Bombay High Court
Capital Of Wartsila India Limited vs Janak Mathuradas & Others on 15 November, 2010
Author: S. J. Kathawalla
Bench: S. J. Kathawalla
1 CP-1037-09
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISIDICTION
COMPANY PETITION NO.1037 OF 2009
CONNECTED WITH
COMPANY APPLICATION NO. 1303 OF 2009.
In the Matter of Reduction of Equity Share
Capital of Wartsila India Limited.
Wartsila India Limited. ..Petitioner Company.
vs.
Janak Mathuradas & Others.
ig ..Intervenors/Opponents.
....
Mr. Hemant Sethi, a/w Ms. Kamlesh Rajwani, a/w. Mr. Bhavin Shah, i/b Vigil
Juris for the Petitioner.
Mr. Janak Dwarkadas, Senior Counsel, a/w Mr. Ashish Kamat, i/b RMG Law
Associates, for the Opponents/Intervenors.
....
CORAM: S. J. KATHAWALLA, J.
RESERVED ON: 25th September, 2010.
PRONOUNCED ON: 15th November, 2010.
JUDGMENT
By this Company Petition, Wartsila India Limited ("WIL") seeks approval and confirmation by this Court in terms of the Special Resolution passed by the shareholders of WIL in its "Extraordinary General Meeting" ("EGM") held on 10th November, 2009 for the reduction of its equity share capital.
::: Downloaded on - 09/06/2013 16:36:57 :::2 CP-1037-09
2. The authorized, issued, subscribed and paid-up capital of WIL as on 31st December 2008 is as under:-
Particulars Amount in Rs.
AUTHORISED
15,000,000 Equity Shares of Rs.10/- each 150,000,000
TOTAL 150,000,000
ISSUED & SUBSCRIBED & PAID-UP
12,034,000 Equity Shares of Rs.10/- each fully 1,20,340,000
paid-up
ig TOTAL 1,20,340,000
3. Of the above, 98.88% of the Paid-up Equity Share Capital of WIL is held by 6 Promoter Shareholders and the balance of 1.12% of the Paid-up Equity Share Capital of WIL is held by 1463 shareholders. There has been no change in the shareholding from 31st December, 2008 till the date of filing the present Petition.
4. WIL is engaged in the business of manufacture and sale of diesel engines and diesel generating sets and providing solutions to the Power and Shipping Industry. The equity shares of WIL were listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Subsequently, an open offer was made by the Promoters under SEBI (Delisting of Securities) Guidelines, 2003 for acquisition of Equity Shares at Rs.622/- per equity share.
::: Downloaded on - 09/06/2013 16:36:57 :::3 CP-1037-09 Since the public shareholding of the Petitioner Company fell below the 10% limit as provided under the Stock Exchange norms, the shares of WIL were delisted from the NSE and the BSE in June 2007.
5. According to WIL, subsequent to the delisting of its equity shares, there was no market to buy and sell the equity shares held by the holders of the equity shares (other than the promoters). The investments made by the public shareholders were locked up and they found it difficult to dispose off their shareholding. Many shareholders for various reasons including change of address, and expiry of offer date had missed the exit opportunity given by the promoters of WIL. Therefore in May 2009, after obtaining a valuation report from M/s. SSP and Company, Chartered Accountants, who valued the WIL Shares at Rs.162 per share, the promoters of WIL namely, Wartsila Technology Oy Ab had again made an offer to the holders of the equity shares (other than the promoters) to purchase their shares at a price of Rs.622/- per share between 15th May 2009 to 31st July, 2009 and thereafter, at a price of Rs.162/- per equity share, for the period 1st August to 15th August, 2009.
6. According to WIL, the holders of the equity shares (other than promoters) continued to face a lot of hardship and inconvenience in the absence of no liquidity/tradability to their shareholding. WIL was receiving requests from time to time from certain non-promoter shareholders to provide them with an exit opportunity. As an investor friendly gesture WIL decided to provide a one-time exit opportunity to the holders of the equity shares (other than the ::: Downloaded on - 09/06/2013 16:36:57 ::: 4 CP-1037-09 promoters) being the shareholders holding 1,34,769 shares representing 1.12% of the total issued, subscribed and paid-up equity share capital of the company by reducing the entire issued and paid-up equity share capital held by all the shareholders other than the promoters, in accordance with Article 62 of the Articles of Association of WIL and the provisions of Section 100 to 104 of the Companies Act, 1956 ("the Act").
7. The Petitioner Company obtained Valuation Report from KPMG India Private Limited (KPMG), an independent Valuer for determining the fair value of the Equity Shares of WIL. As per the Report dated 30th September, 2009 of KPMG, the fair value of every one fully paid-up equity share of WIL is Rs.377/- (Rupees Three Hundred and Seventy-seven only).
8. The Board of Directors of the Petitioner Company at the meeting held on 6th October, 2009 inter alia passed the following Resolution:
"RESOLVED THAT pursuant to the provisions of Sections 100 to 104 and any other applicable provisions of the Companies Act, 1956 and Article 62 of the Article of Association of the Company and subject to the confirmation of the Honourable High Court of Judicature at Bombay and other appropriate authorities in this regards, if any, and the approval of the Members at the General Meeting, consent of the Board be and is hereby accorded to reduce the Issued, Subscribed and Paid-up Equity Share Capital of the Company from Rs.12,03,40,000/- (Rupees Twelve Crores Three Lacs and Forty Thousand only) divided into 1,20,34,000 (One Crore Twenty Lacs Thirty-four Thousand) equity shares of Rs.10/- each to ::: Downloaded on - 09/06/2013 16:36:57 ::: 5 CP-1037-09 Rs.11,89,92,310/- (Rupees Eleven Crores Eighty-nine Lacs Ninety Two Thousand and Three Hundred Ten only) divided into 1,18,99,231 (One Crore Eighteen Lacs Ninety-nine Thousand Two Hundred and Thirty-one) equity shares of Rs.10/- each by cancellation of 1,34,769 (One Lac Thirty Four Thousand Seven Hundred and Sixty-nine) equity shares of Rs.10/- each and held by the holders of the equity shares other than the promoters."
"RESOLVED FURTHER THAT the aforesaid reduction shall be made by paying off /returning to the holders of the Equity Shares other than the promoters a price of Rs.532/- per share (including a premium of Rs.522/- per Equity Share), thereby extinguishing all such shares."
9. Thus WIL sought to extinguish 1,34,769/- equity shares and reduce its paid-up share capital to Rs.11,89,92,310/-. Though, the fair value of a fully paid up equity share of WIL was valued at Rs.377/- by KPMG, WIL deemed it appropriate to value the equity shares of Rs.10/- each, fully paid-up, held by the holders of the equity shares (other than the promoters), at Rs.532/-
(including a premium of Rs.522/- per share), which is at a premium of 41% over the fair value arrived at by KPMG.
10. The Board of Directors of WIL had sent a Notice and an Explanatory Statement dated 6th October 2009 to its shareholders in due compliance of the provisions of the Act, for convening an EGM of the Equity Shareholders of WIL on 10th November, 2009 to consider, inter alia, the passing of the Special Resolution, set out in Paragraph 8 above.
::: Downloaded on - 09/06/2013 16:36:57 :::6 CP-1037-09
11. In the said explanatory statement, the reason for reduction of share capital was explained as under:-
"Subsequent to the delisting of the Equity Shares of the Company, there is no market to buy and sell the Equity Shares held by the Equity shareholders other than the Promoters. The investments made by these shareholders are locked up and they find it difficult to dispose off their shareholding.
This has put the holders of the Equity Shares (other than the Promoters) in a lot of hardship and inconvenience as there is no liquidity /tradability to their shareholding. Further, the Company has been receiving requests from certain non-promoter shareholders to provide them with an exit opportunity. As an Investor friendly gesture, the Company wants to provide an exit opportunity to the holders of the Equity Shares (other than the Promoters), being the shareholders holding 1,34,769 equity shares representing 1.12% of the total issued, subscribed and paid-up equity capital of the Company. As a result of reduction of share capital as mentioned in the Resolution, the entire shareholding in the Company will be held by the Promoters."
It is further provided in the Explanatory Statement as follows:-
"Further the Company in accordance with the applicable provisions of the Income Tax Act, 1961 will be liable to pay Dividend Distribution Tax (DDT) @ 16.995% on the amount paid to the shareholders amounting to about Rs. 90/- per share at the above price.::: Downloaded on - 09/06/2013 16:36:57 :::
7 CP-1037-09 Accordingly the non promoting shareholders will receive a consideration of Rs.532/- per equity share which may be tax free in their hands."
12. The shareholders were further informed by the said Explanatory Statement that a copy of the Memorandum of Association and Articles of Association of the Company as amended from time to time and a copy of the valuation of the independent valuer i.e. KPMG, was available for their inspection and perusal at the registered office of WIL between 11.00 a.m. and 1.00 p.m. on any working day till the date of the meeting.
13. Accordingly the EGM of the shareholders of WIL was held on 10th November, 2009. At the said meeting 76 equity shareholders of WIL holding 11,903,307 equity shares of Rs.10/- each were present either in person or through proxy or through authorized representative under section 187 of the Act. Out of the 76 equity shareholders, 2 equity shareholders holding 30 equity shares of Rs.10/- each abstained from voting at the meeting. Out of the 74 equity shareholders who exercised their voting rights, ballot papers of 2 equity shareholders holding 125 equity shares of Rs.10/- each were found to be invalid. The ballot papers of the other 72 equity shareholders holding 11,903,152 equity shares were found to be valid. Out of these 72 equity shareholders who cast valid votes, 68 members holding 11,902,602 fully paid-
up equity shares of Rs.10/- each, constituting about 99.9954% of the total valid votes cast, were in favour of the Special Resolution while 4 members holding ::: Downloaded on - 09/06/2013 16:36:57 ::: 8 CP-1037-09 550 fully paid-up equity shares of Rs.10/- each constituting about 0.0046% of the total valid votes cast voted against the Special Resolution.
14. The Minutes of the said EGM dated 10th November, 2009 show that the Executive Director of M & A Tax KPMG India Private Limited was present by invitation. The said minutes further record the views expressed against the resolution by two of the shareholders, Mr. Arun Kejriwal and Mr. Janak Mathuradas, who are two out of the four intervenors opposing the present Petition. Their views are as follows:-
"Mr. Arun Kejriwal expressed his comments on valuation based on book value and fair value. He requested for a copy of the valuation report and expressed his dissatisfaction on account of insufficiency of time for evaluating the valuation report and expressed his opposition for the proposed resolution. He stated that the same was not in the interest of non-promoter shareholders of the Company. He also referred to the earlier open offers made by the Promoters of the Company.
Mr. Janak Mathuradas referred to the contents of the explanatory statement to the Notice reasoning the exit opportunity being offered to the minority shareholders. He stated that the resolution was not in the interest of the minority shareholders and the Company should buy the shares only from such shareholders who are willing to surrender their shares. In his opinion it did not necessitate to have a special resolution which would result in exit of all ::: Downloaded on - 09/06/2013 16:36:57 ::: 9 CP-1037-09 the non-promoter shareholders. He also expressed the view that a separate meeting of the minority shareholders should have been held to consider this resolution. He also referred to the price of Rs.622/- per equity share being arrived at on reverse book value at the time of delisting and the exit opportunity provided by the promoters at the same price of Rs.622/- per equity share for a specific period and thereafter reducing to a much lower price and enquired whether the price of Rs.532/- per equity share now offered by the Company under the Resolution for reduction of capital was justifiable. He also enquired on the rationality of the Company treating the exit price as dividend for Income Tax purpose and requested for a copy of the tax opinion on which the Company was relying. He enquired about the total number of shareholders of the Company. He wanted to know whether Members other than Promoters had given proxies.
He requested for inspection of the Proxy Register and corporate authorization, copy of valuation report, Memorandum & Articles and Annual Reports for last 3-4 years. He also requested the Chairman to record his objection to the resolution and provide a copy of the minutes of the meeting when recorded."
15. It is pointed out on behalf of WIL that as on 31st October, 2009, WIL has five secured creditors and WIL has obtained written consent from all the five secured creditors agreeing to the reduction of capital. It is further pointed out that WIL has 405 unsecured creditors. The unsecured creditors, ::: Downloaded on - 09/06/2013 16:36:57 ::: 10 CP-1037-09 comprise of statutory dues, trade creditors and advances received from customers. As on 31st October 2009, the aggregate amount due to them is Rs.
3,27,202,083/-. It is submitted that the unsecured creditors shall be paid as and when their dues become payable in the normal/ordinary course of business.
Attention of this court is drawn to the Minutes of the Order dated 18th December, 2009, admitting the above Company Petition and passing of directions to inter alia advertise the hearing of the Petition on 8th January 2010 in Free Press Journal (English Edition) and Maharashtra Times (Marathi Edition) and also dispensing with the procedure prescribed by Section 101(ii) of the Act. WIL has advertised the hearing of the above Petition as directed by this Court. However, except for the four intervenors, none of the shareholders or creditors of the Company have come forward to oppose the above Petition.
16. When this Company Petition was called out for hearing before this Court on 15th January, 2010, this court had enquired as to what was the main ground on which the said Petition was being opposed by the intervenors.
At that time, this Court was informed that the opposition mainly pertains to the valuation of the shares of WIL and the price offered by WIL to its shareholders (other than promoter shareholders) for their shares, which WIL proposed to reduce. At that point of time without going into the merits of the matter or any further details, this court had, in order to enable the parties to arrive at an amicable figure for each equity share of WIL, suggested that the parties approach one more independent valuer and obtain a second opinion in the ::: Downloaded on - 09/06/2013 16:36:57 ::: 11 CP-1037-09 matter. WIL has therefore, subsequently obtained a valuation report also from M/s. R.M. Raiji and Company, Chartered Accountants.
17. The details of the valuation reports placed before this Court are as under:
(i) Report of KPMG, independent valuer, dated 30th September 2009 relied upon by WIL :
The valuation methodology used by KPMG to arrive at a fair valuation of each equity share of WIL is the Discounted Cash Flow Methodology ("DCF") and Comparable Company's Method ("COCO"). It is a known fact that the Valuer for the purpose of valuation of equity shares uses different approaches like "Cost" Approach, "Market" Approach and "Income" Approach. KPMG for the purpose of valuing the equity shares of WIL has used the Income Approach and followed the DCF Method and the COCO Method. The rationale behind using the DCF and COCO Methods are explained by KPMG at Page 18 of its Report:
"Income Approach a. Discounted Cash Flows ("DCF") Under a DCF approach, forecast cash flows are discounted back to the present date, generating net present value for the cash flow stream of the business. A terminal value at the end of the explicit forecast period is then determined and that value is also discounted back to the valuation date to give an overall value for the business.::: Downloaded on - 09/06/2013 16:36:57 :::
12 CP-1037-09 A Discounted cash flow methodology typically requires the forecash period to be of such a length to enable the business to achieve a stabilized level of earnings, or to be reflective of an entire operation cycle for more cyclical industries.
We have used the DCF approach in the valuation of the Company.
b. Comparable Companies ("Coco") An earnings based approach estimates a sustainable level of future earnings for a business ("Maintainable Earnings") and applies an appropriate multiple to those earnings, capitalizing them into a value for the business. The earnings bases to which a multiple is commonly applied include Revenue, EBITDA and PAT (P/E).
The appropriate multiple is generally based on the performance of listed companies with similar business models and size.
We have used the CoCos multiple (EBITDA and P/E) in our valuation analysis."
KPMG has given its working based on DCF Analysis and COCO Analysis at Pages 29 and 30 of its Report and has after considering an average of the methodology used, at Page 33 valued the share price of common equity of WIL at approximately INR 377/- per equity share.
(ii) Report of N.M. Raiji and Company, Chartered Accountants, dated 4th March 2010 relied upon by WIL.
M/s. N. M. Raiji and Company has adopted the Net Asset Value and the Earning Capitalization Method to arrive at a fair value of each equity share of ::: Downloaded on - 09/06/2013 16:36:57 ::: 13 CP-1037-09 WIL. According to M/s. N.M. Raiji and Company, the value per share of WIL on the valuation date as per the Net Asset Value Method comes to Rs.428/- and as per the Earnings Capitalization Method to Rs.449/-. In their opinion, therefore, the fair value of each equity share of WIL of the face value of Rs.10/-
would be Rs.444/- as on 30th June 2009. M/s. N.M. Raiji and Company have also clarified that for an unquoted Company generally illiquidity discount of 10-20% is considered. However, they have not applied illiquidity discount for calculating fair value in view of the offer of reduction of capital of WIL.
(iii) Report of A. Maheshwari and Company, Chartered Accountants, dated 1st February 2010 relied upon by the intervenors:
The intervenors have relied on the Report of A. Maheshwari & Company, Chartered Accountants dated 1st February 2010. The said Report follows 3 Methods namely, Price/Earning per Share (P/E) Method; Enterprise Value / EBITDA (EV/EBITDA) Method and Price/Book Value (P/BV) Method.
According to the said Report of A. Maheshwari & Company, the average price of each equity share of WIL would be Rs.1,033/- per share.
(iv) Report of Shailesh Haribhakti, Chairman, BDO Consulting Private Limited (BDO), dated 17th March 2010, relied upon by WIL for analyzing the report of A. Maheshwari and Company, relied upon by the intervenors:
WIL has relied upon a report of BDO dated 17th March, 2010 setting out the observations/ comments of Shri Shailesh Haribhakti, Chairman of BDO on the ::: Downloaded on - 09/06/2013 16:36:57 :::
14 CP-1037-09 valuation methodology used by A. Maheshwari and Company (valuer). In his report, Mr. Haribhakti has observed that the valuer has in his report relied upon only one approach i.e. "Relative Valuation Approach". The valuer in the present case has used comparable company multiples instead of using comparable companies multiples for valuation method to value the equity shares of WIL viz., Price/Earning Per Share, Enterprise Value/EBITDA and Price/Book Value. The valuer has totally ignored other three generally accepted approaches to valuation i.e. "Cost" Approach, "Market" Approach and "Income" Approach.
Mr. Haribhakti has pointed out that the Valuer has relied upon only one Company i.e. Cummins India Limited (CIL) for deriving the different multiples.
The right approach would be to consider the comparable companies engaged in similar businesses. The comparable companies should be selected based on the size of the business, nature of business, products manufactured by the Company, stage in the business life cycle, etc. Considering only one company to derive at the multiples would mean comparing the company with another company's management style for managing the business and company affairs, which can give skewed results. Also suitable discounts/premiums should be considered to adjust the size of the company, technology used, etc. of the comparable companies. Although CIL can be considered as a remotely comparable company, it cannot be considered as a close comparable company for the following reasons:-
::: Downloaded on - 09/06/2013 16:36:57 :::15 CP-1037-09 (1) Size of the Company : Last two years average revenues of WIL are around 1/15 times that of CIL and the asset base of WIL is 1/6 times that of CIL.
(2) Capital Structure : WIL is not levered company, whereas CIL is levered nominally.
(3) Earning Before Interest, Depreciation, Tax and Amortization (EBIDTA) Margin : Last two years average EBIDTA Margins of WIL are nearly half that of CIL.
(4) Return on Net Worth (RONW) : Last two years of RONW of WIL is less than half that of CIL.
Mr. Haribhakti has therefore observed that the Valuer should have considered other comparable companies to reduce the 'skewness effect' associated with considering only one company and should have also applied suitable discounts to adjust to the size of the Company.
(5) The observations of Shri Haribhakti on the multiple used by the valuer Shri A. Maheshewari and Company are reproduced hereunder:
"Observations on Multiple Used Valuation as per P/E The valuer has not mentioned in the report the basis considered for deriving the Price and P/E ratio of CIL. Also, the basis for considering the forward P/E multiple by valuer is not clear.
Earning Per Share (EPS): EPS should ideally be considered for Trailing Twelve Months (TTM) period to reflect the normalized EPS (EV).::: Downloaded on - 09/06/2013 16:36:57 :::
16 CP-1037-09 As the above parameters were ignored while arriving the P/E multiple, in our view, P/E multiple derived by the valuer is higher than the ideal calculation of P/E. Valuation as per Enterprise Value (EBITDA (EV/EBITDA) The valuer has not mentioned in the report the basis considered for deriving the Enterprise Value (EV) and EBITDA of CIL.
In deriving the EV of a Company, an average market capitalization of the company should be considered and thereafter add net debt (debt less cash & surplus investments) as per the last audited financial statements of the company. TTM EBITDA should be considered to reflect the normalized EBITDA. In our view, EV/EBITDA derived by the valuer is higher than the ideal calculation of EV/EBITDA as the market capitalization of particular day is considered.
Valuation as per Price/Book Value (P/BV) WIL, being engaged in manufacturing sector, can be valued on an approach which considers asset base of the companies. However, while applying P/BV multiple of one company to another, suitable adjustments on account of difference in return on net worth needs to be considered.
As mentioned earlier WIL's RONW is around half of CIL, a suitable discount to P/BV multiple needs to be considered."
Mr. Haribhakti has in his analysis also observed that the valuer A. Maheshwari and Company has not referred to a valuation date in his report, which is the essence of any valuation report.
::: Downloaded on - 09/06/2013 16:36:57 :::17 CP-1037-09
18. Mr. Sethi, the learned Advocate appearing for WIL, has submitted that although the reduction of share capital of WIL by payment to the holders of equity shares (other than promoters) as embodied in the Special Resolution involves return of paid-up capital and payment of premium out of reserves and surplus, it will not in any manner adversely affect or prejudice the interests of the shareholders, creditors or the public at large. Mr. Sethi has further submitted that during the previous financial years i.e. 2007 and 2008 open offers were made by the promoters of WIL in accordance with SEBI Delisting Regulations. The said price of Rs.622/- was paid by the promoters/acquirers having regard to the discovered price as per Reverse Book Building Method under the then applicable regulations of the SEBI and the same was not on the basis of Valuation of Shares which is normally followed for reduction of capital. The offer by the Promoters is on a different basis and under the regulations which govern the delisting process. The reduction of capital under Section 100 of the Act cannot be equated with the promoters offer. As there were many requests received by the promoters/acquirers in various forms, the promoters/acquirers provided further opportunity through offers in 2008 and 2009 at the same price that was earlier discovered under the delisting regulations. According to KPMG's report, the fair value of the equity shares of WIL was Rs.377/- per share. However, as per the Special Resolution, WIL proposed to pay the price of Rs.532/- per share upon cancellation of the said shares. It was mentioned in the Explanatory Statement that the said Valuation ::: Downloaded on - 09/06/2013 16:36:57 ::: 18 CP-1037-09 Report of KPMG was available for inspection at the Registered Office of WIL.
However, none of the intervenors bothered to inspect the said Valuation Report prior to the EGM. In fact, they have at no place stated when the notice of the meeting was received by them, since that would show that they did have enough time to inspect the valuation report prior to the EGM. Moreover, Mr. Raichura and Mr. Zaveri have not even attended the meeting. The submissions made by the intervenors that the Report of KPMG is purely based on WIL's version and is not an independent analysis by KPMG or that the said report is unreliable and cannot form the basis of any valuation of shares of WIL are false and incorrect.
It is submitted that the price being offered by WIL is fair and has been approved by a significant majority of the shareholders. It is further submitted that the KPMG Report has also considered the Capitalized Earning Method, which as admitted by the intervenors themselves, is akin to the Earnings per Share Method. Mr. Sethi has also drawn the attention of this Court to a communication of the Reserve Bank of India, dated 4th May 2010, forwarding the revised provisions applicable to transfer of shares of an Indian Company in all sectors. It is inter alia provided in the revised provision 2.2 of A.P. (DIR Series) Circular No. 16, dated 4th October 2004 as follows :
"Where the shares of an Indian Company are not listed on a recognized stock exchange in India, the transfer of shares shall be at a price not less than the fair value to be determined by a SEBI registered category -::: Downloaded on - 09/06/2013 16:36:57 :::
19 CP-1037-09 I- Merchant Banker or a Chartered Accountant as per the discounted free cash flow method."
It is therefore submitted by Mr. Sethi that the methods adopted by KPMG to value the shares of WIL are widely accepted methods for valuing the shares of a Company.
19. Mr. Sethi has further submitted that the Valuation Report of SSPA & Co. was obtained by the Promoters and the Valuation done by SSPA & Co. was on the basis of CCI Guidelines. The valuation report obtained by the promoters of WIL from SSPA & Co. was to comply with the requirements laid down by the Reserve Bank of India. SSPA & Co. has valued the shares of WIL based on the pricing guidelines prescribed by RBI for acquisition of shares by non-residents from resident shareholders in accordance with the 'Guidelines for Valuation of Equity Shares of Company and the Business and the Net Assets of the Branches' issued by the Ministry of Finance, Department of Economic Affairs, vide File No. S.11(21)CCI(11)/90, dated 13th July 1990, popularly known as the "CCI Guidelines". The price of Rs. 162/- per share was the price arrived at by SSPA & Co. based on the said pricing guidelines prescribed by RBI for acquisition of shares by a non-resident from resident shareholders. It is submitted that the defects in the report submitted by A. Maheshwari and Company, are clearly brought out in the report of Mr. Shailesh Haribhakti, Chairman of BDO. It is submitted that though M/s. Raiji and Company have used the Net Asset Value and the Earning Capitalization Method, the fair value ::: Downloaded on - 09/06/2013 16:36:57 ::: 20 CP-1037-09 of one equity share of WIL determined by them is Rs. 444/- i.e. less than what is offered by WIL for cancellation of shares held by its non-promoter shareholders.
20. The Learned Advocate appearing for WIL has further submitted that the position in law is well settled that while exercising the jurisdiction and power to sanction a scheme, the court is required to ensure that the statutory provisions have been complied with; that the class of persons who attended the meeting were fairly represented; that the statutory majority was acting bonafide;
and that the arrangement or the scheme was such which an intelligent and honest man, acting in respect of his interest might reasonably approve. It is submitted that the Court is not required to differ from the decision of the majority arrived at the meeting unless any of the above factors are found to be wanting. It is further submitted that it is a settled legal position that the court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the scheme by the requisite majority. The Learned Advocate has in support of his above submission relied on the decision of this Court in ALSTOM Power Boilers Ltd. v. State Bank of India, [2002] 112 Comp Cas 674, and the decision of the Gujarat High Court in Reliance Petroleum, In re, [2004] 119 Comp. Cas 566. The Learned Advocate has also strongly relied on the following observation of the Division Bench of the Andhra Pradesh High Court in V. Ramarao v. Asian Coffee Limited, [2002] 109 Comp. Cas 337:
::: Downloaded on - 09/06/2013 16:36:57 :::21 CP-1037-09 "In the absence of inherent defects or other vitiating factors in the valuation got done by the management of transferor and transferee companies, it is not permissible for the court to suspect the correctness or bonafides of those reports in the light of the subsequent valuation reports which the Appellant produced at the time of hearing of the Company Application."
Mr. Sethi has therefore submitted that the Company Petition filed by WIL be allowed.
21. Mr. J. D. Dwarkadas, the Learned Senior Advocate appearing for the Intervenors has submitted that though the Intervenors have in their Affidavit contended that the proposed reduction of share capital by WIL amounts to forceful acquisition of shares held by them and such action on the part of WIL is against the principles of natural justice, corporate democracy and corporate governance, he is presently not pressing the said contention, in view of the decision of the Hon'ble Division Bench of this court in Sandvik Asia Ltd. v.
Bharat Kumar Padamsee, 2009 (3) Bom CR 57, from which an SLP was preferred to the Hon'ble Supreme Court and was dismissed. However, he seeks to keep the said issue open, to enable the Intervenors to raise the same before the Hon'ble Division Bench of this Court or before the Hon'ble Apex Court if so advised.
22. Mr. Dwarkadas has further submitted that though the Intervenors have raised several issues in their Affidavits, he will be restricting his submissions to only two issues. The first main submission advanced by Mr. ::: Downloaded on - 09/06/2013 16:36:57 ::: 22 CP-1037-09 Dwarkadas is that WIL had earlier made open offers to acquire the shares held by individual shareholders at the rate of Rs.622/- per share. Such open offers issued by WIL were obviously based on WIL's assumption of the then fair value. The profit before tax of WIL has doubled from the year 2007 to the year 2009. WIL has declared dividends of 25% and 30% for the years 2007 and 2008, respectively, and it is therefore, apparent that the earnings which accrue on the shares of WIL have increased. It is therefore obvious that the intrinsic and/or fair value of the shares of WIL has increased and/or appreciated. Mr. Dwarkadas submits that valuation is only one of the many methods of ascertaining the fair value of the shares of a Company but not the only mode/method. He submits that in a matter like the present one, the fair value of the share is to be ascertained on the facts that he has just narrated and not on the valuation by any valuer. Despite WIL having offered Rs.622/- per share prior to the company's profits being doubled, WIL is now offering a paltry sum of Rs.
532/- per share which is an unfair value and/or an undervalue of the said shares.
Mr. Dwarkadas therefore submits that irrespective of any valuation report produced by WIL or by the Intervenors, this court should reject the Petition on the sole ground that the offer of WIL to reduce its share capital at a value of Rs.
532/- per share is totally unjust, unfair and not bonafide.
23. It would be appropriate to deal with this submission of Mr. Dwarkadas at this stage itself. As can be seen from the Affidavit filed by the Intervenors, the foreign promoters of WIL made its first open offer in or about ::: Downloaded on - 09/06/2013 16:36:57 ::: 23 CP-1037-09 October 2001 at a price of Rs.120/- per share. They received roughly 33.7% shares in the open offer and the promoter shareholding went upto approximately 84.7%. The foreign promoters made a second open offer in or about April 2002 to acquire the balance 15.24% shares at Rs.120/- per share. In or about June 2007 the foreign promoters made a public offer and as per the reverse book building prescribed under the SEBI Guidelines the discovered price of Rs.622/-
was accepted. The foreign promoters were able to acquire 6.89% equity shares in the open offer at the reverse book building price of Rs.622/-. The price of Rs.622/- per share paid by the promoters in the year 2007 was therefore not as per any valuation but rather, as per the reverse book building prescribed under the SEBI Guidelines. Two years thereafter i.e. after the profits of WIL doubled as alleged by the Intervenors, the foreign promoters, despite the valuation report of SSPA & Co. valuing each equity share of WIL at Rs.162/-, offered to purchase shares from the non-promoter shareholders at the same discovered price of Rs.622/- offered in the year 2007. The said offer was valid from 15th May 2009 upto 31st July 2009. It was mentioned in the said offer that for the period 1st July 2009 to 15th August 2009 the offer price would be revised downwards to Rs.162/- and would remain valid till 15th August 2009. In my view, the offer of the foreign promoters of WIL of Rs.622/- per share, despite the valuation of SSPA and Co. at Rs.162/- per share, for the period of 10 weeks i.e. from 15th May 2009 to 31st July 2009 is a business/commercial call of the foreign promoters of WIL at that point of time. What business/commercial ::: Downloaded on - 09/06/2013 16:36:57 ::: 24 CP-1037-09 plans the promoters of WIL had in mind at that point of time are known only to them and in my view, the Court cannot and should not attempt to speculate or read into the mind of the promoters. The court also cannot embark upon an exercise of speculating as to why the promoters later offered to pay only Rs.
162/- per share from 1st August 2009 to 15th August 2009. The said offer at Rs.
622/- per share was only for a period of ten weeks and it was for the non-
promoter shareholders of WIL to accept or reject the same. The action of the promoter shareholders in choosing to value the shares first at Rs. 622/- for a limited period of ten weeks and thereafter reducing the valuation is legal and within their authority. The question of why they chose to do so is one that transcends the supervisory jurisdiction of the Company Court and concerns only the commercial wisdom of the promoters.
24. A simple illustration here would further help to explain this situation. When the court fixes a reserve bid for sale of property through the Court Receiver or the Official Liquidator on the basis of a valuation report, there are numerous instances where no purchaser comes forward to buy a property even at the reserved price but a lone buyer comes forward with an offer which is much higher than the reserved price fixed by the Court. This is because a business/commercial offer solely depends on particular factors taken into consideration by an offeror at the time he makes his offer, which in the long run may turn out to be profitable or otherwise for him. Therefore, such offer of an offeror cannot be held to be binding on him for all times to come and cannot ::: Downloaded on - 09/06/2013 16:36:57 ::: 25 CP-1037-09 be used as a yardstick for the subsequent offer made by him or by any other offeror. In the instant case, WIL has moved a Special Resolution for reducing its share capital by compensating its equity shareholders (other than promoters) by paying them Rs.532/- per share after following the correct mode of obtaining the valuation report from an independent valuer. This submission of Mr. Dwarkadas, which though on the face of it may sound attractive, must therefore be rejected.
25. Mr. Dwarkadas, without prejudice to his earlier submission, has further submitted that in factual circumstances such as that of the present case, where the shares are not quoted on a Stock Exchange, the value of the shares should be determined on the Earning Method or the Yield Method i.e. after considering the profits which the company has been making and should be making. In support of his contention, Mr. Dwarkadas has relied on the decision of the Hon'ble Apex Court in Commissioner of Wealth Tax v. Mahadeo Jalan, (1973) 3 SSC 15. Here the question raised for determination of the Hon'ble Apex Court was as to what would be the basis of valuation of shares in private limited companies for the purpose of Section 7 of the Wealth Tax Act, 1957 (27 of 1957). The Hon'ble Apex Court examined various aspects of valuation of shares in a limited company as well as a private limited company and set out its conclusion in Paragraph 12 of the Judgment. However, the Hon'ble Court is also quick in immediately recording the following in the subsequent paragraph of its Judgment (also numbered Paragraph 12):
::: Downloaded on - 09/06/2013 16:36:57 :::26 CP-1037-09 "In setting out the above principles we have not tried to lay down any hard and fast rule because ultimately the facts and circumstances of each case, the nature of the business, the prospects of profitability and such other considerations will have to be taken into account as will be applicable to the facts of each case..."
26. In my view KPMG has used the widely accepted methodologies i.e. the Discounted Cash Flows Methodology and the Comparable Companies Methodology which inter alia includes the P/E multiple analysis for valuation of WIL's shares. One of the valuation methodologies, which was adopted by M/s.
Raiji and Co., is the one suggested by the Intervenors, but even in this valuation, the valuation of each equity share of WIL would be Rs. 444/-. Mr. Shailesh Haribhakti, Chairman of BDO, has given cogent reasons explaining the defects in the valuation of WIL shares by A. Maheshwari and Co. As held in several decisions of the Hon'ble Apex Court and other High Courts including this Court, the role of the court whilst approving such schemes is limited to the extent of ensuring that the scheme is not unconscionable or illegal or unfair or unjust. Merely because the determination of the share exchange ratio or the valuation is done by a different method which might result in a different conclusion, it alone would not justify interference, unless found to be unfair. The Hon'ble Division Bench of the Gujarat High Court in the case of Kiritbhai Hiralal Patel [2001] 107 COMP CAS 232, has aptly recorded as follows:
::: Downloaded on - 09/06/2013 16:36:57 :::27 CP-1037-09 "...... In the book Study on Share Valuation, which has been published by the Institute of Chartered Accountants of India, and on which reliance has been placed by the Learned Advocate for the Appellants, the following observations has been made in its foreword to the first edition ...
'The subject of valuation of shares has always been controversial in the accounting profession. No two accountants have ever agreed in the past or will ever agree in the future on the valuation of shares of a company, as inevitably they involve the use of the personal judgment on which professional men will necessarily differ'..."
In the case of Sidhpur Mills Company Limited, In re, AIR 1962 Gujrat 305, the learned Single Judge observed thus :
"... it is not for the court to scrutinise the scheme in the manner of 'a carping critic, a hair-splitting expert, a meticulous accountant or a fastidious counsel' for the effort is not to emhasise the loopholes, technical mistakes and the accounting errors. The perspective to be that of the ordinary shareholder exercising his discretion in a reasonable and businesslike manner."
27. In the case of Sidhpur Mills Company Limited, In re, AIR 1962 Gujrat 305, the learned Single Judge observed thus :
"... it is not for the court to scrutinise the scheme in the manner of 'a carping critic, a hair-splitting expert, a meticulous accountant or a fastidious counsel' for the effort is not to emhasise the loopholes, technical mistakes and the accounting errors. The perspective has to be that of the ordinary shareholder exercising his discretion in a reasonable and businesslike manner."::: Downloaded on - 09/06/2013 16:36:57 :::
28 CP-1037-09
28. That the Courts should not sit in judgment over the commercial wisdom of parties is a regularly acknowledged principle. In the landmark case of Miheer H. Mafatlal v. Mafatlal Industries Ltd., (AIR 1997 SC 506), the Hon'ble Apex Court stated:
"The court does not have the expertise nor the jurisdiction to delve into the deep commercial wisdom exercised by the creditors and members of the company who have ratified the scheme by the requisite majority. Consequently, the Company Court's jurisdiction to that extent is peripheral and supervisory and not appellate. The Court acts like an umpire in a game of cricket who has to see that both teams play their game according to the rules and do not overstep the limits. But, subject to that, how best the game is to be played is left to the players and not the umpire"
29. In Hindustan Lever Employees Union v. Hindustan Lever Limited, AIR 1995 SC 470, the Hon'ble Apex Court rejected the argument of the Petitioner therein, that if some other method was adopted, probably the determination of valuation would have been more in favour of the shareholders.
Merely because some other method of valuation could be resorted to, which would possibly be more favourable, that alone cannot militate against granting approval to the scheme propounded by the Company. The Court's obligation is to be satisfied that the valuation was in accordance with the law and it was carried out by an independent body.
::: Downloaded on - 09/06/2013 16:36:57 :::29 CP-1037-09
30. In the case of Re Tata Oil Mills Co. Ltd., (1994) 81 Comp Cases 754 (Bom), this Court observed thus:
"... the exchange ratio arrived at by Mr. Malegam has received the approval of shareholders holding more than 99 per cent (in number and value) shares at the meetings. No one except the shareholders holding the minimum percentage of shares has complained before me.
The valuation has been confirmed by two eminent firms of auditors. It would be extremely difficult to hold that the same is unfair. In any case, it has been approved by an overwhelming majority of persons affected and there is no basis to doubt their judgment."
31. Finally, the principle laid down in the landmark case of Gold Coast Selection Trust Ltd. v. Humphey (30 TC 209) must be borne in mind:
"......Valuation is an art, not an exact science. Mathematical certainty is not demanded nor indeed it is possible."
32. In the present case, even if only the non-promoter shareholders' voting is taken into account, the resolution proposing reduction of the share capital of WIL is approved by an overwhelming majority of 93.94 per cent of non-promoter shareholders in number and 85.97 per cent in value in the said EGM. All the secured creditors of WIL have given their consent to the proposed scheme of reduction of capital. Not a single unsecured creditor has raised any objection qua the said proposed scheme of reduction of capital. The hearing of the Petition was advertised by WIL as directed by this Court in two local newspapers. However, except for the four intervenors, no other person has come forward to oppose the Petition. Among these intervenors, two of the ::: Downloaded on - 09/06/2013 16:36:57 ::: 30 CP-1037-09 four did not even attend the EGM. As regards their position, the observations of the Hon'ble Apex Court in Miheer H. Mafatlal v. Mafatlal Industries Ltd.
(supra), where a shareholder did not attend the meeting and vote against the scheme, are most relevant:
"If he was feeling that the scheme was unfair to him or was not going to protect his interest as a shareholder in the respondent-company, nothing prevented him from remaining present and voicing his grievance before the general body of equity shareholders and to apprise them of the alleged pernicious effects of the scheme. It is, therefore, too late in the day for him to contend that the scheme was unfair to him..."
On the other hand, the other two intervenors, Mr. Mathuradas and Mr. Kejriwal, have not deemed it fit to inspect the valuation report prior to the EGM though it was categorically stated in the explanatory statement that the valuation report of KPMG was available for inspection at the registered office of WIL between 11.00 a.m. and 1.00 p.m. on any working day till the date of the EGM i.e. 10th November 2009. The only objection raised by the two intervenors at the EGM was that earlier, the promoters had made an offer to purchase their shares at a value of Rs.622/- per share. No questions were put by the two intervenors to the representative of KPMG who was present at the EGM by invitation, even after a copy of the valuation report was provided to them at the meeting. The Report of KPMG sets out the basis for arriving at the final opinion. The Report clearly mentions that valuation is done by following the much accepted Income ::: Downloaded on - 09/06/2013 16:36:57 ::: 31 CP-1037-09 Approach, the Discounted Cash Flow Method and the Company Comparable Method. Though M/s N.M. Raiji & Co. have followed the Net Asset Value method and the Earnings method, their valuation of each share of WIL also does not exceed the price actually being offered by WIL for purchase of its shares.
Moreover, the drawbacks of the report submitted by the Intervenors have been clearly set out in the Report of Mr. Shailesh Haribhakti, Chairman of BDO. The intervenors have not attributed any motives to KPMG, nor commented on its independent professional status or competency, nor have they been able to point out that the method adopted by them in valuing the shares was impermissible or absurd.
33. Keeping in view the observations of the Hon'ble Apex Court as well as the other High Courts including this Court and the reasons set out herein above, I see no reason why the Valuation Report of KPMG, which I find to be fair, reasonable and based on cogent reasoning, and which has also been accepted by a majority of the non-promoter shareholders of WIL should not be accepted by this Court.
34. Under the circumstances the Company Petition is allowed in terms of prayer clauses (a) and (b).
Order Accordingly.
[ S. J. KATHAWALLA, J. ] ::: Downloaded on - 09/06/2013 16:36:57 :::