1. This is a petition under Section 394 of the Indian Companies Act, 1956 for approving the scheme of amalgamation of the petitioner company M/s. Asian Coffee Limited (for short, 'ACL') with M/s. Consolidated Coffee Limited (for short, 'CCL').
2. The petitioner company-ACL was incorporated on 4-11-1985 as a Public Limited Company. Its registered office is situated in Secunderabad in the State of Andhra Pradesh, The authorised share capital of the petitioner-company-ACL is Rs. 12,00,00,000/- divided into 1,20,00,000 equity shares of Rs.10/- each. The issued, subscribed and paid up share capital of the petitioner company-ACL is Rs.11,67,57,950/- divided into 1,16,75,795 equity shares of Rs.10/- each. The main objects of the petitioner company-ACL are to carry on the business of manufacture of Coffee, Tea, Chicory, Cocoa, Milk Powder, Condensed Milk, Cheese, Plain and flavoured, Yogada, Shrikhond and the like as also to carry on the business in the processing, manipulating, preparing, preserving, canning, refining, bottling, baying, rendering marketable and dealing in their prepared, manufactured or raw state and whether in wholesale and/or in retail. The object of the petitioner-company-ACL is also to carry on the business in Coffee either as Principals or Agents all or any of the trades or business of dealers, merchants, general merchants, buyers etc. The petitioner company-ACL is also engaged in the business of production and sale of instant coffee.
3. The transferee company ' The Consolidated Coffee Estates (1943) Limited was incorporated on 19-11-1943 under the provisions of the Indian Companies Act, 1956 and with effect from 12-6-1967 its name was changed to Consolidated Coffee Limited (for short, 'CCL') and is an existingpublic company within the meaning of the Indian Companies Act, 1956. Its registered office is situated in Kodagu in the State of Karnataka. The authorised share capital of the transferee company-CCL is Rs.9,80,00,000/- divided into 98,00,000 equity shares of Rs.10/- each. The issued, subscribed and paid up capital of the transferee company-CCL is Rs.9,50,69,580/-divided into 95,06,958 equity shares of Rs.10/-each fully paid up. The main objects of the transferee company-CCL are to carry on the business of planters, growers, producers, curers, manufacturers, merchants and exporters of coffee, tea, rubber, pepper and oranges and other produce and derivaties of the soil, estate, land and house owners and dealers, and to cultivate any estates lands and properties and to grow thereon coffee, tea, rubber, cocoa, peppers, oil palm, oranges, cardamoms, cinchona, cereals, timber, garden and any other produce and to prepare, process, manufacture and render marketable the produce and products of any estates, lands or properties. Its objects are also to sell, prepare, purchase, import, export and otherwise deal in coffee, tea, rubber, cocoa, palm oil, pepper, oranges, cardamoms, cinchona, cereals, timber garden and other produce and to carry on the business of general planters, growners, curers, manufacturers, etc. Its objects are also to manufacture, purchase and otherwise deal either as principles or agents in all estate requirement such as fertilisers, chemicals, pesticides, tools, implements, gunnies, twines etc. The transferee company-CCL is also engaged in the business of coffee plantation, coffee curing and production and/or marketing of filter coffee and instant coffee and cultivating and/or growing tea, paddy, pepper, cardamom, oranges and other minor produce and sale of timber and timber products.
4. The Board of Directors of the transferor company-ACL and the transferee company-CCL at their respective meetings,by resolutions passed, unanimously approved the scheme of amalgamation.
5. The transferee company-CCL is a subsidiary of Tata Tea Limited (for short, 'TTL') and is the largest coffee plantation company in Asia and the largest coffee curer in the country with its estates located in all the three coffee growing regions of Karnataka State. The transferee company-CCL exports a sizeable quantity of its coffee products. It has substantial presence in the four main value added segments of the coffee market. It produces and markets filter coffee (pure) and filter coffee (with chicory blend) under the well established brands 'Coorg' (pure) and 'Coorg Double Roast' (with chicory blend) and markets instant coffee (pure) and instant coffee (chicory mixed) under the Tata Cafe (pure) and Tata Kaapi (chicory mixed) brands.
6. Coffee Lands Limited (for short, 'CLL') is a public limited company and its registered office is situated in Saklaspur, Hassan District, in the State of Karnataka. The main object of CCL is to cultivate any estates, lands and properties and to grow thereon coffee, tea, rubber, pepper, oranges, cardamoms, cinchona, cereals, timber, garden etc., and to carry on the business of planters, growers, curers, manufacturers, farmers, and to prepare, process, manufacture and render marketable the produce and products of any estates, lands or properties of the company etc. The transferee company-CCL holds about 34.45 per cent of the equity share capital of CLL. Charagni Ltd. (for short, 'CL') is also a public limited company and its registered office is situated in Saklaspur of Hassan District in the State of Karnataka. The main objects of CL are to carry on the business of manufacture of smokeless briquetted fule and its by products of tar, gas etc., by conversion of agricultural/forestry residue/ wastes of whatsoever nature, and to carry on and undertake the business of finance,investment and trading, hire purchase leasing. It is presently engaged in the business of investing in shares and securities. Veerarajendra Estates Limited (for short, 'VEL') is also a public limited company. Its registered office is situated in Pollibetta, Kodagu in the State of Karnataka. The main objects of VEL are to acquire, open, cultivate and otherwise develop for the profit of the company the Wosnullagottay Estate situated in the South Coorg District, Mysore State, and to commence and carry on the business of planters, growers, producers, curers, manufacturers, merchants and exporters of coffee, tea, rubber, pepper and oranges and other produce and derivaties of the soil, estate, land and house owners and dealers, and to cultivate estates, lands etc., and to grow thereon coffee, tea, rubber, pepper, oranges, cardamoms, cinchona, cereals, timber, garden and other produce. VEL is a wholly owned subsidiary of the transferee company-CCL.
7. The Board of Directors of CIL, CL and VEL have at their respective meetings, by resolutions passed unanimously, approved the scheme of amalgamation of these companies with the transferee company-CCL.
8. VEL had filed an application in CP No.195 of 1998, CL had filed an application in CP No.196 of 1998 and CLL had filed an application in CP No.197 of 1998 in the High Court of Karnataka for amalgamation of these companies with the transferee company-CCL. CCL had also filed an application in CP No.198 of 1998 in the High Court of Karnataka for amalgamation of these companies with it. On 15/16-3-1999, the High Court of Karnataka at Bangalore had allowed the applications and accorded approval of the proposed scheme of amalgamation.
9. The financial position of the transferor company-ACL and the transferee company-CCL ending on 31-3-1998 has beenshown in Para 7 of the petition and it is reproduced below:
(All figures in Rs. Lakhs)
ACL CCL
A. Profit & Loss AccountTotal Income3,620.9310,918.04Expenses(3,352.32)(8,295.51)Depreciation(119.46)(309.67)Increase/Decrease (in Stocks)- 295.25Extraordinary Items- (50.29)Profit before tax149.152,557.82Provision for tax- (1,370.39)Profit after tax149.15(1,187.43)B. Balance Sheet Share capital1,167.58950.70Reserves & Surplus1,218.794,028.83Secured loans1,396.832,014.49Unsecured loans- 87.21Total3,783.207,081.23Fixed Assets1,608.253,671.22Investments356.33863.15Current assets, loans & Advances2,232.246,075.07Less Current liabilitiesand provisions(422.80)(4,052.03)Net current assets1,809.442,023.04Miscellaneous expenses9.18523.82Total3,783.207,081.23
10. The reasons for the proposed amalgamation are more particularly set out in Para 9 of the petition. Some of the salient features of the scheme of amalgamation are that the instant coffee marketed by the transferee company-CCL is manufactured by the transferor company-ACL. The business of the transferor company-ACL primarily comprises of manufacture of instant coffee at its export oriented unit, the bulk of which is exported and the balance is sold in the domestic tariff area as per applicable rules, including to thetransferee company-CCL. The transferor company-ACL is also a subsidiary of TTL. The transferee company-CCL is the largest coffee plantation company in Asia and the largest coffee curer in the country and has substantial presence in the four main value added segments of the coffee market. There is commonality of business of the transferor company-ACL and the transferee company-CCL. The combination of the activities and operation in a single entity would be convenient and advantageous to both of the companies and the combined entity will have a commanding position in the domestic coffee market. It would possess the competitive advantage of vertical integration. The amalgamation will result in the creation of a larger and totally integrated coffee company involved in the growing. It will reduce the working capital requirements, captive source of supply of the basic raw material that is coffee beans. The merger will reinforce the overall strategy of insultating plantation operations from the cyclical nature of commodity products. The amalgamation will enable the more efficient and better utilisation of all available resources of the companies. The pooling of resources of the transferor company-ACL and the transferee company-CCL will also increase the research and development capabilities of the amalgamated company.
11. As per the scheme of amalgamation, the entire undertaking of the transferor company-ACL shall be transferred to and vested in or deemed to have been transferred to the transferee company-CCL and the liabilities of the transferor company-ACL shall without any further act or deed be transferred to the transferee company-CCL and the transferee company-CCL shall become liable for the debts, liabilities and dues of the transferor company-ACL. All contracts, deeds, agreements, any other instruments of whatever nature belonging to which thetransferor company-ACL is a party, shall have full force and affects against or in favour of the transferee company-CCL. All the staff, workmen and employees of the transferor company-ACL in service on the effective date that is 1-4-1998 shall become the staff, workmen and employees of the transferee company-CCL, without any break or interruption in service and on the basis of continuity of service and the terms and conditions of their employment with the transferee company-CCL shall not be less favourable than those applicable to them with reference to the transferor company-ACL. The provident fund, gratuily fund, superannuation fund or any other special fund created or existing for the benefit of the staff, workmen and employees of the transferor company-ACL shall be continued by the transferee company-CCL. The transfer of the properties and liabilities of the transferor company-ACL to the transferee company-CCL and the continuance of all contracts and proceedings by or against the transferee company-CCL shall not affect any transaction or proceedings already concluded by the transferor company-ACL prior to the scheme becoming effective.
12. The transferee company-CCL, in consideration of the transfer of and vesting of the undertakings and properties of the transferor company-ACL in terms of the scheme, shall, without any further application or deed, issue and allot to the members of the transferor company-ACL whose names appear in the Register of Members of the transferor company-ACL on such date as the Board of Directors of the transferee company will determine (hereafter called 'the record date'), one equity share of Rs.10/- each in the transferee company-CCL credited as fully paid up for every six fully paid up equity shares of Rs. 10/- each held by them in the transferor company-ACL. No fractional shares shall be issued by the transferee company-CCLin respect of the fractional entitlements, if any, to which the shareholders of the transferor company-ACL may be entitled on issue and allotment of the new equity shares of the transferee company-CCL. The Directors of the transferee company-CCL shall consolidate all such fractional entitlements, if any, and thereupon issue and allot equity shares in lieu thereof to a Director or Officer of the transferee company-CCL on the express understanding that such Director or Officer to whom such equity shares are allotted shall sell the same in the market at the best available price and pay to the transferee company the net sale proceeds thereof, whereupon the transferee company-CCL shall distribute such net sale proceeds to the members of the transferor company-ACL in proportion to their fractional entitlements. The shares of me transferor company-ACL held by the transferee company-CCL and the shares held by the transferor company-ACL inter se shall upon the scheme becoming effective, stand cancelled and in lieu thereof, no allotment of new equity shares in the transferee company-CCL shall be made to any person whatsoever. The new equity shares in the transferee company-CCL to be issued as above shall rank pari passu in all respects with the existing equity shares of the transferee company-CCL, save and except that such new equity shares shall be entitled to dividend in relation to any financial year commencing on or after the appointed date. With effect from the appointed date and till the effective date, the transferor company-ACL shall carry on and be deemed to have earned on their business and activities and shall stand possessed of all their properties to be transferred to the transferee company-CCL, as aforesaid, in trust for the transferee company-CCL and shall account for the same to the transferee company-CCL.
13. It is alleged that the exchange ratio of the shares of the transferee company-CCL for the shares of the transferor company-ACL is based on the financial information of the companies and other relevant factors and has been fixed on the basis of the valuations done by N.M. Raiji and Co., and M/s. A.F. Ferguson and Co., reputed firms of Chartered Accountants. ANZ Grindlays Bank Limited (Investment Banking Division) has reviewed the valuation and they recommend the said exchange ratio as being fair and reasonable. The reports of both the valuers have been accepted by the Board of Directors of both the companies as being fair share exchange ratio.
14. The transferor company-ACL had filed an application CA No.453 of 1998 for convening the meeting of equity shareholders of the petitioner-transferor company-ACL. In pursuance of the order passed by this Court on 17-9-1998, the meeting of the shareholders of the petitioners transferor company-ACL had been convened under the Chairmanship of Mr. Vilas A. Afzulpurkar, Advocate. After due notice of the said meeting by pre-paid letter post under certificate of posting to each equity share holder of the transferor company-ACL, together with a form of proxy, meeting was held on 23-10-1998. Prior to that, the notice of the said meeting was also advertised in one issue of English daily, Deccan Chronicle, and one issue of Eenadu, a Telugu daily, on 28-9-1998. As per the report of the Chairman, Mr. Vi/as A. Afzulpurkar, the said meeting was attended personally or by proxy by 233 equity shareholders of the petitioner transferor company-ACL and entitled together to 77,45,397 equity shares of Rs.10/- each fully paid up. By a majority of 76,74,443 votes against 61,536 votes, the following resolution was passed at the meeting :
'Resolved that the Scheme of Amalgamation of Asian Coffee Limited into Consolidated Coffee Limited as embodied in the Scheme, a copy whereofis placed before this meeting and initiated by the Chairman for the purpose of identification, be and is hereby approved without any modification.'
15. It is also alleged in the petition that no one will be prejudiced if the proposed scheme of amalgamation is sanctioned and the sanction of the amalgamation will benefit and is in the interest of the transferor company-ACL, its share holders, creditors, employees and all concerned.
16. One of the shareholders of the transferor company-ACL, namely Challa Rajendra Prasad, had filed an application CA No.674 of 1998 objecting the confirmation of the scheme of amalgamation of the transferor company-ACL with the transferee company-CCL until the exchange ratio is worked but afresh on the accepted accounting methods by independent auditor keeping in view the interest of the minority shareholders. It is alleged that in the meeting convened on 23-10-1998, he had expressed his opinion regarding the exchange ratio of the shares. It is also alleged that the petitioner transferor company-ACL is a profit making, debt free company which is manufacturing instant coffee with good value addition and healthy return with future potential. The profits of the company have been increasing almost by 60 per cent every year till 1995-96. There was a planned attempt to reduce the share value of the transferor company-ACL and thereby the profits were shown as Rs.152.13 lakhs and Rs.149.15 lakhs respectively for the years 1996-97 and 1997-98 from Rs.809.79 lakhs profit in the year 1995-96 inspite of increased turnover. The share value of the petitioner company-ACL has been deliberately brought down and is equated as l/6th value of the share of the transferee company-CCL which is unfair and unrealistic. No basis has been shown as to how they have arrived at the exchange ratio of one equity share of the transferee company-CCL to six equity sharesof the transferor company-ACL. The share price of the transferee company-CCL had hardly quoted in the stock exchange being a subsidiary company of TTL. In the year 1994-95, TTL had offered one equity share for every five shares of the transferee company-CCL considering the book value of Rs.15.02 which is equivalent to Rs.75.80 per share as per the market quotation prevailing as on that date. However, the book value of share of the transferee company-CCL at present is-more than Rs.25A as per the financial figures given by the management but they are offering one equity share of Rs.10/- each in the transferee company-CCL for every six equity shares of Rs.10/- each of the transferor company-ACL whose market price is less than Rs.120/-. The net effect is that the transferor company-ACL share price is arrived at Rs.20/- even though the book value is more than Rs.20/-. If the book value of the share is discounted by 10 times, the market price of the share should be Rs.200/- thereby the exchange ratio should be a minimum of two shares in the transferee company-CCL for every one share of the transferor company-ACL. In the year 1995-96, intentionally, an amount of Rs.356 lakhs was diverted to a sick BIFR company from the transferor company-ACL without any income from the investment and on the contrary borrowings were shown by the transferor company-ACL for its operations by paying interest and this resulted in reduction of profits. The management has resorted to a dubious method of domestic marketing by selling the product of the transferor company-ACL on almost actual cost at very reduced price than the actual selling price to none other than the transferee company-CCL and TTL and the entire profits of the transferor company-ACL are being passed on to these two companies. There is no need for first sale to these two companies by the transferor company-ACL and the second sale by these companies to the consumer and thetransferor company-ACL can sell to its customers directly and achieve the realistic profits. This practice is adopted to show the profits of the transferor company-ACL lower than the actual profits and consequently show the profits of the transferee company-CCL and TTL more than the actual profits to arrive at the exchange ratio. Thus, the exchange ratio worked out is detrimental to the interests of the shareholders. It is further alleged that out of the four companies i.e., CLL, CL, ACL and VEL, only for the transferor company-ACL, the transferee company-CCL has fixed the exchange ratio of one share in the transferee company-CCL for every six shares of the transferor company-ACL whereas the exchange ratio for the other companies is 1:1, when they are 100 per cent subsidiaries of the transferee company-CCL. The performance, profitability, net worth, replacement cost, reserves and potential of the transferor company-ACL is better than CLL, CL and VEL. The transferor company-ACL has shown a sudden slump in the profit margin from the year 1996-97 and has not declared any dividend for the year 1997-98 even though it has earned a profit of Rs.149.15 lakhs and has reserves of Rs.1,218.79 lakhs and this has been done in view of the proposed amalgamation. During the year, the transferor company-ACL has availed foreign currency loan of Rs. 10.23 crores and the purpose of availing this loan has not been specified anywhere. Even the sundry creditors of the transferor company have increased from Rs.82.77 lakhs of the year 1996-97 to Rs.280.91 lakhs in the year 1997-98. The transferor company-ACL has made a profit of Rs.109 lakhs as against Rs.75 lakhs loss incurred during the same period in the previous year as per the unaudited results for the quarter ending 30-9-1998. TTL is holding majority of shares that is 70 per cent of shares in the transferor company-ACL as also the transferee company-CCL being a subsidiary of TTL, the exchange ratioproposed by the transferor company-ACL will only benefit the said companies at the expense of the minority shareholders of the transferor company-ACL. The entire exercise of the proposed scheme of amalgamation has been done in haste and without any proper basis of arriving at the exchange ratio. During the meeting held on 23-10-1998, the applicant has questioned the valuation report done by the auditors and had sought information regarding the basis on which the valuation report has been finalised by the auditors, but it was not made available to him. M.N. Raiji and Co. and A.F. Ferguson Company had prepared the valuation report and it was confirmed by the ANZ Grindlays Bank. While M.N. Raiji and Co., are the statutory auditor of the transferee company-CCL, M/s. A.F. Ferguson Company are the statutory auditor of the associated company of the transferee company-CCL namely TISCQ. ANZ Grindlays Bank is the banker of TTL. Therefore, it cannot be 'aid that fair and independent valuation has been done. The valuation report should be obtained from an independent auditor and till then the scheme of amalgamation should not be confirmed. The transferor company-ACL through its counter resisted this application.
17. Vadlamudi Rama Rao, another shareholder of the transferor company-ACL also filed CA No.686 of 1998 objecting the confirmation of the scheme of amalgamation on the ground that the proposed exchange ratio is arbitrary and the scheme of amalgamation should not be confirmed until an independent auditor is appointed to work out the exchange ratio afresh on the basis of the accepted accounting method. He has taken almost similar objections as have been taken by Challa Rajendra Prasad in CA No.674 of 1998. This application is also resisted through counter of the transferor company-ACL.
18. Another shareholder, J. Victor, filed CA No.687 of 1998 taking similar objections as have been taken by Challa Rajendra Prasad in CA No.674 of 1998. K. Panduranga Rao, another shareholder, has also taken similar objections to the proposed scheme of amalgamation in CA No.688 of 1998. The transferor company-ACL resisted these applications through its counter.
19. It is a matter of record that Challa Rajendra Prasad had also filed CA No.6 of 1998 in CA No.674 of 1998 for directing the transferor company-ACL to furnish the details of the valuation report as also the calculations as to how it had arrived at the exchange ratio. This application was resisted. On 1-3-1999, this application has been rejected on the ground that Challa Rajendra Prasad, petitioner in CA No.674 of 1998, is not entitled to obtain mathematical calculations demonstrating the exchange ratio arrived at as also the mathematical calculations undertaken by the valuers, because it cannot be said to be part of the statement to be furnished under Section 393(1) and (3) or under Section 173(2) of the Companies Act.
20. In pursuance of the docket order dated 13-11-1998, the petition CP No. 199 of 1998 has been published in one issue of Deccan Chronicle and one issue of Eenadu in all editions. The Official Liquidator was noticed and he had filed his report. The Regional Director, Company Law Board, Chennai, was also noticed and he also filed report.
21. The Regional Director, Company Law board, Chennai, has stated in its report that the transferor company-ACL has been making profits all through and there appears to be no reason for downgradding the assets of the company. According to the proposed scheme for every six shares of the transferor company-ACL, one share ofthe transferee company-CCL shall be allotted. Thus, the transferee company-CCL will allot 19,45,966 shares to the shareholders of the transferor company-ACL at the rate of Rs.10/- each amounting to Rs. 1,94,59,660/-. On acquiring the shares of the transferor company-ACL, the transferee company-CCL shall get 48,36,030 shares of Rs.10/- each of Sapthagiri Agro Industries Limited. Excluding the assets and liabilities of Sapthagiri Agro Industries Limited, the transferee company-CCL will make a clear profit of Rs.2.90 crores. This clearly exploits the exchange ratio of the scheme and is against the interests of the transfer company-ACL and will benefit the shareholders of the transferee company-CCL to a large extent and 'ITL will get more benefit at the cost of other minority shareholders. Since the transferor company-ACL is a subsidiary holding of TTL, the remaining 40 per cent shareholders are put to loss if the exchange ratio is not amended. A request for appointment of a leading advocate to calculate the exchange ration the normal accepted principle of calculation of exchange ratio has been made in this report. The transferor company-ACL has submitted its counter to this report alleging that Sapthagiri Agro Industries Limited, is a sick company and has been referred to BIFR under Section 22 of SICA Act, and similar representation made by the Regional Director has been rejected by the High Court of Karnataka vide order dated 15/16-3-1999 while disposing of the applications filed by the other transferor companies, CLL, CL, and VEL.
22. The Official Liquidator in his report has stated that on examination of the books, records, etc., produced by the company which were available with the Registrar of Companies, A.P., Hyderabad, in his opinion, the affairs of the transferor company-ACL have not been conducted in a manner prejudicial to the interests of its members and to the public interest.
23. Mr. C. Kodanda Ram, learned Counsel of the petitioner in CA No.686 of 1998 has argued that, M/s. N.M. Raiji and Company, and M/s. A.F. Ferguson and Company, Chartered Accountants, who were appointed Valuers, after narrating the background history of the transferor company-ACL and the transferee company-CCL, have stated in Para 2.2 of their report that the value per share has been determined by an amalgam of (1) the book value per share method (2) the earning capitalisation value per share method and (3) the stock exchange quoted value per share. Thereafter they have stated the salient features of the said methods in Paras 2.2.1 to 2.2.4, which appears only a lecture on the subject, but they have not stated as to how these methods have been applied for opening the exchange ratio of one share in the transferee company-CCL for every six shares of the transferor company-ACL. Similarly in Paras 3 to 4.3 they have just stated to have based their working on the audited balance sheet as on 31-3-1998 and on certain adjustments, assumptions, but it is too vague and no details have been furnished so as to verify what was the data actually collected and whether the calculation is correct, or not. Therefore, the report is of no help in determining the exchange ratio of 6:1 that is to say for every six shares of the transferor company-ACL, one share in the transferee company-CCL (for the sake of convenience, this exchange ratio is hereinafter referred to as the proposed exchange ratio). ANZ Investment Bank, it appears, had only a cursory look at the report and had not supplied any reason for opining that the proposed exchange ratio recommended by the said Valuers is fair to the shareholders of the transferor company-ACL or the transferee company-CCL. ANZ Investment Bank has offered no opinion on any other aspect of the valuation report and/or the proposed amalgamation except the opinion on fixation of the proposed exchange ratio.
24. Shri Y. Ratnakar, learned Counsel appearing for the applicant in CA No.687 of 1998 has urged that the TTL holding 65 per cent voting in the transferor company-ACL is the holding company of the transferee company-CCL and, therefore, giving lesser number of shares in the transferee company-CCL to the minority shareholders of the transferor company-ACL would benefit only TTL. Only with a view to benefit TTL, the proposed exchange ratio has been fixed at 6:1. The Chartered Accountants who have valued the shares are the Chartered Accountants of CCL and TTL and, therefore, there is a built in bias. He has further argued that out of 76,74,443 votes polled in favour of the merger, TTL holds 75,29,904 votes as it holds 75,29,904 shares and, therefore, the number of votes of the other independent shareholders who supported the merger comes to 1,44,539 as against 61,536 votes cast by the shareholders who have opposed the merger. Therefore, it cannot be said that the overwhelming majority of the shareholders had supported the resolution of merger. The actual details of the calculation and the manner in which the proposed exchange ratio of 6:1 has been arrived at were never furnished to the shareholders. Neither an independent auditor was appointed for valuation of shares nor for confirmation by another independent auditor. As per the book value of shares as on 31-3-1998, the proportion works out to be 1:2 because the book value of the share as on 31-3-5998 of the transferor company-ACL has been shown to be Rs.20.43 Ps. and the book value of the transferee-company as on 31-3-1998 has been shown to be Rs.52-30. Therefore, it cannot be said that the share valuation is fair and reasonable. He has also argued that ANZ Investment Bank is the Banker of TTL and, therefore, review of the valuation report should have been entrusted to any independent person. The Central Government has rightly objected to the share valuation which is against theinterests of the minority shareholders of the transferor company-ACL. The valuation of shares of the transferor company-ACL has been deliberately lowered down with a view to benefit TTL.
25. Shri V.S. Raju, learned Counsel appearing for the applicant in CA No.674 of 1998 has contended that during the year 1994-95, TTL has offered one equity share for every five shares of the transferee company-CCL considering the book value at Rs. 15,02. The net assets of the transferor company-ACL are Rs.2,377.19 lacs and to arrive at the value of the share when the net assets are divided by the number of shares, that is Rs.23,77,19,000/-divided by 1,16,75,795, the value of each share comes to Rs.20.36. Similarly when the net assets of the transferee company-CCL are divided by the number of shares, that is to say when Rs.4,455.7l lakhs divided by 9506958, the value of each share comes to Rs.46-87. Therefore, the exchange ratio comes to 20.36 : 46.87 that is to say for every 2.36 shares of the transferor company-ACL, one share of the transferee company-CCL is equivalent. Independent Auditors M/s. Narasimha Rao and Associates have submitted their valuation report dated 9-4-1999 and have rightly opined that 3.65 shares of Rs.10/- each fully paid up of the transferor company-ACL are equivalent to one share of Rs.10/-fully paid up of the transferee company-CCL. The management of transferor company-ACL has diverted substantial money into a sick company M/s. Sapthagiri Agro Industries Limited, in the year 1996 and has suppressed that fact with the shareholders. M/s. N.M. Raiji and Company, and M/s. A.F. Ferguson and Company, the Valuers, are interested in TTL and, therefore, their opinion should not be relied upon, particularly because they have not supplied the calculations. The proposed exchange ratio is neither fair nor reasonable. The transferor company-ACL has earned profit of Rs.809.79 lacs in theyear 1995-96, but with a view to reduce the value of the share, the profits have been reduced to Rs.152.13 laks and Rs. 149.15 lakhs respectively for the years 1996-97 and 1997-98. It has also been urged that the votes have not been properly counted by the Chairperson. The shareholders who are interested in TTL and the transferee company-CCL have voted for the merger only with a view to ultimately help TTL. Relying on Patiala Starch and Chemical Works Limited, and on Bank of Baroda Limited v. Mahindra Ugine Steel Company Limited, (1976) 46 CC 227 (Guj), it has been argued that where the shareholders have not independently gaurded their interests by examining the proposal in the scheme of amalgamation, the Court cannot abdicate responsibility of examining the proposal to verify whether it is fair and reasonable. The company Judge should go into the question of valuation and fixation of exchange ratio and if it is not satisfied about the valuation, it would be justified in refusing the sanction of the scheme. He has lastly argued that both the Valuers M/s. N.M, Raiji and Company, and M/s. A.F. Ferguson and Company, were interested in TTL and the transferee company-CCL. The fact that review was entrusted to ANZ Investment Bank is indicative of the fact that at one time the transferor company-ACL and TTL themselves have doubted the correctness in fixation of the exchange ratio as done by the said Valuers.
26. Smt. S. Rekha Prasad, learned Counsel appearing for the applicant in CANo.6S8 of 1998 has adopted the arguments advanced by the learned Counsels M/s. V.S. Raju, C. Kodanda Ram and Y, Ratnakar.
27. On the other hand, Shri S. Ravi, Advocate, appearing on behalf of the transferor company-ACL has contended that M/s. N.M. Raiji and Company, are one ofthe statutory auditors of the transferee company-CCL and TTL, but it by itself is no disqualification for being appointed as Valuers. M/s, A.F. Ferguson and Company, is not the auditor of either the transferee company-CCL or TTL or of any other transferor companies. The statutory auditors are independent of the company and its Board of Directors. The above auditors are reputed Chartered Accountants and their integrity is above board. ANZ Investment Bank was entrusted the work to review the report and to opine not because the Board of Directors of the transferor company-ACL and the transferee company-CCL had doubted the correctness of the valuation report of the joint valuers, but as per the common practice and in all fairness. ANZ Investment Bank after making queries and on perusal of the valuation report has given its independent opinion confirming the proposed exchange ratio. It is further used that TTL holds approximately 64.49 per cent of the total issued shares of the transferor company-ACL and 51.35 per cent of the total issued shares of the transferee company-CCL and under the scheme of amalgamation, shares would be allotted to the shareholders of the transferor company-ACL in the proposed exchange ratio that is to say one share in the transferee compound-CCL for every six shares of the transferor company-ACL and the exchange ratio is not different for TTL. Even if the share ratio is changed and the minority shareholders are benefitted, TTL will get more shares and, therefore, it is wrong to say that only with a view to benefit TTL, the proposed share exchange ratio has been deliberately fixed. The votes were validly cast and have been duly accepted by the Chairman and there is no substance in the argument that the shares held by TTL should be excluded while considering whether the resolution has been passed with overwhelming majority or not. The request for furnishing the details of calculations relating to the exchange ratio has been rejected by this Court on 1-3-1999and, therefore, this point cannot be reagitated now. The auditors have applied the three well accepted methods for arriving at the exchange ratio, that is (1) the yield method (2) the asset value method and (3) the market value method and, therefore, no reliance can be placed on the share exchange ratio arrived at only on the basis of the book value method. The applicant in CA No.674 of 1998 himself is not certain on the share exchange ratio because in Para 7 the share in the transferee company-CCL has been shown as 1:2 share in the. transferor company-ACL while in Para 13, it has been shown as 1:2.30 and in the valuation report submitted by him, it has been shown as 1:3.65. In the valuation report submitted by M/s. Narasimharao and Associates, market value has not been taken into consideration. It has been lastly argued that M/s. Sapthagiri Agro Industries Limited, has been referred to B1FR and, therefore, it cannot be said that the value of investment of the transferor company-ACL in the equity shares of this company is the value of 4,43,60,000, but on the other hand, the actual valuation would be much less as the said company is potentially sick and has been referred to BIFR. Reliance has been placed on the case of Miheer H. Mafatlal v. Mafatlal Industries Limited, : AIR1997SC506 .
28. It would be beneficial to reproduce the following passage from the case of Miheer H. Mafatlal (supra).
'The company Court which is called upon to sanction a scheme of compromise and arrangement has not merely to go by the ipse dixit of the majority of the shareholders or creditors or their respective classes who might have voted in favour of the scheme by requisite majority but the Court has to consider me pros and cons of the schemes with a view to finding out whether the scheme is fair, just and reasonable and is not contrary to any provisions of law and it does not violate any public policy. Thisis implicit in the very concept of compromise or arrangement which is required to receive the imprimatur of a Court of Law. No Court of law would ever countenance any scheme of compromise or arrangement arrived at between the parties and which might be supported by the requisite majority if the Court finds that it is an unconscionable or an illegal scheme or is otherwise unfair or unjust to the class of shareholders or creditors for whom it is meant. Consequently it cannot be said that a Company Court before whom an application is moved for sanctioning such a scheme which might have got the requisite majority support of the creditors or members or any class of them for whom the scheme is mooted by the concerned company has to act merely as a rubber stamp and must almost automatically put its seal of approval on such a scheme. It is trite to say that once the scheme gets sanctioned by the Court it would bind even the dissenting minority shareholders or creditors. Therefore, the fairness of the scheme qua them also has to be kept in view by the Company Court while putting its seal of approval on the concerned scheme placed for its sanction.'
29. The Apex Court formulated the following broad contours of jurisdiction of the Company Court which is called upon to sanction a scheme of compromise or arrangement, in the case of Miheer H. Mafatlal (supra).
'1. The sanctioning Court has to see to it that all the requisite statutory procedure for supporting such a scheme has been complied with and that the requisite meetings as contemplated by Section 391(1)(a) have been held.
2. That the scheme put up for sanction of the Court is backed up by the requisitemajority vote as required by Section 391, sub-section (2).
3. That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class.
4. That all necessary material indicated by Section 393(1)(a) is placed before the voters at the concerned meetings as contemplated by Section 391, subsection (1).
5. That all the requisite material contemplated by the proviso to subsection (2) of Section 391 of the Act is placed before the Court by the concerned applicant seeking sanction for such a scheme and the Court gets satisfied about the same.
6. That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously X-ray the same.
7. That the Company Court has also to satisfy itself that members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to mat of the latter compromising of the same class whom they purported to represent.
8. That the scheme as a whole is found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant.
9. Once the aforesaid broad parameters about the requirement of a scheme forgetting sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the Court there would be a better scheme for the company and its members or creditors for whom the scheme is framed. The Court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the Court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction.
30. It has also been observed in the case of Miheer H. Mafatlal (supra) by the Apex Court that, valuation of shares is a technical and complex problem which can be approximately left to the consideration of experts in the field of accountancy. Pennington in his 'Principles of Company Law' mentions four factors which had to be kept in mind in the valuation of shares:
'(1) Capital Cover,
(2) Yield,
(3) Earning Capacity, and
(4) Marketability'.
So many imponderables enter the exercise of valuation of shares. Once the exchange ratio of shares of the transferee company to be allotted to the shareholders of the transferor company has been worked outby a recognised firm of Chartered Accountants who are experts in the field of valuation and if no mistake can be pointed out in the said valuation, it is not for the Court to substitute its exchange ratio, especially when the same has been accepted without demur by the overwhelming majority of the shareholders of the two companies or to say that the shareholders in their collective wisdom would not have accepted the said exchange ratio on the ground that it will be detrimental to their interest.
31. The grievance of the applicants-objectors is regarding the proposed exchange ratio. The question, therefore, falls for determination is whether the proposed exchange ratio is reasonable and fair or not?
32. In the light of the law laid down by the Supreme Court in the case of Miheer H. Mafatlal (supra) and referred to above, I will now proceed to deal with the point for determination indicated in the preceding paragraph.
33. At the outset, it is to be remarked that the learned Counsel of the transferor company-ACL had produced the details of the valuation report as also the calculations on the basis of which the Chartered Accountants M/s. N.M. Raiji and Company, and M/s. A.F. Ferguson and Company, who have been appointed as Valuers, had proposed the exchange ratio. Learned Counsel for the transferor company-ACL had submitted the said valuation report in a sealed cover for perusal of this Court and requested that this report may be kept confidential. After opening the sealed cover, I have minutely perused the report and the concerned calculations memo and have resealed it. As noted above, the application CA No.6 of 1999 in CA No.674 of 1998 filed by the applicant-objector Mr. Challa Rajendra Prasad for supplying him the details of the valuation report as also thecalculations as to how the said Valuers have arrived at the proposed exchange ratio, had been rejected on merits by this Court on 1-3-1999. This order has become final.
34. For arriving at the proposed exchange ratio, the said Valuers have applied three well-known methods, namely (1) net asset value method, (2) earning capitalisaiton method, and (3) market price method. Net assets value method per share has been calculated on the basis of the balance sheets of the transferor company-ACL and the transferee company-CCL. Value as per market price method has been arrived at by averaging the daily closing balances for a period of one year, that is to say July, 1997 to June, 1998. Weightage as and when required has also been given. Earning capitalisation method has also been worked out from the concerned data.
35. ANZ Investment Bank, after making queries and receiving answers and after perusing the valuation report, has opined that the proposed exchange ratio as recommended by the Valuers M/s. N.M. Raiji and Company, and M/s. A.F. Ferguson and Company, is fair to the transferor company-ACL and the transferee company-CCL.
36. It is not disputed before me that M/s. N.M. Raiji and Company, and M/s. A.F. Ferguson and Company, (for short, 'the Valuers') are reputed Chartered Accountants. Therefore, merely because M/s. N.M. Raiji and Company, happens to be one of the statutory auditors of the transferee company-CCL and TTL, its integrity cannot be doubted, particularly when the independent Chartered Accountants, M/s. A.F. Ferguson and Company, was the co-valuer with it and another Body ANZ Investment Bank has confirmed their opinion after scrutinising their report. There appears to be no substance in the contention of Shri V.S.Raju, learned Counsel of the applicant in CA No.674 of 1998 that the mere obtaining of the views of ANZ Investment Bank is indicative of the fact that the work was entrusted to it because the transferor company-ACL and the transferee company-CCL were themselves doubtful about the correctness of the valuation report. On the other hand, it appears that, only with a view to have a second opinion, the work was entrusted to ANZ Investment Bank.
37. From what is stated above, it cannot be said that the valuers have only narrated in their report the theory as to how the exchange ratio should be worked out and have actually not applied that theory on the relevant material and data for working out the proposed exchange ratio.
38. True that TTI, holds 75,29,904 shares, but there appears to be no valid reason for excluding these votes while determining whether the scheme of amalgamation has been passed with overwhelming majority by its members including through proxies present and voting, or not. Even for the sake of argument, these 75,29,904 votes are not taken into consideration, the scheme of amalgamation has been approved with sufficient majority because 1,44,539 valid votes had been cast in favour of the scheme as against 61,536 votes polled against the scheme of merger.
39. It is not disputed before me that, during the year 994-95, TTL had offered one equity share for every five shares of the transferee company-CCL considering the book value at Rs.15.02 Ps. But, this cannot be made the basis for arriving at the share exchange ratio which is done after about three years. M/s. Sapthagiri Agro Industries Limited was financed in the year 1996. Therefore, it cannot be said that substantial amount has been diverted to a sick company because that could not have been anticipated in 1996. The said company hasbecome sick after about two years therefrom. There appears to be force in the contention of the learned Counsel appearing for the transferor company-ACL that in the year 1995-96, the transferor company-ACL had earned good profit because there was a frost followed by drought in Brazil which is the largest producer of coffee in the world and in the subsequent years, Brazil re-entered and re-established itself as the principal supplier of coffee in the world while the major coffee importers from India reduced the purchase, even so, the transferor company-ACL learned profits in the subsequent years, whereas the Company of Mr. Challa Rajendra Prasad had suffered huge losses in the years 1996-97 and 1997-98, therefore, it cannot be said in a planned way the profits of the transferor company-ACL have been reduced. It is not out of place to mention that the investment in M/s. Sapthagiri Agro Industries Limited, was a commercial decision, the profit and loss accounts have been prepared and passed and accordingly the annual reports have been issued, but it does not appear that the applicants-objectors have ever objected to the correctness of the annual reports at any time before filing the objections in this Court during these proceedings. The minor difference in the calculation found in the report of the Chairman regarding the percentage of votes polled and counted in the extraordinary general body meeting is admittedly inconsequential.
40. The valuation report of M/s. Narasimharao and Associates, Chartered Accountants, submitted by Mr. Challa Rajendra Prasad, the applicant-objector in CA No.674 of 1998, cannot be preferred to the valuation report of the Valuers reviewed by ANZ Investment Bank for three reasons. The first reason is that the report of M/s. Narasimharao and Associates is based only on the balance sheets of the transferor company-ACL and the transferee company-CCL. The secondreason is that, as stated in this report, the market value of the fixed assets as on 31-3-1998, physical verification and valuation reports of inventories as on 31-3-1998, balance confirmation certificates in respect of the secured loans, unsecured loans, sundry debtors, cash and bank balances, loans and advances, current liabilities and contingent liabilities, though required for determination of the exchange ratio, were not supplied to it. The third reason is that the market value of the shares has not been considered by it. It is apposite to mention that the applicant-objector, Mr. Challa Rajendra Prasad, did not obtain the valuation report from M/s. Narasimharao and Associates before the extraordinary general body meeting was scheduled to be convened and did not place it to be considered at that meeting so as to enable the members to consider the same. On the other hand, the Board of Directors of the transferor company-ACL and the transferee company-CCL have unanimously approved the scheme of the proposed amalgamation and the scheme of amalgamation has been passed with overwhelming majority in the extraordinary general body meeting.
41. It is also not out of place to mention that the applicant-objector, Mr. Challa Rajendra Prasad himself has proposed different exchange ratios on different occasions. In Para 7 of his application, the exchange ratio has been proposed at 1 : 2, in Para 13 of the application, it has been shown as 1:2.30, and in the valuation report of M/s. Narasimharao and Associates, it has been shown as 1:3.65. Even for the sake of arguments, if the share exchange ratio as proposed by M/s. Narasimharao and Associates is accepted, it goes without saying that it would be more beneficial to TTL, as admittedly TTL has got 65 per cent equity shares in the transferor company-ACL.
42. For the foregoing reasons, it cannot be said that the proposed exchange ratio is unfair or unreasonable or unconscionable.
43. It is interesting to note that the applicants-objectors actually do not oppose the scheme of amalgamation, but their objection has been confined only to the proposed exchange ratio. But, I have found that there is no substance in their contention that the proposed exchange ratio is unfair to the equity shareholders of the transferor company-ACL.
44. In the result, the applications CANo.674 of 1998, CA No.686 of 1998, CA No.687 of 1998 and CA No.688 of 1998 are dismissed.
45. There are only three secured creditors in the transferor company-ACL who had given their written consent for the proposed amalgamation. The value of the claim of the unsecured creditors, who have given their consent for the proposed amalgamation, is 94.17 per cent, that is to say more than 3/4th majority in number. Therefore, the convening of the meeting of the creditors, both secured and unsecured, had been dispensed with in CA No.453 of 1998 vide docket order dated 17-9-1998.
46. On perusal of the record it appears that the requisite statutory procedure has been complied with, that the necessary material was supplied before the meeting was held and it was duly advertised in the newspapers, that the scheme has been approved by the majority vote of the shareholders of both the companies, that the secured creditors of the transferor company-ACL have given their written consent for the amalgamation, that the unsecured creditors, who are 3/4 majority in number have also given their consent for the amalgamation of the transferor company-ACL with the transferee company-CCL and that the majority of decision of the concerned class is just and fair to the class as a whole. It does not appear that the proposed scheme of amalgamation is violative of any provisions of law and it does not appear to be contrary to any public policy. The whole scheme appears to be just, fair and reasonable from the point of view of prudent men of business. Under these circumstances, there appears to be no substance in the objections raised by the Registrar of Companies that the proposed exchange ratio is to be refixed. The petition, therefore, deserves to be allowed.
47. In the result, the company petition is allowed. The transferor company-ACL be amalgamated with the transferee company-CCL as per the proposed scheme of amalgamation, a copy of which is annexed as Annexure No.1 in the material papers supplied by the transferor company-ACL with consequential reliefs as prayed for, in the petition. Consequently, ail the rights, liabilities and duties of the transferor company-ACL shall stand transferred to and vested in the transferee company-CCL without any further act or deed and all the liabilities and duties of the transferor company-ACL shall become the liabilities and duties of the transferee company-CCL and the transferor company-ACL shall stand dissolved, without winding up, in view of the aforementioned scheme of amalgamation being sanctioned. The petitioner transferor company-ACL is directed to file a copy of this order with the Registrar of Companies within a period of thirty days from the date of receipt of a certified copy of this order and the Registrar of Companies shall treat the transferor company-ACL as dissolved with effect from 1-4-1998. It is clarified that any person interested shall be entitled to apply to this Court for any appropriate direction that may be necessary. Costs as incurred.