1. Balaji Distilleries Limited has filed Appeal No. 189 of 2009 against paragraph No. 2.7.6(i) and (ii) of the order dated 16.7.2009 passed by the Board for Industrial and Financial Reconstruction (BIFR) under section 25 of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) in case Nos. 103 of 2004 and 315 of 2004. Vide its impugned directions, the BIFR has declared the allotment of warrants for Rs. 124.02 crores to Vicki Investments and Properties (P) Ltd. (VIPPL), Hiwide Enterprises (P) Ltd (HEPL) and Mighty Agrotech (India) Limited (MATIL) on 20.12.2007 and its subsequent conversion into equity on 15.6.2009 as null and void and by another direction the BIFR has directed the appellant company to submit an alternate draft rehabilitation scheme to the IDBI (operating agency) without involving any change of management. Against this order, the appellant company as well as VIPPL (Appeal No. 193 of 2009), HEPL (Appeal No. 187 of 2009) and MATIL (Appeal No. 196 of 2009) have also fried separate appeals challenging the same order on various grounds. Therefore, all the aforesaid appeals are being decided by this common order.
2. Brief facts of the case are that Balaji Distilleries Limited filed a reference under section 15(1) of SICA and in the hearing held on 20.12.2006, the BIFR declared the company sick and appointed IDBI as the operating agency (OA) with the direction to prepare a viability study report and rehabilitation scheme for the company with 31.3.2007 as the cut off date.
3. The BIFR, by its order dated 25.3.08, permitted the company to create first mortgage and charge in favour of Standard Chartered Bank on the movable and immovable assets of the distillery and brewery divisions (excluding current assets) of the company in pari passu with LandT Finance Ltd. Thereafter, the BIFR further directed the company to submit a fully tied up DRS to IDBI (OA) within two weeks and OA was directed to consider the same in a joint meeting of all concerned and submit a report along with a fully tied up DRS.
4. In the hearing held on 26.6.08, the BIFR observed that the company has made substantial progress in settling the dues of the secured creditors. The BIFR directed the company to submit a revised DRS incorporating the settlements reached with the secured creditors to OA and the BIFR by 31.7.2008 with 31.3.2008 as the cut of date, IDBI was directed to consider the DRS in a joint meeting of all concerned and submit its report along with a fully tied up DRS within one month thereafter. It was further directed that if any fully tied up DRS was recommended by the IDBI, the next hearing would be held on 15.9.2008. In the hearing held on 15.9.2008, the Board observed that the company has settled the outstanding dues of most of the secured creditors and submitted its revised DRS pursuant to the suggestions made in the meeting held on 8.9.2008 to IDBI (OA). Again, in the hearing on 14.1.2009, the Board issued certain directions of which the material directions were that the company and the OA shall submit their response to the written submissions filed by SEBI within 15 days. The OA was directed to submit a detailed report to the effect whether the three investors, viz., VIPPL, HEPL and MATIL belong to the promoter group after verifying their ownership (shareholding).
5. In the hearing held on 26.6.2008, Indian Bank was impleaded as a party and in the hearing held on 15.9.2008, IDBI (OA) was directed to submit the company's DRS incorporating the changes suggested in the joint meeting providing for the dues of Indian Bank as a contingent liability to the board by 19.9.2008. On 14.1.2009, the BIFR directed that as the dues of Indian Bank under the corporate guarantee given by the company have been crystallized, they should be adequately covered in the DRS. Federal Bank and Bank of Baroda were exempted from attending future hearings. In the hearing held on 14.1.2009, direction was given to the OA to convene a joint meeting of all those concerned and submit a fully tied up DRS within 45 days. In the hearing held on 3.3.2009, the BIFR issued direction to IDBI (OA) to revise the DRS taking into consideration the observation made by the Board under paragraph 2.1 and submit a fully tied up DRS with full details of the rationale for merger of one unit â distillery division with United Spirits Ltd and demerger of another unit â brewery division with Chennai Breweries (P) Ltd., giving details of the division-wise assets and liabilities and viability of each unit. The BIFR further directed that the OA shall submit a detailed report on whether the 3 investors, viz., VIPPL, HEPL and MATIL belong to promoter group after verifying their ownership (shareholding) and give the documents/credentials of the three companies. A further direction was given to the company that the company may negotiate with Indian Bank to arrive at a settlement.
6. In the hearing held on 25.5.2009, the Board issued directions that OA shall examine the various issues mentioned under paragraph 2.3 and submit a report whether the company has complied with SEBI guidelines while allotting convertible warrants to .investors not belonging to the promoter group within 15 days. The company was also directed to clarify with copy to the OA and SCB how change of management can take place without the permission of BIFR and without following a transparent procedure by allotting 20.98% each in the post- conversion equity of the company to 3 investors out of which two, namely, VIIPL and MATIL, are owned by Digistar Investment (P) Limited (DIPL) of Mauritius. As a result DIPL has become the owner of 41.96% of the equity of the company and HEPL of 20.98% of the equity compared to the promoters' proposed holding of 7.29% and associates' holding of 5.11%. It was further directed to examine whether these 3 entities with low paid up capital can invest Rs. 124.02 crores in the equity of the sick company and whether it is permissible to borrow abroad to invest in the equity of the sick company. It was further directed to clarify whether permission of Reserve Bank of India (RBI) and Foreign Investment Promotion Board (FIPB) of Government of India is required for such investment. The company was also asked to clarify whether HEPL is owned by any foreign entity.
7. In the hearing held on 16.7.2009, the representative of IDBI (OA) referred to their letter dated 5.6.2009 and stated that the allotment of warrants will definitely lead to change in shareholding pattern and post-conversion, warrants holders will have shareholding in excess of existing promoters. However, this will be only for an interim period till the company is merged with United Spirits Ltd. because after the merger is completed, the warrant holders' shareholding in the merged entity will be insignificant. It was further pointed out that the warrant holders have also executed irrevocable proxies in favour of Shri M. Sreenivasulu Reddy, the existing promoter, to vote on their behalf at all the general body meetings of the appellant company including at any adjourned meeting to be held from 1.7.09 to 31.2.2014 or till the merger of the appellant company with United Spirits Ltd., whichever is earlier. IDBI further submitted that warrant holders propose to borrow funds within India for subscribing to warrants and also confirmed that the warrant holders do not propose to borrow any money from outside India. It was further submitted that legal opinion submitted by the company has confirmed that the company has complied with all SEBI guidelines and no approvals of RBI and under FEMA regulations are necessary as the warrant holders are Indian companies. It was further stated that the DRS was prepared taking into account the proposed conversion of funds through warrants. The swap ratio has also been considered taking into consideration of the above infusion of funds. If the proposed funds from warrant holders do not materialize, then entire viability/DRS would have to be re-worked.
8. Before the BIFR it was submitted by the company that mere issue of shares may not tantamount to change of management. It was further submitted that in case ownership alone determines management, the company has requested for condonation for not obtaining prior permission of the BIFR. It was further stated that the dues of the Indian Bank and the Oriental Bank of Commerce were paid by the company. OCCRPS of Rs. 18.02 crores also were redeemed by the company. The dues of Indian Overseas Bank were also settled under OTS. Indian Bank has also stated that their dues have also been paid and both of them sought exemption. SCB also submitted a letter dated 13.7.2009 stating that SCB is agreeable to the demerger of the brewery division of Balaji Distilleries Ltd. to Chennai Breweries Limited, a subsidiary of the company, subject to fulfillment of the terms and conditions-mentioned in SCB's letter dated 13.7.2009 to the company. The representative of LandT Finance Limited stated that their dues are being paid regularly by the company. The entire warrant amount of Rs. 124.02 crores has been brought in as Rs. 111.62 crores representing 90% of the warrants was also paid and the warrants were converted into shares, on 15.6.2009. All the companies have jointly submitted that the warrant holders have agreed to be only passive investors. They have also agreed not to have any place on the board of directors and, therefore, it was assured to the BIFR that there shall be no change of management in the company.
9. After considering the submissions of the parties, the BIFR was of the view that change of management/ownership has clearly taken place as the existing promoters have become minority shareholders and the BIFR was of the view that there cannot be any post facto approval regarding change of management/ ownership of a sick company without the approval under section 18(b) of SICA and without following a transparent procedure, and accordingly the Board declared the allotment of share warrants for Rs. 124.02 crores to 3 companies and subsequent conversion into equity on 15.6.2009 as null and void as the same has not been done as per the provisions of SICA and directed the company to submit an alternate DRS to the OA without involving change of management against which the appellant company as well as the three shareholders have filed these appeals.
10. We have heard the learned counsel for the parties in all the appeals. Shri Abhishek Manu Singhvi, learned senior counsel appearing for the sick company, submitted that the appellant company was in urgent need of funds and to explore the possibility of raising funds offered issue of warrants. Pursuant to the offer of the company, only three investors evinced interest and, accordingly, the company agreed to issue warrants for Rs. 124.02 crores to the three parties. On 9.8.2007, after negotiations, the investor companies confirmed that they would be passive investors and they were not interested in the management of the appellant company. They also confirmed that they would not seek any seat in the board of directors (BoD) of the appellant company. Thereafter, at a meeting held on 11.8.2007, the board of the appellant company decided to issue the convertible warrants to the investor companies in line with SEBI (DIP) Guidelines. This was also subsequently approved by shareholders of the appellant company at AGM held on 12.9.2007. The warrants were issued at Rs. 13.78 each in accordance with SEBI guidelines with regard to pricing of issues. The appellant company on receipt of 10% of the application money allotted the warrants on 20.12.2007 and the warrant holders had 17 months and 29 days time to bring in the balance money and get the warrants converted into equity shares of the appellant company. On 15.6.2009, the balance money of Rs. 111.62 crores was paid and the warrants were converted into equity shares.
11. Shri Singhvi further argued that the appellant company has complied with all necessary statutory requirements. It was argued that the company has complied with various SEBI guidelines regarding disclosure and investor protection which deal with pricing, lock-in, etc., and SEBI (Substantial Acquisition of Shares and Takeover) Regulations. He has also stated that the certificate of CA confirming that the SEBI (DIP) guidelines have been complied with has been obtained. He has also submitted the record of detailed workings as to how pricing of Rs. 13.78 is arrived at. It was further argued that the company has complied with all compliances and provisions of the Companies Act, 1956. The company has also effected compliances of Bombay Stock Exchange as well as Madras Stock Exchange. It was argued that the BIFR deliberately has not considered all the aforesaid documents and has distorted the facts. It was further argued that on the question of change of management the finding thereto is erroneous and incorrect. In corporate structure, the ownership of the company is with the shareholders whereas the management of the company is with the BoD of the company. The BIFR has failed to understand that a change of share structure does not mean a change in management. The change of ownership of the appellant company cannot be construed as change of management as, in olden days, there was no concept of corporate structure but only sole proprietorship or partnership. After evolution of time, corporate structure has come into existence with the concept of differentiating ownership and management. It was further argued that the appellant company has placed on record the confirmation of investor companies that they are only passive investors and would not seek a seat on the BoD or the management of the company. The investor companies have also given irrevocable proxies; to the existing promoter Mr. M. Sreenivasulu Reddy which are valid till 2014 to vote on half of the investors at the general body meetings. The appellant company has also placed on record an affidavit through its company secretary confirming that there is no change in management and there is also no legal bar preventing the appellant company from raising funds through issue of warrants. It was further argued that the company has settled with all its secured creditors. IDBI is only the OA and not a lender. SCB has consented to the DRS and has requested that the same be circulated but the BIFR has erroneously overlooked the same.
12. Shri Singhvi further argued that the process of finding an investor and the allotment of warrant for the purpose of infusion of funds was purely for the revival of the company and it is not something that has come as a surprise to the BIFR. It was within the knowledge of the BIFR that-the appellant company was considering the revival through infusion of funds through issue of warrants. The process was carried out in a transparent manner which was in the knowledge of the BIFR. It is clear from the written submissions of SEBI regarding the proposed allotment and even in the hearing held on 14.1.2009 the question of infusion of funds for the purpose of rehabilitation of the sick company was discussed. The BIFR, in its order dated 3.3.2009, has also discussed the same and has raised various questions to satisfy itself whether the investor companies are Indian companies; whether there is any violation of FEMA and the company has fully answered the questions raised by the BIFR from time to time and all the directions issued by the BIFR were examined by IDBI (OA) in detail and answers were submitted and even then without assigning any cogent reason, the BIFR simply discarded them which is not legal. The BIFR has not considered this aspect of the matter that the funds raised by allotment had been used to pay and settle the dues of creditors on OTS basis. The transaction of allotment of warrants and its subsequent conversion into equity shares has been consummated and the funds raised by the company have been utilized towards the revival of the company. It was further argued that BIFR has illegally declared the allotment null and void and directed the company to submit an alternate draft rehabilitation scheme without involving change of management, whereas as the investors have given clear undertaking that they will not be involved in any way in the change of management of the company. The impugned order passed by the BIFR setting aside the allotment would ruin the company involving return of the investment made, cancellation of shares allotted, re-arrangement of OTS with banks, etc., and would turn the clock back requiring a search for an investor. In fact, the BIFR should have considered the larger interests of the company as well as in the interest of stakeholders instead of looking at the technical objections. It was argued that the company has no objection if direction is given by this Authority that the DRS shall contain a clause to ensure that there shall be no change of management in the company's post-conversion of warrants and pre-merger. It was further argued that, in the DRS, the company has already sought exemption from open offer requirement as per the SEBI guidelines.
13. Shri Vivek Sibal, learned counsel appearing for the three investors/ appellants arguing on the same lines, submitted that the BIFR has not followed the mandate that no person shall be condemned unheard. In the instant case, the BIFR, without even issuing a notice to the appellants and without affording an opportunity of any kind of hearing, has declared the allotment of convertible warrants by the sick company to the appellants as null and void. It was submitted that the BIFR has never invited the appellant companies to attend a hearing including the hearing when the impugned order was passed. The appellants are only investors and have invested substantial sums of money in the company, Balaji Distilleries, in order to augment and support the ameliorative efforts being attempted by the promoters of the sick company to revive and rehabilitate it. The BIFR has already noted the fact that the banks and FIs have been settled by the appellant through OTS and the BIFR has accorded its approval for settlement of the creditors through OTS out of the funds raised by the company. The provisions of SICA do not vest any power in the BIFR to set aside the allotment of warrants or shares or declare any corporate action as null and void. The impugned order has been passed by the BIFR transgressing its jurisdiction. It appears that the BIFR has passed the impugned order simply taking into consideration the fact that the allotment of warrants and its subsequent conversion into equity has resulted in change of management with respect to the sick industrial company without permission of BIFR and is violative of provisions of SICA, He further argued that the terms 'control' and 'management' are not defined under provisions of the Companies Act, 1956. The BIFR has erred in ignoring that the warrant holders, including the appellants, had executed irrevocable proxies in favour of the existing promoter to vote on their behalf at all general body meetings of Balaji Distilleries Limited which is valid upto 2014. The conduct of the appellants leaves no doubt that the appellants are only passive investors and are neither keen nor interested in participating in the management of the company. In the light of such unequivocal stand, the doubt expressed by the BIFR as regards the change of management was unfounded and without any basis. It was further argued that the decision of the BIFR that there is a change of management and such change of management can only take place by a transparent procedure and that such procedure has not been followed in the instant case is totally baseless and is liable to be rejected. As such, it was further submitted that the sick industrial company and the OA had apprised the BIFR regarding infusion of funds. The company has furnished all details pertaining to the transaction. The entire procedure has been above board and in the knowledge of all parties including the BIFR and OA. It was further argued that the BIFR has failed to appreciate that the revival of the company can only be done by raising funds from the strategic investors. The BIFR has completely ignored the various methods by which the revival of the company may take place and has proceeded on a myopic view. It was submitted that investors of these funds are Indian companies and the funds were being invested from source of funds in India. Such investment neither requires approval of RBI nor FIPB. Besides, there is no violation of FEMA regulations. It was further argued regarding the pricing of warrants that the same was strictly as per the guidelines of SEBI and that no objection had been raised by SEBI insofar as the pricing was concerned. BIFR has also erred in observing that the funds employed in allotment of warrants were not from credible sources. The observation is unwarranted in the circumstances of the case. The appellant investors have made available funds from reliable sources certified by banks and FIs, therefore, the observation is clearly misplaced and misconceived. The promoters of the company are friends/business associates of the promoters of the sick industrial company and upon being satisfied with the financial viability of the company, the appellants agreed to invest in the sick industrial company. It is the case of the appellant company that BIFR raised several queries on the allotment of warrants and the proposed conversion of warrants into equity on various occasions and consequent thereto joint meetings were held by the OA and status reports were also filed by OA. All documentary evidences were also placed before the BIFR but the BIFR has acted purely on conjectures and surmises and has ignored the entire documentary evidences including the reports submitted by the OA and results of the joint meetings. Therefore, the order of the BIFR is totally illegal, unjustified and opposed to the revival of the sick company. BIFR has noted the fact that the banks and FIs were settled by the appellant company by way of OTS. Therefore, the approach taken by the BIFR in this case is arbitrary and the impugned order of the BIFR is liable to be set aside. It was also argued that the BIFR has exceeded its jurisdiction by declaring the transaction null and void. The appellants have repeatedly argued that there shall be no change of management. However to obviate any change of management a condition can be put in the DRS. In all the three appeals, Shri Sibal argued that the impugned order passed by the BIFR be set aside, the investment be taken on record, the DRS be sanctioned and the BIFR be directed to supervise it and see that the company is revived as per the scheme. Shri Sibal submitted that this Authority can also issue direction about the circulation of DRS and cited four decisions in which this authority has issued similar directions; (J.K. Synthetics Ltd., (Appeal No. 301/2000); (2) Gujarat Sidhree Cement Limited (Appeal No. 367 of 2001); Kothari Sugars and Chemicals Ltd. (Appeal No. 188 of 2002); and (4) Renuka Silk Mills Ltd. (Appeal No. 72 of 2006).
14. No one appeared before us for the respondents except IDBI (OA), Indian Bank and SCB. As directed on 27.11.2009, the appellant company has filed its affidavit through its company secretary and stated therein that on the day when the convertible warrants were issued to the 3 financial investors, Mr. Raghu Ram was the managing director and Mr. V.C.S. Reddy and Sesha Reddy were the directors and Mr. M. Sreenivasa Reddy resigned from the post of director and his resignation was accepted by the BoD in its meeting dated 28.12.2007. In the affidavit, it has been mentioned that subsequent to the issue of warrants, there is no change in the board of directors of the company, a reply the DGM of the Indian Bank has filed an affidavit that Indian Bank is one of the secured creditors, The bank has sanctioned an OTS on 27.4.09 and Balaji Distilleries has paid the sanctioned OTS amount and, therefore, the Indian Bank may be exempted from appearing in further hearings. The representative appearing for the IDBJ drew our attention to the tabular chart dated 5.6.2009 and letter dated 9.1.2009 and submitted that the same is their submission in this appeal. In the aforesaid letter, IDBI has mentioned that the company had submitted its DRS on 31.7.2008 and the same was discussed in a joint meeting on 8.9.2008 and thereafter report of the meeting was submitted to the BIFR on 22.9.2008. Subsequently, the company's board of directors in the meeting held on 29.11.2008 approved merger of Balaji Distilleries Limited with United Spirits Limited. A revised merger based DRS was submitted on 31.12.2008. As part of the rehabilitation strategy to improve the net worth of the company and to part finance the OTS and expansion of distillery and brewery the company has obtained the approval of shareholders in the AGM dated 12.9.2007 for issue of convertible warrants on preferential basis to the three companies, viz., VIPL, HEPL and MATCL which are associate companies owned by friends of the promoters. The price has been fixed al Rs. 13.78 per share in accordance with SEBI guidelines. The investors have deposited 10% of the warrant amount, aggregating to 1240 lakhs, and the warrants have been allotted to them on 20.12.2007 after obtaining necessary permission from stock exchange. The investors had the option to convert the warrants into fully paid equity shares within a period of 17 months and 29 days from the date of allotment, i.e., any time on or before 17.6.2009. IDBI (OA) further submitted in the said letter that in view of the urgent need of funds to meet the VAT payment and ongoing capital expenditure, which are part of cost of the rehabilitation proposal submitted by the company, the company by its application dated 30.12.2008 has sought following relief:
(a) To grant exemption to warrant holders from the open offer requirement as per SEBI Regulations, 1997, on conversion of warrants into equity shares.
(b) To consider the issue of equity share of BDL on conversion of warrants as supervening extraordinary event in terms of listing agreement of BSE, MSE, HSE and grant automatic listing of shares of BDL on conversion.
14.1. SCB has relied on its letter dated 13.7.09 and consented to the DRS.
15. We have heard the learned counsel for the appellants as well as well as the respondent and have perused the relevant records as pointed out by the learned counsel for the parties. During the course of the argument, learned counsel for the appellants vehemently argued and answered all the queries raised before the BIFR. We agree with the contention of Shri Sibal that the BIFR ought to have provided an opportunity of hearing to all the three investor companies before passing any adverse order against them. However, we find that no such opportunity was given to the appellants in violation of the principles of natural justice and therefore, such an order is bad in law.
16. So far as the question of statutory compliances are concerned, the appellant company in its letter dated 3.6.2009 (annexure M at page 203) has clearly submitted that the warrant holding companies, viz., VIPPL, MAT1L and HBPL, are companies registered in India. The warrant holding companies are raising resources in India and holding warrants in Indian rupees only. These warrant holding companies are not raising any money directly from a foreign company, Digistar Investment Limited, Mauritius. Therefore, there is no requirement for obtaining permission from RBI and FIPB and there is no violation of FEMA regulations. It was further submitted that a report was submitted by the appellant company in respect of these companies regarding their shareholding pattern and it was evident from such report that the shares of warrant holding companies are not held by Digistar Investments Limited (DIL). On 3.6.2009, the company also submitted a letter to the BIFR seeking exemption from open offer and also requested to accord approval for the DRS. In the letter dated 3.6.2009, it was submitted by the appellant company that the warrants have been issued only to group companies which are willing to invest in a sick company. The company has also followed the requisite procedure while allotting the warrants and has provided full transparency to the shareholders and also the statutory bodies by obtaining (i) the permission of the shareholders in a joint meeting in accordance with the Companies Act, 1956; (ii) obtaining permission of all concerned according to SEBI guidelines; (iii) obtaining the permission of statutory authorities in accordance with SEBI guidelines; (iv) lock-in period of 12 months from the date of issue of warrants has been prescribed in accordance with SEBI guidelines; and (v) permission of Bombay Stock Exchange and Madras Stock Exchange has been obtained. From the perusal of the impugned order, it is clear that the BIFR has not made any comments on the documentary evidence produced regarding compliance made by the appellant company in respect of the statutory provisions. So far as SEBI's letter dated 24.9.2008 about the delay in infusion of funds is concerned, the same was rectified by receiving further 90% funds on 15.6.2009 which has not been considered by the BIFR. Regarding following open offer requirement as per SEBI guidelines, the appellant has sought exemption in the DRS itself, which will have to be considered by the BIFR at the time of hearing objections/suggestions to the DRS. The BIFR has also not recorded any finding on the averment that the warrant holding companies are Indian companies registered in India and that they are subscribing in Indian rupees only to the warrants and the warrant holding companies are not receiving any funds from OIL, a foreign company. Therefore, permission from RBI and FIPB was not required. The IDBI (OA), vide its letter dated 5.6.2009, submitted a tabular chart regarding all statutory compliances and was of the view that company has made all compliances and has not raised any objection.
17. So far as the question of change of management is concerned, we agree with the view that the ownership of a company is with the shareholders whereas the management of the company is with the directors and that the change in shareholding structure does not ipso facto mean a change in management. It is a fact that post-conversion of warrants, the warrant holders will have shareholdings in excess of the existing promoters but since the DRS envisages revival of the company by way of de-merger of the brewery division and merger of the distillery division with USL, the post-merger equity structure of the merged unit needs to be seen. The post-merger equity structure shows that the warrant holders will have minority stake in the merged unit. Be that as it may, it is necessary to see whether during the interim period, i.e., post-conversion of warrants and pre-merger, there is a change of management. The appellant company has filed an affidavit showing the management structure during the interim period which does not reveal any change of management. Besides the BIFR has not considered this aspect of the matter that the investor companies have claimed that they are only passive investors. They have placed an undertaking in writing before the BIFR that they are not seeking any seat or position on the board of directors. The investor companies have also given 'proxies' to the existing promoter which has also not been taken into account. The 'proxies' have the power to vote on behalf of the investors in the general body meetings up to 2014. Though the above evidence has not been controverted yet the BIFR failed to consider the same. During the course of argument learned counsel for the appellants also submitted that if BIFR had any doubts on the undertaking given by the appellant companies in writing and also the irrevocable 'proxies' submitted by them, the BIFR could have placed some terms and conditions in the DRS prohibiting any change of management. The BIFR has passed the impugned order declaring the allotment of convertible share warrants to the warrant holding companies as null and void on the presumption of change of management without considering the facts and evidence on record. Therefore, we are of the view that the impugned order has not been passed after due consideration of the material placed on record and, hence, the same is liable to be set aside.
18. The next question for consideration is about the rationale for allotment of shares to the appellant companies, viz., VIPPL, FIEPL and MATIL. We have also perused the DRS submitted before the BIFR. In the DRS, in paragraph No. 3, the present management and the shareholding pattern have been mentioned. In paragraph No. 7.4, the infusion of funds through issue of warrants to the three warrant holding companies has been mentioned. In paragraph 7.4.3 (a) shareholding pattern, conversion of funds into shares has also been mentioned. In paragraph 7.6.1 the rationale for scheme of arrangements has been mentioned in detail and in paragraph 7.6.6 shareholding pattern of USL, post-merger of BDL has been mentioned and, in paragraph 8.3.1., the post-merger structure of management has also been clarified. In the order dated 25.5.09, it has been clarified by the BIFR itself that IDBI has confirmed by their letter dated 18.5.2009 that the three warrant holding companies, viz., VIPPL, HEPL and MATIL, do not belong to the promoters group. In paragraph 2.2, SCB submitted that the DRS may be circulated. The IDBI submitted that the DRS incorporates the observations of the BIFR, as directed in the hearing held on 3.3.2009. It was mentioned in the letter that as SCB has conveyed its no objection to the circulation of the DRS and the company has entered into a settlement with Indian Bank regarding swap issue certificate from the company which has also been obtained. We have also perused the letter of IDBI dated 5.6.09 wherein they have prepared a tabular chart about the directions issued by the BIFR in its hearing held on 26.5.2009 and the OAs comments thereon. In that letter, the OA has clearly mentioned that the company has complied with the SEBI guidelines and the investors do not wish to participate in the management of the company and they are only passive investors. IDBI has suggested condoning the appellant company for not taking the prior permission of the BIFR before issuing the warrants. The BIFR has stated that the warrants have been issued on 20.12.2007 fixing the price of shares at Rs. 13.78 for payment of only 10% of the prices. We have also perused the share price movement of BDL shares in BSE and MSB from March, 2008, to November, 2008, mentioned at paragraph 3.5 of the DRS. The lowest price of the share in the Mumbai and Madras stock exchanges in October, 2008, was as low as Rs. 13.90 per share during the period of 9 months. CA has also certified that the preferential issue price was worked out to Rs. 13.78 per share and the same has been calculated in accordance with SEBI guidelines. The details of calculation of the price for the issue of shares on preferential basis gives the average of the weekly high and low of the closing prices of shares of BDL during the six months preceding the relevant date, i.e., 13.8.2007. It shows that the highest price of share was Rs. 16.92 as against the lowest price per share of Rs. 7.85 which was taken into consideration and, thereafter, price was fixed at Rs. 13.78 as per the calculation given in the detailed workings. The calculation sheet explains the rationale for fixing the share price but the BIFR without any evidence to the contrary has observed that the share price was around Rs. 25 at the time of receiving the remaining 90% of the price of the convertible warrants.
19. In fact, the BIFR has not considered this aspect of the matter that the basic object of SICA is to revive a sick industrial company. The DRS has been submitted and the SCB, the only secured creditor, and IDBI (OA) have consented to it and during the course of hearing and while approving settlement with the other secured creditors, no rider was put by the BIFR regarding the allotment of warrants. The funds invested by the investors have already been utilized for payment of the dues of secured lenders. Secured lenders including SCB have not opposed the DRS and they have also not opposed the merger of the company with USL. As argued by the learned counsel for the appellants, when the company's reference is pending before the BIFR, unless a restraint order is passed, there is no bar for allotment of share warrants or converting them into shares. When the OA has not submitted any adverse report against the proposed DRS and the infusion of money through the issue of warrants was a part of DRS which has taken place resulting in settling the dues of secured creditors, when most of the statutory compliances have been made as per the OA's report and, in respect of some compliances exemption has been sought in the DRS, there appears no reason why the BIFR declared the allotment of share warrants and their subsequent conversion into shares as null and void without taking into consideration the evidence on record. We are of the view that all the apprehensions raised by the BIFR in its impugned order are not based on appreciation of evidence on record.
20. In view of the aforesaid discussion, this appeal is allowed. The impugned order
dated 16.7.2009 whereby the BIFR has declared the allotment of warrant and its subsequent conversion into equity shares on 15.6.09 as null and void, is set aside. The other direction that the company may submit an alternate DRS without involving change of management is also set aside. We direct the BIFR to reformulate the DRS, including in the DRS, if necessary, a provision to ensure that during the interim period, i.e., post-conversion of warrants and pre-merger, there will be no change of management and taking into consideration all evidence on record in the light of the observations made above circulate the DRS and thereafter proceed further in accordance with law.