This is being done in the absence of the parties to the 2003 Scheme. No reason has been given for this either.
3.4 The Disclosure and Investor Protection Guidelines, 2000 makes it mandatory under Clause 13 to disclose the reasons for allotting preferential shares. In the explanatory statement the objectives for issuing preferential shares are lacking. Re-valuation of the Seed undertaking is Rs.500 crores which 15 has been accepted by the applicants. The shares on demerger become less in value resulting in an increase in share at a lesser value. The public holding in FAL reduces to 9.76%, listing therefore is not required and the value of the shares decreases.
3.5 The appointed date in the Scheme is 1st April, 2005. Therefore the transfer takes place in April, 2005. There is no reason for choice of this date except to reap the benefits of the profits of 2006-07. On 3rd March, 2005 the transferor company has shown a profit of Rs.1.2 crore which has increased in the subsequent years. The meeting was held on 13th September, 2006. The Listing Agreement postulates 25% to be given to the public under Clause 40(A)(i) and in AIR 1997 SC 506, (2004)9 SCC 438 and (1966) CoLJ 278 the Court's role to examine minority shareholders has been upheld. The only meeting to be looked into is that of the parent company as the other meetings are of the controlling company and approval would have been granted.
3.6 The Scheme is intended to promote the interest of a group of shareholders and therefore must fail. For the said proposition reliance is placed on (1975) 3 AER 382. The Scheme is aimed at increasing the promoter's stake and thereby gaining control and as held in 101 Company Cases 343 for the said reason too the scheme must fail. The unreported decision in C.A. No.344 of 2006 was upheld on appeal by order dated 14th December, 2006 which supports the said proposition. The decision relied on by the applicants are distinguishable. The 16 instant case is not one of bad faith. The objectors in the reported decisions were getting more while in the instant case they are getting less by denudation of their share holding. The majority are expected to act bona fide and in an honest manner and not as is being done in the instant case. The bonds and preferential shares which are the liabilities of the Seed undertaking are not transferred to FAL but are retained by the transferor company which is contrary to the Income- tax Act and Clause 1.1.7 will take effect without compliance of Section 2(19)(AA)(ii) of the Income-tax Act.
3.7 The Stock Exchange has no power to issue directives in a Scheme of Arrangement. The Stock Exchange is only concerned with buying, selling and dealing in securities and not Schemes, under Section 391 of the 1956 Act. The powers of the Stock Exchange will appear from Section 7A of the 1956 Regulations. From the supplementary affidavit it will appear that the Stock Exchange has not directed modifications in the Scheme as it is not empowered to do so. The reasons for conversion contained in paragraph 4(c) of the Supplementary Affidavit is contrary to the reason set-out in paragraph 20 of the affidavit-in-reply. The promoters by the Scheme are increasing their stake in FAL. The share holding pattern will undergo a change. In the Memorandum of Association investment is not the main object. By demerger two units are being created otherwise one undertaking will exist. The focus is therefore to demerge and the explanatory statement is misleading. No reason has been given for conversion. By the conversion the promoters stand to benefit as their share 17 holding will increase and there is no denial that the value of the Seed undertaking is Rs.500 crores. The majority shareholders have voted for their own interest and for their benefit. In the meeting 11% opposed the scheme and 11% ballots were rejected and the share-holders present and voting were their own men, therefore, manipulation with the aid of one of the scrutineers, who also was their men was possible.
3.8 The promoters (JKIL) constitute a separate class and ought to have voted at a separate meeting, and not with the rest of the share-holders. For all the said reasons the Scheme be rejected.
4. Petitioner's-in-reply 4.1 Counsel for the applicants in reply submit that in view of Section 3(j)(ii) of the 1997 Code, the said Code is not to apply to a Scheme under Section 391 of the 1956 Act and in view of AIR 1959 Cal 679 preferential allotment to share- holders can be made. None of the objectors have been misled by the Explanatory Statement which has also not been challenged. Sections 391 to 394 of the Companies Act is a complete Code. Section 173 of the Companies Act contemplates notice of a general meeting and the explanatory statement is under Section 393 of the Companies Act and the two sections operate in different fields, therefore, 47 Company Cases 503 has no application. No exception can be taken to the explanatory statement as it has been settled by an officer of Court. 18 4.2 There is no pleading or evidence of coercion. Preferential allotment has been made due to conversion of Bonds and conversion is an integral part of the scheme. No report of a Chartered Accountant appointed by the objectors has been disclosed to show or prove the unfairness of the proposed exchange ratio. 4.3 There is no allegation with regard to the Chairman's Report in the pleadings. Lawyers were deputed to take inspection. As the names of the objectors appear in the attendance register, the attendance slips is insignificant. In the event the objectors were prevented from exercising their votes, nothing prevented them from complaining to Court at the earliest. The existence of cogent evidence is necessary to substantiate the charge, mere suspicion will not be enough, but charge must be established by legal testimony. For the said proposition reliance is placed on 1886 (11) Moo Indian Appeals 43, AIR 1921 PC 69 and 1971 (3) SCC 247. Therefore, there has been no procedural lapse. 4.4 In 1975 (3) AER 382 it has been held that promoter share-holders is not a separate class. 1966 (2) Company Law Journal 278 is no longer good law.
5. Reply by Objector Chandak 5.1 Counsel for objector Chandak submits that 1971 (3) SCC 247 is distinguishable as it a case under the Code of Criminal Procedure. 1886 (11) Moo Indian Appeals 43 is based on Benami Transaction while AIR 1921 PC 69 is 19 based on suspicion or legal equity. Therefore, all the cases cited are distinguishable.
6. CONCLUSION 6.1 Having considered the submissions of the parties the objector Chandak has not objected or challenged the number of share-holders who were present at the meeting nor their share-holding. All that has been challenged is the votes cast against sanction of Scheme on the ground that he had exercised all his votes against the sanction but some of the votes have been shown missing. 6.2 From a perusal of the chairperson's report it will appear that 751 share- holders (498+128+125) had in all cast votes. Out of this 125 were invalid. Even if the votes cast by objector Chandak against the Scheme in respect of his personal holding, the missing attendance slips and the proxies are taken into account even then the scales would not have tilted in his favour nor could he have defeated the Scheme for the following reasons :-
(i) In the chart submitted by objector Chandak 20 proxy forms were shown not to have been considered. Details of such proxy form is as follows :
Sl. No. Proxy Form Number 01. 463 02. 467 03. 469 20 04. 485 05. 519 06. 522 07. 523 08. 552 09. 553 10. 554 11. 556 12. 674 13. 596 14. 597 15. 598 16. 599 17. 603 18. 604 19. 605 20. 606
(ii) According to the Company votes in respect of the following were validly cast -
(a) Serial No.6 Proxy # 522 Ballot # 630
(b) Serial No.7 Proxy # 523 Ballot # 423
(c) Serial No.18 Proxy # 604 Ballot # 462
(d) Serial No.12 There is no proxy Ballot # 672.
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(iii) This leaves us with 16 proxy forms. Even if these 16 proxies were validly cast and 41 ballots relating to the missing attendance slips credited to the lot of objector Chandak, he could not have defeated the Scheme as it would be below the 3/4th majority present and voting in number and value.
6.3 The appointed date cannot be faulted as when the application for issuing notice was filed the only audited Balance Sheet available was of 31st March, 2005.
6.4 The share exchange ratio can also not be faulted as no better ratio has been produced. The method adopted has also not been challenged nor the method to be adopted suggested. In fact by the share exchange ratio adopted the objector Chandak stands to gain and can have no grievance in case of profits earned.
6.5 The retention of liability by the Transferee Company is a decision taken in the commercial wisdom of the management and calls for no interference. 6.6 The next and most important issue to be considered is whether the terms of the Scheme are fair.
226.7 The Scheme, sanction of which is sought seeks demerger of the seed division from the investment division. This does not, however, seem to be the sole purpose of the Scheme. It also seeks conversion of the zero coupon redeemable preference shares (ZCRPS) and zero coupon non-convertible Bonds (ZCNCB) given under the 2003 Scheme.
6.8 By such conversion J. K. Industries Ltd. (JKIL), the promoter Company acquires shares in Florence Alumina Ltd. (FAL), the applicant no.2 whereby its share-holding increases. This increase will not benefit any share-holder except the promoters. Therefore, the conversion contemplated will benefit the promoters and none else. This cannot be the intention of the propounders of the Scheme. 6.9 By virtue of the conversion contemplated on sanction and prior to demerger the 2003 Scheme is sought to be modified without either requisitioning a meeting for such purpose or by filing an appropriate application. 6.10 The Bonds and Preference Shares were to be redeemed over a period of time. In fact the Bonds were to be redeemed in 5 instalments. The 1st instalment was to be redeemed on the expiry of the 4th year i.e. 01-4-2006 till the 8th year i.e. 01-4-2010. The appointed date of the instant Scheme is 01-4-2005 i.e. prior to 01-4-2006 and will take effect from 01-4-2005 if sanctioned. 6.11 The 1st instalment in respect of the Preference Shares was to be paid on the expiry of the 8th instalment (i.e. 2010).
236.12 By virtue of the conversion the said Bonds and Preference Shares are being redeemed much before the time specified and the present day discounted value ought to have been considered. This has also not been done. 6.13 This is relevant as no prudent businessman while considering the commercial aspect of the Scheme in his wisdom would have proposed a Scheme without considering the discounting aspect. Furthermore, such a Scheme could also not have been approved by a prudent businessman cloaked with commercial wisdom unless such men approving were nothing but "yes-men" of the Transferor Company, Transferee Company and Promoter Company.
6.14 In the Supplementary Affidavit filed the reason given for conversion is the decision of the Bombay Stock Exchange. The application filed before the Bombay Stock Exchange was only in respect of the Listing agreement. Therefore, the Scheme has been examined by the Bombay Stock Exchange only for the purpose of approving listing on the Stock Exchange and for no other purpose. The said approval is also subject to certain relaxation granted by SEBI under the 1957 Rules.
6.15 Although in the affidavit filed by Pawan Kumar Rustogi it has been stated that the promoter Company (JKIL) would not have agreed to discount the value. 24 There is no proposal made to JKIL by the applicant no.1, therefore, the question of acceptance or refusal by JKIL does not arise.
6.16 One of the reasons given for conversion is insufficient cash flow. On a reading of the cash flow statement in the audited Balance Sheet for the year ended 31-3-2005 a sum of Rs.1186.82 lacs was lying to the credit of the applicant No.1 and, therefore, it was capable of redeeming the Bonds by payment of the 1st instalment.
6.17 A Scheme is aimed at not adversely affecting the share-holders or creditors and, therefore, is placed before the class of share-holders (equity or preference). If the opinion of the share-holder was not needed, the Scheme could have been accepted without their approval. In the instant case, the Scheme is not intended to benefit the share-holder but is pro-promoter.
6.18 Single window clearance though accepted in 80 Company Cases 289 and followed in subsequent decisions, will not be applicable in the instant case as by virtue of the conversion further shares are being allotted to JKIL and for this purpose the special procedure laid down in Section 81(1A) ought to have been followed.
6.19 The single window clearance contemplated will only apply if the alteration is restricted to the structural changes of the Company for implementation of the 25 Scheme. The issuance of shares for purposes of increasing the share-capital is not such alteration and the procedure laid under Section 81(1A) of the Company's Act ought to have been followed and, thereafter, the Scheme sanctioned. No copy of the resolution taken under Section 81(1A) of the 1956 Act has been produced.
6.20 As the single window clearance theory has no application in the instant case the decisions cited in respect thereof can also have no application. 6.21 As held in 87 Company Cases 792 and 101 Company Cases 343 that the sanctioning Court while ascertaining the real purpose underlying the Scheme can judiciously x-ray the same and not function as a rubber-stamp or post office, but must satisfy itself that the Scheme is genuine and bona fide and in the interest of the creditor or share-holder and in doing so the Scheme to the extent it promotes conversion is not just, fair or bona fide.
6.22 In 1960 (1) AER 772, the objection was rejected as no unfairness could be established. Such is not the case here as the conversion will only benefit the promoter share-holder and none-else.
6.23 The conversion is intended to promote the interest of JKIL which is a separate class and a meeting of such class ought to have been called as held in 1975 (3) AER 382 to ascertain the intention of its share-holders with regard to 26 acceptance of the arrangement. This, according to 1975 (3) AER 382, is fatal to the arrangement and there is no reason to differ therefrom. 6.24 There is no dispute with the ratio of the decision reported in AIR 1919 PC 9 but in view of the aforesaid the Scheme of arrangement in so far as it contemplates conversion cannot be sanctioned.
7. Accordingly this application for sanction of Scheme of Arrangement and Demerger is rejected.
( Patherya J. )