In Re: SKS ISPAT and Power Ltd.

G.S. Patel, J.—These company scheme petitions seek sanction to a scheme of arrangement for demerger of the Cement Division of SKS Ispat and Power Ltd. ("the demerged company"; "SKS Ispat") into SKS Cements Ltd. ("the resulting company"; "SKS Cements"). SKS Cements is a wholly-owned subsidiary of SKS Ispat. SKS Ispat and Power Ltd., was originally incorporated on April 17, 2000, under the name SKS Ispat P. Ltd. On January 11, 2005, its name was changed to SKS Ispat Ltd. A fresh certificate of incorporation consequent on change of name was obtained. On December 29, 2006, its name was once again changed, this time to the present name of SKS Ispat and Power Ltd. Yet another fresh certificate of incorporation consequent on this change of name was obtained.

SKS Cements Ltd., the resulting company, was originally incorporated on April 2, 2008. On October 14, 2008, SKS Cements obtained a certificate of commencement of business.

Four years later, on October 15, 2012, the present proposed scheme of arrangement was formulated. The board of directors of both SKS Ispat and SKS Cements approved the proposed scheme of arrangement. All equity shareholders consented to the proposed scheme of arrangement, issuing consent letters. On February 7, 2013, SKS Ispat and SKS Cements filed Company Summons for Direction Nos. 202 of 2013 and 203 of 2013 seeking dispensation from holding and convening a meeting of their equity shareholders, secured creditors and unsecured creditors. On March 1, 2013, these company summons for direction were allowed. The present petitions have been filed thereafter.

The avowed purpose of the scheme of demerger is to separate the steel and cement divisions of SKS Ispat and to house the cement division in SKS Cements. This, it is stated, is in the interests of business and operational efficiency, inter alia, so that SKS Ispat can better focus on its core business. Under the proposed scheme of demerger the net asset value of SKS Ispat''s Cement Division to be transferred to SKS Cements is Rs. 96.27 lakhs. In consideration, shares equivalent to this value are to be issued to SKS Ispat, as a result of which the SKS Cements will continue to remain a wholly-owned subsidiary of SKS Ispat.

On October 15, 2012, M/s. S.B. Wakharkar and Co., chartered accountants, submitted a valuation report for the purposes of determining the share transfer ratio required for the proposed scheme of demerger. This valuation is relied on in the company scheme petition. M/s. S.B. Wakharkar and Co., adopted a net asset value valuation method (book value of net assets or net worth) and arrived at a valuation of Rs. 96,27,000 of SKS Ispats Cement Division as a going concern, and as on March 31, 2012. The chartered accountants therefore recommended that SKS Ispat be issued 9,62,700 equity shares of Rs. 10 each credited as fully paid-up in SKS Cements Ltd.

Initially, the company scheme petitions were opposed by two unsecured creditors, namely, L & T Finance Ltd. ("L & T") and Tata Capital Financial Services Ltd. ("Tata Capital"). L & T has subsequently withdrawn its objection, and Ms. Shah, the learned advocate appearing for L & T, requested that her statement to that effect be noted. Tata Capital pressed its objection, taking exception to the valuation report of M/s. S.B. Wakharkar and Co., and, in particular, to the valuation method they adopted.

On October 25, 2013, the petitioners and two objectors were heard by this court. The objection was noted : that the cement business and other assets of SKS Ispat were sought to be transferred at a gross undervaluation. Jamdar J. did not express any final opinion on the correctness of M/s. S.B. Wakharkar and Co.''s valuation report, but observed that report had not considered several aspects required to be kept in mind by the valuer before arriving at the valuation. The court was also noted that the valuation report was over a year old. In those circumstances, the court felt it would be appropriate to ask for a fresh valuation to value the assets defined as demerged under clause 1.1 of the scheme. Accordingly, M/s. S.M. Pradhan and Co., chartered accountants, on the panel of the official liquidator of this court were directed to value the assets as defined in clause 1.1 of the scheme and to submit a report to this court in a sealed cover.

M/s. S.M. Pradhan and Co., submitted their report dated December 18, 2013. That report shows that M/s. S.M. Pradhan and Co., called for additional documents. In their report, M/s. S.M. Pradhan and Co., examined the accounts for the years ending March 31, 2013, 2012, 2011, 2010 and 2009. They found that the entire expenditure of Rs. 96.27 lakhs incurred by SKS Ispat was on tangible assets, capital work in progress and intangible assets under development. The expenditure, M/s. S.M. Pradhan and Co., reported being told, consisted of mining rights and other licenses, and certain legal and professional fees. It was only the initial expenditure in relation to the development of limestone mines in Bilaspur in the Bilaspur of Chhattisgarh, in the nature of geological reports, acquisition of mining rights and other pre-operative related expenses that was attributable to the cement division. On this basis, given that there was no further expenditure incurred by SKS Ispat and since the cement division was still in its formative stages, M/s. S.M. Pradhan and Co., concluded that the only viable valuation method was the actual expenditure incurred, i.e., the net asset method. This was the very method that M/s. S.B. Wakharkar and Co., too, had adopted. In their report, M/s. S.M. Pradhan and Co., listed the various other valuation methods available. In particular, I must note their comments on the P/E valuation method, one most energetically propounded by the remaining objector, Tata Capital, as more realistic and accurate. M/s. S.M. Pradhan and Co., concluded that since the cement business would take some time to shape up, the future price ratio could not be ascertained. SKS Ispat''s investment in the cement division was limited only to the mining rights. SKS Cements had incurred expenses only on acquisition of freehold land and other pre-operative expenses. Therefore, using the P/E method was unviable. On the other hand the net asset value, or NAV, method was one that took into account assets less liabilities at book value. This, in the opinion of M/s. S.M. Pradhan and Co., was the only suitable method. As a result of their assessment, M/s. S.M. Pradhan and Co., concurred with the view taken earlier by M/s. S.B. Wakharkar and Co. They, too, valued the cement division at Rs. 96.27 lakhs, concluding that this was a fair determination of the value of the cement division.

Tata Capital objects even to this report. It contends that the net asset valuation method adopted by M/s. S.M. Pradhan and Co., is inappropriate, and, in any case has not been appropriately applied. The result, according to Tata Capital, is a depressed valuation. Tata Capital contends that the valuation report by M/s. S.M. Pradhan and Co., completely ignores other appropriate methods "such as P/E valuation". Importantly, Tata Capital says that it is the potential of the cement business, including various licenses and especially the mining license, that should be taken into consideration and be valued. This potential, according to Tata Capital, is required to be assessed to arrive at a fair value of the assets of the proposed demerged undertaking.

Tata Capital''s objection to M/s. S.M. Pradhan and Co.''s report must be viewed in conjunction with its earlier objection, taken in an affidavit August 16, 2013. It is undisputed that Tata Capital is one of SKS Ispat''s creditors. In the August 2013 affidavit, Tata Capital alleges that the cement division has been undervalued by SKS Ispat "to cheat its creditors". It expresses an apprehension that SKS Ispat is attempting to hive off the cement division to its subsidiary at a meagre value so that it can later be sold to a third party at a higher valuation.

There is no stated basis to these expressed apprehensions. Tata Capital, like L & T, is a secured creditor of SKS Ispat. Tata Capital''s dues are secured, inter alia, by a pledge of SKS Ispats shares held by a promoter associate company, Shree Krishna Structures P. Ltd., a first and exclusive charge on the residential property of the promoter, promoter associate company, personal guarantees and corporate guarantees (L & T Finance is similarly secured). Some of these securities have in fact been enforced.

Ms. Ghone, learned counsel for the petitioner, points out that there is a corporate debt restructuring ("CDR") scheme in place for SKS Ispat. This has been favourably considered and approved by both CDR and non-CDR lenders. 92.49 per cent, of these lenders have consented to the CDR scheme, in which a suitable restructuring mechanism has been established. Since SKS Cements is a wholly-owned subsidiary of SKS Ispat, any realisation of proceeds from the stake sale of SKS Cements Ltd., is bound to be booked in SKS Ispat. These proceeds would be used, if realised, toward a reduction of the outstanding liabilities of SKS Ispat. In an affidavit dated February 20, 2014, SKS Ispat has set out the details of the various lenders who have objected to and supported the CDR Scheme. The provisions of the CDR Scheme fully and adequately protect the interests of both objectors.

I have considered the submissions made by Ms. Ghone on behalf of the petitioner, and by Mr. Khandeparkar, learned counsel for Tata Capital. In my view, there is a compelling justification put forward by the petitioner in support of the Scheme. SKS Ispat has no plans for setting up a cement plant. This is not even contemplated under the approved CDR Scheme. A cement plant is, however, proposed through the resulting company, SKS Cements Ltd., the wholly-owned subsidiary of SKS Ispat and Power Ltd. This is, evidently, a more efficient and productive business strategy. The setting up of a cement plant requires various clearances. At present, the single most valuable asset of the cement division is a limestone mining license in the Bilaspur District of Chhattisgarh. This is specifically for captive use. That means that it will be used for the purposes of the cement plant proposed by SKS Cements. At present, SKS Ispat has not been able to obtain various statutory and environmental and regulatory clearances. A more commercially efficient arrangement would enable the subsidiary to achieve this objective.

In any case, after the demerger the value of the assets to be transferred to SKS Cement is Rs. 96.27 lakhs, about 0.06 per cent, of the total assets of SKS Ispat as on the appointed date of April 1, 2012. There is no transfer of revenue contemplated as the cement division is not even commercially operational. This is undisputed position. Indeed all that is being transferred is a nominal value of the assets.

As to the question of an appropriate approach in valuation, I am unable to accept, on the basis of the material before me, Mr. Khandeparkar''s submission that it is only the P/E valuation method that ought to have been used. A variety of valuation models are available in any scenario. Not all of them can always be deployed. For instance, a discounted cash flows ("DCF") method is of virtually no utility when valuing a greenfield project. Project costs and means of finance cannot be valued at this nascent stage. Future cash flows, terminal values, discount rates, net present values, investment risks, opportunity costs, etc., cannot be estimated. Similarly, where a plant is not commercially operational and has not even been set up, and there is no history of past earnings, it is impossible to estimate future profits in order to use a profit-based valuation method. The market approach too is unviable since the cement plant is not established and has no commercial operations. Comparisons with other established cement companies and cement plants are unrealistic and apt to lead to distortions. In this context, I must note that both chartered accountants have arrived at a similar valuation. They have also both used an identical method for arriving at their valuation. It is, in these circumstances, difficult for a court to sit in judgment over the opinions of professionals, especially when an independent professional has been appointed by the court and, has in response to that appointment, submitted his opinion. Unless it is shown by cogent and compelling material and evidence that the method and valuation are both grossly incorrect and improper, a court should be hesitant to substitute its own view for that of an independent professional.

In the present case, the submissions made on behalf of Tata Capital are coloured by the fact that they are, clearly, disgruntled creditors complaining of non-payment of their debts. This, however, in itself is no reason not to grant sanction to the scheme, especially when other creditors, secured and unsecured, and equity shareholders have voted in favour of it. Indeed, apart from a mere allegation that the valuation is intended to cheat some of its creditors, there is absolutely nothing that Tata Capital is able to point out to vitiate either report or in support of its objections to the scheme.

I must also note that the other statutory authorities, such as the Regional Director, Ministry of Corporate Affairs, Western Region, as also the Registrar of Companies have not objected to the scheme. If, as Tata Capital suggests, the scheme was not in public interest then one would have expected these two public authorities to have so said. On the contrary, both authorities are satisfied with the explanations and undertakings given by the petitioners.

It is not, in my view, be necessary to consider all the many authorities cited by Ms. Ghone. It is sufficient to note that a private dispute between an objector and a petitioner-company cannot be used to stall a scheme that is otherwise not demonstrated to be opposed to the public interest. The court has always the power to sanction the scheme with or without modification.

Ms. Ghone relied on the decision of the Supreme Court in Miheer H. Mafatlal Vs. Mafatlal Industries Ltd., , in support of the proposition that a scheme when approved by the majority of shareholders and creditors should not be allowed to be frustrated because of the private dispute of a sole or solitary creditor/shareholder. As the Supreme Court held : "financial institutions and statutory corporations... are naturally informed about the business requirements and economic needs and the requirements of the corporate finance in the light of their personal interest... (they) would not wholly approve the scheme if it was contrary to the interest of the shareholders as a class". Importantly, in Miheer H. Mafatlal Vs. Mafatlal Industries Ltd., , one of the issues raised was as to the share exchange ratio. The question of what is an appropriate share exchange ratio is a commercial decision of well informed equity shareholders. It is not for the court to sit in appeal over this value judgment; and once expert chartered accountants have taken relevant factors into account, and where this opinion of the chartered accountants has carried weight with the board of directors and the shareholders, it is not for any individual creditor to insist that some other ratio should be adopted or that some other valuation method might or ought to have been preferred. This court cannot act as a Court of Appeal to sit in judgment over the informed view of the parties concerned. It has neither the expertise nor the jurisdiction to examine matters that lie within the commercial wisdom of creditors and members of the company. The sanctioning court must ensure that the requisite statutory procedure has been followed and 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. Once these broad parameters are met, the court has no further jurisdiction, let alone an appellate jurisdiction. Moreover, once a share exchange ratio has been worked out by a recognised firm of chartered accountants, it is not for the court to substitute its own view as to the share exchange ratio especially when the one recommended by the chartered accountants has been accepted by the overwhelming majority of the shareholders and creditors. In the present case, Tata Capital is unable to show how the scheme is prejudicial to a class. All the Tata Capital says is that some other valuation method ought to have been used No attempt is made to demonstrate how the present valuation method prejudices the shareholders or other creditors. This must also be seen in the light of the fact that Tata Capital is the only creditor who continues to object to the scheme. The second valuation report was obtained on Tata Capital''s objection. The valuers, M/s. S.M. Pradhan and Co., were appointed by the court. They are on the panel of accountants of the official liquidator of this court. For Tata Capital to persist in the same objection, as if to suggest that unless it has its way the scheme cannot be sanctioned, is, in my view, unacceptable.

Ms. Ghone is also justified in relying on the decision of the learned single judge of this court in In Re: Pmp Auto Industries Ltd., . It is settled law that there need not be a unity of the objects or purposes of the two companies in question, whether in a scheme of amalgamation or in a scheme of demerger as in the present case. Where it is demonstrated that business efficiency and commercial prudence justify such a demerger, it cannot be opposed by the solitary creditor on the ground that its debts, though otherwise secured, and though otherwise sought to be enforced, have not been fully satisfied. Having regard to the facts and circumstances of the case, I am satisfied that there is no substance to the objections raised. The scheme is sanctioned as prayed for. The petition is made absolute. Minutes to be drawn up accordingly.