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Judgment
Anil Kumar B., Member (T)
The hearing of this Petition has been conducted through video conferencing platform.
M/s. Apollo Hospitals Enterprise Limited (hereinafter referred to as "Transferor Company"), a listed public limited Company and M/s. Apollo Pharmacies Limited (hereinafter referred to as "Transferee Company") an unlisted public limited Company, in their Board of Directors meeting held on 14.11.2018 respectively, have accorded approval for their proposal for acquisition of front-end retail pharmacy business of the Transferor Company by the Transferee Company for a total sale consideration of Rs. 527.80 Crores under the Scheme of Arrangement (hereinafter referred to as "Scheme"), which is commonly annexed as Annexure '4' to the typed set filed along with the Petition.
Transferor Company - (CP/1396/CAA/2019)
3.1. The Transferor Company, as already alluded supra is a listed public limited Company whose shares are listed in the Stock Exchanges. The Learned Authorized Representative (AR) for the Petitioner Companies submitted that the Transferor Company is inter-alia engaged in the business of enhancing the quality of life of the patients by providing comprehensive, high quality hospital services on a cost - effective basis and the principal activities of the Transferor Company includes operation of multi-disciplinary private hospitals, clinics and pharmacies.
3.2. The Learned AR for the Petitioner Companies submitted that the Board of the Transferor Company believe that business of front end retail pharmacy carried out at standalone pharmacy has matured to a stage that it requires greater business attention and possesses high growth potential, independent of the hospital business and thereby allowing the Transferor Company to focus on hospitals and healthcare services which is its core business as the risks and reward associated with each of the aforesaid business verticals is different. Thus, the Board of the Transferor Company has proposed to transfer the "Divestment Business" (hereinafter referred to as "Demerged undertaking") to the Transferee Company on a going concern basis by way of slump sale, including the Divestment Assets, Divestment Employees and Divestment Liabilities as described in detail under Clause 4 of the Scheme.
Transferee Company - (CP/1397/CAA/2019)
4.1. The Transferee Company, as already alluded supra is an unlisted public limited Company. The Learned AR submitted that the Transferee Company is engaged in the business of buying, selling, importing, exporting, distribution or dealing in or manufacturing Medical and Pharmaceuticals products like intravenous sets, intravenous solutions, all kinds of drugs, disinfectants, tinctures, colloidal products, injectable and all pharmaceuticals and medical preparations.
1st Motion Application - In Brief
5.1. The Transferor & Transferee Companies have filed the First Motion Application vide CA/804/CAA/2019 & CA/805/CAA/2019 respectively seeking for directions for convening the meeting of the Shareholders and dispensing with the requirement of convening the meeting of the Creditors of the Transferor Company and in relation to the Transferee Company, it was prayed to dispense with the meeting of the Shareholders and based on such application moved under Sections 230-232 of the Companies Act, 2013; directions were issued by this Tribunal, vide order dated 28.08.2019 and also on 09.09.2019. Subsequent to the said order, the meeting of the Shareholders of the Transferor Company was held on 21.10.2019 and the Chairman to the said meeting has filed his report before this Tribunal on 01.11.2019 and the second motion petition was filed before this Tribunal by the petitioner companies on 07.11.2019 for sanction of the Scheme of Arrangement before this Tribunal.
Rationale of the Scheme
6.1. The Rationale and benefits of the Scheme as submitted by the Learned AR of the Petitioner Companies would inter alia result in the following benefit;
a. Divesting standalone pharmacy business and utilizing the proceeds towards growth and enhancement of other existing businesses;
b. Enhancing strategic flexibility to build a viable platform solely focusing on each of the businesses; and
c. Enable dedicated management focus, resources and skill set allocation to each business, which will in turn accelerate growth and unlock value for the shareholders;
d. Creation of value for shareholders by acquiring ready-to use of assets, including business undertakings and reducing time to markets;
e. Strengthening and streamlining the Direct - to - Consumer (D2C) front end operations of the standalone retail pharmacies;
f. Enhancing the private label business; and
g. Enabling foray into Digital/Online Pharmacy.
In the second motion application filed by the Petitioner Companies, this Tribunal vide order dated 13.02.2020 has directed the Petitioner Companies to issue notice to the Statutory/Regulatory Authorities viz. (i) Regional Director (Southern Region), (ii) RoC, Chennai, (iii) the Income Tax Department, (iv) Reserve Bank of India, (v) State Drug Control Authority, as well as for paper publication to be made in "Financial Express", English (All India Edition) and "Makkal Kural" Tamil (Tamil Nadu Edition).
In compliance with the said directions issued by this Tribunal, the Petitioner Companies have filed an affidavit of service on 17.03.2020 in relation to the compliance of the order passed by the Tribunal as noted above and a perusal of the same discloses that the Petitioner Companies have effected the paper publication as directed by the Tribunal in one issue of "Financial Express" (All India Edition) in English and "Makkal Kural" (Tamil Nadu Edition) in Tamil on 24.02.2020. It is also seen that notices have been also served to (i) The Regional Director, Southern Region, Chennai on 19.02.2020, (ii) Registrar of Companies Chennai on 19.02.2020, (iii) Assessing Officer, Income Tax Department on 19.02.2020, (iv) Securities & Exchange Board of India on 19.02.2020, (v) Reserve Bank of India on 19.02.2020, (vi) The BSE Limited on 19.02.2020, (vii) The National Stock Exchange of India Limited on 19.02.2020 (viii) State Drug Control Authority (13 States) on 19.02.2020 and the proof of the same acknowledgements/receipts have been enclosed.
Statutory Authorities
9.1. The Regional Director, (hereinafter referred to as 'RD') Chennai to whom the notice was issued in the first motion itself, has filed his Report on 20.01.2020 before this Tribunal and has stated that Para 9 of Part B of the Scheme provides for the protection of the interest of the employees of the Demerged Undertaking of the Transferor Company. It was further observed that as per the report of RoC, Chennai, the Transferor and Transferee Companies are regular in filing their statutory returns and has reported that there is no prosecution/Inspection or Investigation pending against the Companies. Thus, the Regional Director, after examining the Scheme has decided not to make any objection to the Scheme.
9.2. In relation to the Department of Income Tax, despite notice being served in the first motion and also during the second motion stage, there was no representation. However, this Tribunal after examining the Scheme has decided to give one more notice to the Income Tax Department vide order dated 03.06.2020. Upon notice being served, the Department of Income Tax has filed a memo before this Tribunal on 10.06.2020 and has stated that the requirement to send notice to the concerned department is a procedural requirement and as such it does not impact the right of the Department to proceed in accordance with the provisions of the Income Tax Act, 1961. Apart from that the Income Tax Department has not raised any objection to the Scheme.
9.3 In relation to the other statutory authorities to whom notices have been issued, neither they have filed any reply nor raised any objections to the Scheme and in the circumstances, this Tribunal presumes that other statutory authorities viz. Securities & Exchange Board of India, the BSE Limited, the National Stock Exchange of India Limited, the Reserve Bank of India and the State Drug Control Authorities do not have any objection to the sanction of the Scheme.
Valuation Report
10.1. The Learned AR for the Petitioner Companies invited the attention of this Tribunal to the Valuation Report obtained from one M/s. B S R & Associates LLP dated 13.11.2018, wherein it has been discussed that the retail pharmacy business operated by the Company provides multi brand pharmacy products and as of 30th September 2018, the Company operates 3,167 retail standalone pharmacy stores having presence in 400+ cities, 24 States and 4 Union territories and has a dedicated staff of 21,000+ employees. Thus, it is discussed that for arriving at a fair valuation for the Transaction would require determining the Enterprise Value of the Demerged Undertaking being transferred as part of slump sale.
10.2. The Independent Valuer after analysing the scheme in toto has adopted Discounted Cash Flow Method for arriving at a target and as such after considering the relevant factors and circumstances, recommended an enterprise value of the Target at INR 5,278 million as of 09.11.2018 based on forecast balance sheet as at 01.04.2019.
Observations of this Tribunal
11.1. After examining the Scheme per se, it seen that upon Scheme coming into effect, the Transferee Company shall discharge a lump sum consideration of Rs. 527,80,00,000/- (Rupees Five Hundred and Twenty Seven Crores and Eighty Lakhs Only) to the Transferor Company through normal banking channels. In relation to the same, this Tribunal posed a query to the Learned AR for the Petitioner Companies that as per the definition of "Demerger" as found in Section 2(19AA) of the Income Tax Act, 1961 more particularly sub-clause (v) states that the shareholders holding not less than three - fourth in value of shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for the resulting company or, its subsidiaries) become shareholders of the resulting company or companies by virtue of demerger.
11.2. Apropos to the said query, the Learned AR for the Petitioner Companies referred to Clause 13.1 of the Scheme and stated that the Capital gains tax, if any, that may arise on account of payment of the consideration shall be the sole responsibility of the Transferor Company and as such they have not sought for any exemption and therefore the necessity of shareholders holding not less than three - fourth in value of shares in the demerged company to become shareholders of the resulting company does not arise.
11.3. Further, it is also significant to refer to the decision of the Hon'ble High Court of Delhi in the matter of Bilt Power Limited in Company Petition No. 67/2006, dated 25.05.2006, wherein the Hon'ble High Court of Delhi, while dealing with the similar issue, wherein consideration was being paid to the transferor company, has held as follows;
"Department of Company Affairs, Noida, on behalf of Central Government whereby he raised three objections: The first objection is that by the proposed scheme of arrangement/demerger, the Transferee Company is liable to pay Rs. 235 crores as consideration for transfer of "transferred undertaking" of the Transferor Company. He submitted that shares should have been allotted to the shareholders of the Transferor Company, instead of paying consideration of Rs. 235 crores to the Transferor Company and this is prima facie against the interest of shareholders of the Transferor Company. The Court observed that merely because consideration is being paid to the Transferor Company, it cannot be presumed that the scheme as such is contrary to public interest or against the interest of shareholders of the Transferor Company. Under normal circumstances, the Transferor Company could have always transferred/sold any of its assets for consideration to the third party. The Court further observed that the sale consideration as fixed is based upon independent judgment of two valuers, namely, M/s. SPB Products and Consultancy Limited, Chennai and M/s. Infrastructure Leasing and Financial Services Ltd., New Delhi. The Regional Director nowhere stated or even contended that the sale consideration so fixed is inadequate and does not represent the market value of "transferred undertaking-1". The Court did not find any merit in the said objection and rejected the same. The second objection is that there is no object clause of the scheme and therefore, the purpose and benefits under the scheme as proposed may be ascertained. The Court observed that the Transferor Company is being split into three parts and transferred undertaking No. 1 i.e. (Power Division) is being transferred to the transferee company for a sum of Rs. 235 mores. Court did not find any merit in this objection also and rejected the same. The third objection is in respect of the articles and memorandum of association of the transferee company No. 2 and the proposed scheme under which transferred undertaking No. 2 i.e. (Real Estate Division) is to be transferred to the transferee company No. 2, the Court ordered that it need not examine this aspect as the Mumbai High Court has already granted sanction to the scheme of arrangement/demerger in the case of the transferee company No. 2; and there being no investigation proceedings pending in relation to the petitioner company u/s 235 to 251 of the Companies Act, 1956. The scheme of Arrangement/Demerger in respect of Transferor Company and Transferee Company No. 2 has already been sanctioned by High Court of Judicature at Bombay, Nagpur vide order dt. 25/4/06."
4. The Hon'ble High Court of Bombay, in the matter of Thomas Cook Insurance Services (India) Limited, in Company Scheme Petition No. 99 of 2016 dated 02.07.2015, while sanctioning the Scheme as contemplated between the petitioner company, has held as follows;
"...It is not that in every case the consideration for transfer of an undertaking as part of a scheme of arrangement must come in the form of an allotment of shares of a transferee company or for that matter allotment of any shares. The consideration for such transfer can he any legitimate consideration, which the transferor is entitled to accept for contract of transfer. The scheme may, thus, not provide for any allotment of shares at all or provide any other appropriate consideration including allotment of shares of a holding company of the transferee company. Acceptance of any particular consideration is part of the commercial wisdom to he exercised by the shareholders of the transferor company...."
Accounting Treatment
12.1. The Learned AR for the Petitioner Companies have stated that the Statutory Auditors of the Petitioner Companies have examined the Scheme and have certified that the Petitioner Companies have complied with proviso to Section 230 (7)/Section 232 (3) and the Accounting Treatment contained in the proposed Scheme of Arrangement is in compliance with the Applicable Indian Accounting Standards and more particularly Ind AS 103 - Business Combinations. The aforesaid Accounting Treatment standard is also captured in Clause 15 of the Scheme.
Dispositive Reasoning
13.1. This Tribunal has done an extensive analysis of the Scheme proposed between the Petitioner Companies. Part A of the Scheme deals with the Definitions and Share capital. Part B of the Scheme Deals with Transfer of Divestment Business of the Transferor Company to the Transferee Company on a going concern basis by way of a Slump Sale. Part C of the Scheme deals with General Terms and Conditions.
13.2. Clause 4 of Part B of the Scheme deals with the Transfer and vesting of the Divestment Business upon the Transferee Company and it discusses the mode in which it is being vested. Clause 5 of the Scheme deals with the Transfer of Divestment Assets, which are movable in nature the cash equivalents, sundry debtors, outstanding loans and advances, bank balances, etc more particularly stated therein, shall be vested with the Transferee Company. Clause 6 of the Scheme deals with Transfer of Divestment Liabilities, wherein the Transferee Company undertakes to meet and discharge and satisfy the same, subject to the conditions mentioned therein.
13.3. Clause 7 of the Scheme deals with the Contract, Approval and other instruments, wherein from the Appointed date, all the contracts in relation to the Divestment Business shall continue in force and may be fully and effectually enforced against the Transferee Company. Clause 8 of the Scheme deals with the Effective date, which is the date on which the certified copy of the scheme being filed with the RoC, Chennai. Clause 9 of the Scheme deals about the Divest Employees and from the Appointed Date, they shall be deemed to become the Employee of the Transferee Company, without any interruption of service.
13.4. Clause 10 deals with Continuation of the Legal proceedings and Clause 11 deals about the Treatment of Taxes. Clause 12 deals with Conduct of Divestment Business.
13.5. Clause 13 deals with Consideration, wherein it has been stated as follows;
"Upon this Scheme coming into effect, the Transferee Company shall discharge the lump sum consideration of Rs. 5,27,80,00,000/- (Rupees Five Hundred Twenty Seven Crore Eighty Lakhs Only) to the Transferor Company in the form of cash through normal banking channels. It is clarified that capital gains tax, if any, that may arise on account of payment of consideration shall be the sole responsibility of the Transferor Company.
Upon the Scheme becoming effective, the Transferee Company shall discharge the consideration as under.
(i) Raising equity share capital
AMPL (Apollo Medicals Private Limited) the holding Company of the Transferee Company, shall raise Rs. 1,43,45,00,000/- (Rupees One Hundred Forty Three Crores Forty Five Lakhs Only) towards equity share capital from the Transferor Company and other identified investors. AMPL shall thereafter subscribe to equity share capital of the Transferee Company to the extent of Rs. 1,43,45,00,000/- (Rupees One Hundred Forty Three Crores Forty Five Lakhs Only). The Transferee Company shall utilize the share subscription amount of Rs. 1,43,45,00,000/- (Rupees One Hundred Forty Three Crores Forty Five Lakhs Only) to discharge partial sales consideration to Transferor Company; and
(ii) External borrowings
The Transferee Company shall borrow sufficient funds/monies to discharge the balance consideration of Rs. 3,84,30,00,000/- (Rupees Three Hundred Eighty Four Crores Thirty Lakhs only).
13.6. Clause 14 of the Scheme deals with the residual undertaking of the Transferor Company wherein it has been stated that the excluded assets, excluded liabilities, rights, title, interest or obligation thereto shall continue to belong and be vested in the Transferor Company. Clause 15 and 16 deals with the Accounting Treatment in the books of the Transferee and Transferor Companies respectively.
13.7. From the standalone Financial Statement (at Pg. No. 317) of Apollo Hospitals Enterprise Limited, the Net Segment Assets and Liabilities is culled out as follows;
Rs. in Million As on 31.03.2019
Retail Pharmacy Segment Assets (A)
11,233.51
Retail Pharmacy Segment Liabilities (B)
2,249.68
Net Segment Assets (A-B)
8,983.83
It is seen that the Net Assets of the Pharmacy business Segment of the Transferor Company is transferred to the Transferee Company for a consideration of Rs. 527.80 Crores. As per the valuation Report, the valuers have considered the Discounted Cash Flow Method and this Tribunal, is however not inclined to venture into the commercial wisdom exercised by the shareholders of the Transferor Company.
13.8. The Learned AR for the Petitioner companies submitted that no investigation proceedings are pending against the Transferor or Transferee Companies under the provisions of the Companies Act, 1956 or the Companies Act, 2013 and no proceedings against the petitioner companies for oppression or mismanagement have been filed before this Hon'ble Tribunal or erstwhile Company Law Board.
13.9. In relation to the Income Tax Authorities, the NCLT, New Delhi in Company Petition CAA-284/ND/2018 vide Order dated 12.11.2018, has made the following observations with regard to the right of the IT Department in the Scheme of Amalgamation, "taking into consideration the clauses contained in the Scheme in relation to liability to tax and also as insisted upon by the Income Tax and in terms of the decision in RE: Vodafone Essar Gujarat Limited v. Department of Income Tax (2013) 353 ITR 222 (Guj) and the same being also affirmed by the Hon'ble Supreme Court and as reported in (2016) 66 taxmann.com.374(SC) from which it is seen that at the time of declining the SLPs filed by the revenue, however stating to the following effect vide its order dated April 15,2015 that the Department is entitled to take out appropriate proceedings for recovery of any statutory dues from the transferor or transferee or any other person who is liable for payment of such tax dues, the said protection be afforded is granted. With the above observations, the petition stands allowed and the scheme of amalgamation is sanctioned."
13.10. After analyzing the Scheme in detail, this Tribunal is of the considered view that the scheme as contemplated between the petitioner companies would be beneficial to the Company and will not be in any way detrimental to the interest of the shareholders of the Company. In view of absence of any other objections having been placed on record before this Tribunal and since all the requisite statutory compliances having been fulfilled, this Tribunal sanctions the Scheme of Arrangement appended as Annexure "4" with the Company Petition as well as the prayer made therein.
13.11. Notwithstanding the above, if there is any deficiency found or, violation committed qua any enactment, statutory rule or regulation, the sanction granted by this Tribunal will not come in the way of action being taken, albeit, in accordance with law, against the concerned persons, directors and officials of the petitioners.
13.12. While approving the Scheme as above, it is clarified that this order should not be construed as an order in any way granting exemption from payment of stamp duty, taxes or any other charges, if any, payment is due or required in accordance with law or in respect to any permission/compliance with any other requirement which may be specifically required under any law. It is further clarified that this approval shall not be construed as an approval for any regulatory compliance required to be done or obtained under the appropriate statutes.
THIS TRIBUNAL DO FURTHER ORDER:
(i) That all properties, rights and powers of Demerged undertaking of the Transferor Company be transferred by way of a Slump Sale, without further act or deed to the Transferee Company and accordingly the same shall pursuant to Section 232 of the Companies Act, 2013 be transferred to and vested in the Transferee Company for all intents, purposes and interest of the Demerged undertaking subject nevertheless to all changes now affecting the same; and
(ii) That all the liabilities, (if any) and powers, engagements, obligations and duties of the Demerged undertaking shall pursuant to Section 232 (3) of the Companies Act, 2013 without further act or deed be transferred to the Transferee Company and accordingly the same become the liabilities and duties of the Transferee Company; and
(iii) That all proceedings now pending by or against the Demerged undertaking shall be continued by or against the Transferee Company; and
(iv) That all the services of all the employees of the Transferor Company employed in the Demerged undertaking shall stand transferred to the Transferee Company on the same terms and conditions at which these employees are engaged by the Demerged Company without any interruption of service as a result of the transfer; and
(v) That upon the Scheme coming into effect, the Transferee Company shall, without any further application or deed, discharge the lump sum consideration of Rs. 527,80,00,000/- (Rupees Five Hundred Twenty Seven Crores Eighty Lakhs Only) to the shareholders of the Transferor Company or to their respective heirs, executors, administrators or other legal representatives or the successors - in - title, as the case may be.
(vi) That the Appointed date for the Scheme is 1st April 2019; and
(vii) That the Petitioner Companies, shall within thirty days of the date of the receipt of this order cause a certified copy of this order to be delivered to the Registrar of Companies for registration and on such certified copy being so delivered, the Demerged undertaking shall be deemed to be transferred; and
(viii) That any person interested in the Scheme, shall be at liberty to apply to the Tribunal in the above matter for any directions that may be necessary;
Accordingly, the Company Petitions stand allowed on aforementioned terms.