Mahendra G. Wadhwani vs M/s. Reed Relays & Electronics India Ltd

Dr. Alok Srivastava, Member (Technical)

This appeal has been filed under Section 421 of the Companies Act, 2013 by Mahendra G. Wadhwani, a public shareholder of M/s. Reed Relays & Electronics India Limited (Respondent No. 1, in short ‘Reed Relays’) against the order dated 18.9.2019 passed by the National Company Law Tribunal, Chennai in CA/21/66(1)/CB/2017 (hereinafter called ‘Impugned Order).

The Appellant is aggrieved by the Impugned Order mainly on the ground that it has been passed in a mechanical manner by only reiterating the observations made by the Division Bench of NCLT, Chennai in its earlier order dated 4.10.2017, without paying attention to the fact that the Respondent Company Reed Relays did  not  follow  the  guidelines/procedure  laid  down  in  the  Exit Circulars and Delisting Regulations of Securities and Exchange Board of India (in short ‘SEBI’).

It is recalled that an order was passed by the NCLT, Chennai in CP/21/66(1)/CB/2017 on 4.10.2017 regarding the petition of M/s. Mahendra G. Wadhwani, which was assailed by him in appeal bearing CA(AT)/337/2017 before the National Company Law Appellate Tribunal (in short ‘NCLAT’) which, by order dated 17.4.2018, set aside the order of NCLT, Chennai stating as follows:-

“46. In view of the above discussions, we are not giving our judgement/decision on the other various issues/counter issues raised by the parties in the appeal. The impugned order dated 4.10.2017 passed by the Tribunal is set aside. The matter is remanded back to the Tribunal to re-hear the matter, NCLT shall take into consideration the affidavit dated 18.9.2017 of Respondent No. 3 and after giving due opportunity to all the parties to argue on the same, decide the Company Petition expeditiously in terms of Section 422 of the Companies Act, 2013. Earlier evidence will also be evidence in the cause. The parties are also given opportunity to argue on the other issues as well before the Tribunal. No order as to cost.

Parties are directed to appear before the NCLT, Chennai Bench, Chennai on 28th May, 2018 and no separate notice would be necessary.”

The judgment dated 17.4.2018 in CA(AT) 337 pronounced by NCLAT was challenged before Hon’ble Supreme Court in Civil Appeal No. 6117/2018 which was dismissed vide order dated 24.7.2018.

The observations made by NCLAT in order dated 17.4.2018 made it clear that the affidavit dated 18.9,2017 filed by the Regional Director of Companies, Southern Region, Ministry of Corporate Affairs (in short ‘RD’), should be taken into consideration and after giving due opportunities to all the parties to argue on the same, the Company Petition should be decided expeditiously. The said order also gave opportunities to the parties to argue on other issues as well before the NCLT.

The NCLT, Chennai Bench re-heard the arguments of the parties and passed the Impugned Order, which effectively maintain the earlier order of the Division Bench of the NCLT dated 4.10.2017 withing making any modification therein.

We heard the arguments presented by the Learned Senior Counsels for both parties and perused the record.

The Learned Senior Counsel for Appellant has submitted the following arguments in support of his case:-

(i) The order dated 4.10.2017 passed by NCLT, Chennai (Division Bench) was set aside by order dated 174.2018 of the NCLAT and remanded of the matter. Upon remand, the matter was heard by Single Member (Judicial) of NCLT, whereas the earlier order was passed after hearing by the Division Bench of NCLT on 4.10.2017. Therefore, the Impugned Order suffers from defective constitution of bench as a Single Member (Judicial) Bench. Moreover, since the order dated 4.10.2017 was set aside by NCLT, it was required that the NCLAT should have taken into consideration the contents of the affidavit dated 18.9.2017 filed by the RD, and a fresh order should have been passed since the earlier order dated 4.10.2017 no longer existed in law. The NCLT has not passed a fresh order, but has simply said that after careful study of the relevant material, this Tribunal is of the opinion that the earlier order passed on 4.10.2017  does  not  warrant  any  modification,  and thus it has effectively maintained the earlier order dated 4.10.2017.

(ii) The Impugned Order has been passed in an application made under section 66 of the Companies Act, 2013, which is regarding reduction of share capital, whereas the buy-back of shares was done under section 100 of the Companies Act, 1956. Since, the Special Resolution was passed under section 52 of the Companies Act, 2013, which provides for use of Security Premium Account for Buy-Back of shares, the intention was always to Buy-Back of shares and therefore, the application under section 66 was not maintainable.

(iii) The voting in the EGM dated 12.12.2016 in which decision for reduction of share capital was taken, show the votes cast by the promoters clubbed with votes cast by non-promoter shareholders, whereas the votes of promoters shareholders and non-promoters shareholders should have been shown separately to show clearly the views/opinion of the non-promoter shareholders, since promoter shareholders are interested party in the buy-back of shares.

(iv) The process of reduction of share capital was initiated in Board meeting dated 5.10.2016. The ‘Exit Circular’ dated 10.10.2016, which established a clear and unambiguous procedure for providing exit to shareholders, should have been taken note and the Company’s Board should have decided to follow the procedure for exit, as stipulated in ‘Annexure A’ of the Exit Circular dated 10.10.2016.

(v) The notice for Board meeting October 13, 2016, which authorised convening of an Extra-ordinary General Meeting was issued on 8.10.2016. This period of notice of 5 days is less than the 7 days compulsory notice period which is provided in section 173(3) of the Companies Act, 2013.

(vi) The Special Resolution dated 12.12.2016 adopted in EGM for reduction of share capital under section 100-104 of the Companies Act, 1956 permitted use of Security Premium Account for buy-back of shares, whereas the Exit Circular dated 10.10.2016 made it very clear that the promoters will have to buy-back the shares of the exiting non-promoter shareholders and company’s funds should not be used for the same.

(vii) The shareholders were paid @ Rs. 107 per share, whereas the valuation of shares on the basis of Net Asset Value was at Rs. 351 per share.

(viii) The company made an incorrect statement in the notice dated 27.10.2016 and in the attached explanatory statement that no director is concerned/interested in the Resolution, which was not the case, and therefore, it is non-compliance of the section 102 of the Companies Act, 2013.

(ix) The non-promoters’ shares were to be provided voluntary exit option, but the action as taken by the company was for compulsory cancellation and buy-back of the shares through reduction of share capital route, which is not consistent with the modality established by Exit Circular dated 10.10.2016. After the EGM and buy-back of the shares, intimation was sent to the National Stock Exchange and SEBI without mentioning that the action was not taken in accordance with the Exit Circular dated 10.10.2016.

(x) The 4th Exit circular dated 17.4.2015 gave 18 months’ time to Exclusively Listed Companies (ELCs) within which they had to obtain listing upon compliance with the listing requirements of a nation-wide stock exchange and it was not the time period given for providing exit to non-promoter shareholders.

(xi) The 5th Exit Circular dated 10.10.2016 provided the modality/procedure for exit to public, non-promoter shareholders which should have been followed. According to Annexure ‘A’ of this circular, there had to be a public announcement by the promoter of the company in one national newspaper and one regional newspaper with material information relating to exit opportunities to its shareholders, which should have included the proposed exit price per share. Thereafter, the exiting shareholders were required to tender their shares to the company and the promoter was required to open an escrow account in favour of the independent valuer/designated stock exchange and the total estimated amount of consideration based on the exit price and number of outstanding public shareholders was to be deposited in the escrow account. The payment of exit shareholders was to be made by the promoters and not the company and the promoters had to certify to the satisfaction of the designated stock exchange that appropriate procedure has been followed for providing exit to the shareholders. This procedure was not followed by the Respondent No. 1 Company in the present case.

The Learned Senior Counsel for Respondent No. 1 has submitted the following arguments in support of his case:-

(i) On the issue of the defective constitution of bench, it has submitted that NCLAT in its order dated 17.4.2018 had ordered that “the matter is remanded back to the Tribunal to re-hear the matter. NCLT shall take into consideration the affidavit dated 18.09.2017 of Respondent No. 3 and after giving due opportunity to all the parties to argue on the same, decide the Company Petition expeditiously in terms of Section 422 of the Companies Act, 2013..” There was nothing specific in this order of NCLAT that the case after remand should be heard only by a Division Bench of NCLT and cannot be heard by validly constituted Single Member (Judicial) Bench of NCLT. Further the affidavit filed by the RD dated 18.9.2017 has been considered in paragraphs 2 to 11 of the impugned judgment and a well-reasoned order has been passed by NCLT. Even if the bench that passed the order was a Single Member Bench, it is not an invalid bench and even a vacancy or defect in bench’s constitution does not make the order illegal, as is stipulated in section 431 of the Companies Act, 2013. Moreover, during the hearing by NCLT’s Single Member Bench, the Appellant never once raised any objection to the case being heard by a Single Member Bench.

(ii) When the matter was heard after remand by the NCLT, the Counsel for SEBI appeared and submitted that the issue regarding the appointment of Auditor was not pressed by SEBI, since SEBI’s Exit Circular dated 10.10.2016 which prescribed criteria for appointment of Auditor was issued subsequent to the appointment of Auditor by Respondent No. 1 Company on 5.10.2016, and that the said Exit Circular dated 10.10.2016 had no retrospective effect.

(iii) The Appellant has raised similar contention before SEBI and thereafter in appeal before the Securities Appellate Tribunal (SAT), which by order dated 20.3.2017 has dismissed the appeal. This fact has been suppressed by the Appellant in this appeal. The principles of Res Judicata would, therefore, apply in the present appeal as, a similar issue has been heard and decided through an order dated 23.11.2017 by the SAT.

(iv) The Special Resolution approving the reduction of share capital of Respondent No. 1 Company was passed in the EGM with a majority of 89.56% on 12.12.2016 and at that time section 100-104 of the erstwhile Companies Act, 1956 were in force. With the enactment and coming in force of the Companies Act, 2013 on 15.12.2016, the Respondent No. 1 Company applied for necessary approval by filing petition section 66 of the Companies Act, 2013 because provision of section 66 of the Companies Act, 2013 is pari materia to section 100 of the Companies Act, 1956.

(v) Madras Stock Exchange (“MSE”) was in the process of getting de-recognised and exclusively listed companies (ELCs) earlier listed with MSE, were required to either get listed on a nation-wide stock exchange or provide exit to its public, non-promoter shareholders. Since the Respondent No. 1 company did not enter into any listing agreement with a nation-wide stock exchange, it ceased to be a listed company, a fact which is taken note in the Impugned Order in paragraphs 8-9 and therefore, Respondent No.1 company which was no longer a listed company, was not required to follow SEBI Listing Regulations and also its circulars including the various Exit Circulars.

(vi) The SEBI’s Exit Circular dated 17.4.2015 provide a time period of 18 months to either get listed on a nation-wide stock exchange or to provide exit to its shareholders, and this period was getting over on 16.10.2016. Therefore, in order to comply with the timeline, set by SEBI, Respondent No.1 Company issued a notice dated 26.9.2016 for board  meeting, which was held on 5.10.2016, wherein it was decided to provide exit to its non-promoter shareholders, by way of reduction of share capital and appoint an independent Chartered Accountant firm to do valuation of shares. The valuer’s report was presented in the Board meeting on 13.10.2016, wherein the valuation of shares @ Rs. 107/- per share as per Discounted Cash Flow (DCF) was considered since the company was a going concern and pay off to non-promoters’ shareholders by utilizing share premium reserves and general reserves was approved by the Board. Since the process of giving exit to non-promoters’ shareholders had already started on 20.9.2016 and the valuer was appointed on 5.10.2016, there was no question of adopting the procedure provided in the Exit circular dated 10.10.2016 in view of strict time-line for completing the exit process.

(vii) Section 66 of the Companies Act, 1956 requires passing of Special Resolution and does not mandate counting of votes segregated on the basis of “promoter” and “non-promoter” votes. Such a segregated counting of votes is not mandatory and does not make the decision taken by the majority in passing the Special Resolution illegal or erroneous.

(viii) Section 66 of the Companies Act, 2013 states that the reduction of share capital can be carried out by a company “in any way” and therefore the Respondent No. 1 Company committed no illegality in offering exit opportunity to non-promoters’ shareholders by reduction of share capital. Furthermore, reduction of share capital is not by buy-back of shares, as these acts are completely different and operate differently.

(ix) Utilisation of Securities Premium Account in paying off shareholders is permitted under section 52 (1) of the Companies Act, 2013 and any argument that this money in this account can be utilised only for “buy-back” of shares under section 52 (2)(e) is erroneous and untenable.

(x) The  judgments  of  Hon’ble  Madras  High  Court  in Parry’s Confectionary Ltd. vs. Unknown (2004 122 Comp Case 900 Mad.) and in the matter of In Re: Nestle India Ltd. [MANU/DE/2751/2008] were cited in support of the contention.

(xi) Hon’ble  Supreme  Court  has  held  in  the  matter  of Hindustan Lever Employees’ Union vs. Hindustan Lever Ltd. (AIR (1995) SC 470) that the valuation of shares is a technical and complex issue, which can be appropriately left to the accounting expert and merely because some other method of valuation could be resorted to, which could possibly be more favourable to the objector, this alone cannot militate against granting approval to the modality adopted by the company, and the court’s obligation is to see that valuation was done in accordance with law and it was carried out by an independent body.

(xii) After the order of NCLT dated 18.9.2019, Respondent No 1 Company transferred requisite funds to a Special Bank Account in HDFC Bank, which has thereafter, issued demand drafts/warrants to the company’s shareholders and out of 2506 such non-promoter shareholders, more than 1430 shareholders have encashed their warrants as on 31.12.2019. The Appellant has also acquired further shares of Respondent No. 1 Company, after passing of the concerned  Special  Resolution,  even  though  he  has objected to the reduction of the shares capital. Thus all the former non-promoter shareholders, including the appellant, were satisfied with the buy-back of their shares.

The Learned Counsel for SEBI has submitted that it finds that the Respondent company exercise the then available method of buy-back of shares as it started the exercise with the appointment of valuer on 5.10.2016, which was before the date of issue of Exit Circular on 10.10.2016.

In rejoinder, the Learned Senior Counsel for Appellant has said that after the resolution for payoff to the shareholders regarding their shares, the shareholders’ meeting was held after about two months and there was no reason why, after the Exit Circular dated 10.10.2016 has been issued, the Respondent No. 1 company could not follow the procedure stipulated in providing exit to its shareholders, which had to start with the appointment of an independent valuer from the panel of valuers approved by SEBI. He has also reiterated that in the application under section 66 of the Companies act, 1956, a confirmation by High Court is required, whereas in section 66 of the present Companies Act, 2013, a procedure for reduction of share capital is provided. He has made the point strongly that the intention of SEBI circular dated 10.10.2016 was that the promoter had to pay to the exiting shareholders the value of their shares, and not the company, as has been done in the present case. He has also contended that irrespective of the fact whether the company was listed or unlisted, it was bound to follow the guidelines/procedures laid down by SEBI, which was not done in the present case. He has also referred to the Valuer’s report for valuation of equity shares to point out that there are many conditionalties and limitations mentioned in the Report in paragraph 5, which point to a number of assumptions taken in the preparation of the report, particularly regarding non-consideration of cash reserves and bank balance, non-current investments and liabilities which amount to Rs.22,40,20,314/-, Rs.49,91,472/- and Rs.65,91,693/-respectively as on 31.3.2016 and whose consideration in the valuation calculation, shall mean an incremental amount of Rs.207/- per equity share over and above Rs.107/- per share. In the ‘Opinion Section’ of the Valuation Report, the valuer has said that it is the Company’s discretion and decision to adopt the most appropriate value and the Company shall adopt a suitable fair value per equity share based on factors and reasons considered appropriate by the Company.

The Learned Senior Counsel for Respondents has cited the following judgments in support: -

(i) The Hon’ble Delhi High Court in the matter of Reckitt Benckiser (India) Ltd. vs Unknown (122 (2005) DLT 612) and Sandvik Asia Limited vs Bharat Kumar Padamsi (MANU/MH/0237/2009).

(ii) The Hon’ble Supreme Court of India in the matter of Hindustan Lever Employees’ Union v/s Hindustan Lever Ltd. [1994 SUPPL (4) SCR 723] and G.L. Sultania and Anr. v/s SEBI [2006 67 SCL 71 SAT].

The issues that are relevant in deciding this appeal are as follows:-

(i) Whether the Adjudicating Authority hearing the matter in a Single Member Bench was legally competent to consider the matter after remand by NCLAT, , which matter was earlier heard by a Division Bench of NCLT?

(ii) Whether the Special Resolution passed under sections 100-104 of the erstwhile Companies Act, 1956 read with section 52 of the Companies Act, 2013 is in the nature of buy-back shares of non-promoters’ shareholders and is akin to providing them exit as contemplated under the Exit Circulars of SEBI?

(iii) Whether the Respondent Company was not required to follow the various circulars issued by SEBI for providing exit to its non-promoters’ shareholders upon de-recognition of a stock exchange where the Company was earlier listed?

(iv) Whether the valuation of share value as done by the company was protecting the interest of its public shareholders who wanted to voluntarily exit the company?

(v) Whether the Company’s funds could have been used for buy-back the shares of exiting non-promoters’ shareholders, providing exit to non-promoters’ shareholders instead of using the funds of the shareholders and also whether the shareholders have unjustly enriched themselves by becoming 100% shareholders of the company without using their own funds, which is contrary to the guidelines given by SEBI in its Exit Circular dated 10.10.2016?

In relation to the issue included in para 13 (i), it is noted that Mr. Ramji Srinivasan, Learned Senior Advocate was appointed as Amicus Curiae vide order dated 22.02.2021 to advise this Tribunal on the question of law whether a Single Judicial Bench is competent to hear and adjudicate the matter after remand by NCLAT. The Learned Amicus Curiae submitted report dated 11.8.2021, wherein he has concluded that on the basis of legal and factual background to the technicalities and administrative exigencies, the provision of section 419(3) of the Companies Act, 2013, the first proviso thereto and section 431 of the Companies Act, 2013 must be interpreted in a manner which subserve the cause of justice. He has advised that a decision rendered by a Single Member (Judicial) Bench is permissible in law and the jurisdiction cannot be held to be violative of provisions of section 419 of the Companies Act, 2013. Provisions of sub-section 3 of section 419 and the first proviso therein of the Companies Act, 2013 is reproduced below for appreciation of this view:-

“419. Benches of Tribunal. –

(3) The powers of the Tribunal shall be exercisable by Benches consisting of two Members out of whom one shall be a Judicial Member and the other shall be a technical Member:

Provided that it shall be competent for the Members of the Tribunal authorised in this behalf to function as a Bench consisting of a single Judicial Member and exercise the powers of the Tribunal in respect of such class of cases or such matters pertaining to such class of cases, as the President may, by general or special order, specify:”

We note that sub-section (3) of section 419 of the Companies Act, 2013 provides that if a Single Member Bench comprising of a Single Judicial Member is constituted by President of NCLT in respect of such class of cases or such matters pertaining to such class of cases, then such a Bench would be considered competent to hear such cases.  We also note that the Single Member (Judicial) Bench constituted at NCLT, Chennai by the order of the Hon’ble President, NCLT on 27.11.2017 in exercise of powers under section 419 of the Companies Act, 2013, whose copy is attached with the report of the Learned Amicus Curiae, the Single Judicial Member, Bench was entrusted with powers to dispose of cases relating to Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016.  Thus, it is clear that the Single Judicial Member Bench that heard the case and passed the Impugned Order was validly constituted by the Hon’ble President of NCLT. We also note that while the case was being reheard by NCLT, Chennai Bench, after remand by order dated 17.4.2017 of the NCLAT, the Appellant never raised any question or issue regarding any defect in the constitution of the Single Judicial Member Bench. We are, therefore, of the view that the Single Judicial Member Bench that heard the Company Petition bearing No. CA/212/66(1)/CB/2017 and passed order dated 18.9.2019 was a validly constituted bench to hear cases under the Companies Act, 2013 by Hon’ble President, NCLT and was fully empowered and competent to hear and dispose of the said company petition.

Regarding the second issue in para 13 (ii) whether the Special Resolution passed under section 100-104 of the erstwhile Companies Act, 1956, the buy-back of non-promoters’ shares is a valid modality for providing exit to the shareholders, we note that section 100 of the erstwhile Companies Act, 1956 states as follows:-

‘100. SPECIAL RESOLUTION FOR REDUCTION OF SHARE CAPITAL

(1) Subject to confirmation by the 1 [Tribunal], a company limited by shares or a company limited by guarantee and having a share capital, may, if so authorised by its articles, by special resolution, reduce its share capital in any way, and in particular and without prejudice to the generality of the foregoing power, may -

(a) extinguish or reduce the liability on any of its shares in respect of share capital not paid-up ;

(b) either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up share capital which is lost, or is unrepresented by available assets ; or

(c) either with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share capital which is in excess of the wants of the company;

(2) A special resolution under this section is in this Act referred to as "a resolution for reducing share capital".

A perusal of section 100 provides for the Special Resolution for reduction of shares capital in three cases viz. clauses (a), (b) and (c) of sub-section (1) of section 100.  Since the share capital of the non-promoters who were to be provided option by the company,  sub-sections  (a)  and  (b)  are  not  applicable  and  sub section (c) makes it clear that any paid-up share capital, which in

excess of the wants of the company, can be paid off.  Insofar as the present case of providing exit to the shareholders of the company, it is clear that the payoff of any paid up share capital is not in excess of the wants of the company, but due to the reason that this  exclusively  listed  company  Reed  Relays  on  Madras  Stock Exchange has got delisted because Madras Stock Exchange has been de-recognized. Therefore, either Madras Stock Exchange has to get itself listed on any other nationwide stock exchange or provide exit to its shareholders following its various Exit Circulars, particularly Exit circular dated 10.10.2016. Since Madras Stock Exchange had decided not get itself listed on any nationwide stock exchange, it has to provide exit to its non-promoters’ shareholders and the mechanism/modality for providing exit to such shareholders was stipulated by SEBI in the various Exit Circulars starting with circulars dated 29.12.2008, 13.5.2014, 22.5.2014, 17.4.2015 and 10.10.2016. These circulars which are reproduced in Appeal paper book, Vol. II of the documents filed by the Appellant (vide dy. No. 30794), take note of the fact that exclusively listed company has got de-listed and therefore, the exiting non-promoters’ shareholders have to be provided exit option as stipulated in these circulars, particularly circulars dated 29.12.2008 and 17.4.2015 and finally circular dated 10.10.2016.

We note that the application for reduction of share capital has been certified by the company under section 66 of now prevailing Companies Act, 2013. Clause (ii) of sub-section (b) of section 66 of the Companies Act, 2013 allows a company to payoff any paid up share capital, which is in excess of the wants of the company, which is the reason given by the company in its section 66 application regarding reduction of its share capital preferred before the NCLT. Section 68 of the Companies Act, 2013 allows the company to purchase its own shares and otherwise securities (buy-back) out of Securities Premium Account and the buy-back of shares has to be in accordance with the regulations made by SEBI in this behalf. On the other hand, the buy-back of shares using Securities Premium Account of the company is not permissible as is clear from various Exit Circulars, particular Exit Circular dated 10.10.2016, wherein in Annexure ‘A’ of the Circular it is made clear that the promoters of the company shall acquire shares of such companies from the public shareholders by paying them such value determined by the valuer. Thus, the buy-back of shares of exiting shareholders cannot be done by using the Securities Premium Account reserve of the company, though in the present case, the Securities Premium Account of the company has been used for buy-back of the shares. Moreover, we also note that while the reduction of share capital was made under section 100-104 of the erstwhile Companies Act, 1956, the application for reduction of share capital has been made under section 66 of the new Companies Act, 2013 by the company claiming that the new section 66 is pari-matera with the erstwhile section 100 of the Companies Act, 1956, whereas section 66 cannot be used when a company buy-back its own securities, as was done in the present case.

The  third  issue  that  falls  for  our  consideration  which  is stated in para 13 (iii) is whether the company Reed Relays was obligated to follow various Exit Circulars issued by SEBI for providing exit to its non-promoters’ shareholders consequent to the de-recognition of a stock exchange where the company was exclusively listed. In this connection, we note that the first Exit Circular dated 29.12.2008 makes it clear in para 8 that the companies which are listed in such derecognized regional stock exchanges, and Madras Stock Exchange is one of them, has to provide exit option to shareholders as per SEBI De-Listing Guidelines/Regulations after taking shareholders’ approval for the same within a time frame, which is to be specified by SEBI. Thereafter, circular dated 17.4.2015 allows a timeline of 18 months within which such companies have to obtain listing after complying with the listing requirements of the nationwide stock exchange subject to certain conditions or provide exit to its public, non-promoter shareholders. Again, an Exit Circular issued by SEBI on 10.10.2016 (called the 5th Exit Circular), provides a ‘procedure to provide exit to investors’ in para 4 (d), wherein it is clarified that the exclusively listed companies shall be required to ensure compliance with the procedure for exit which is prescribed in ‘Annexure A’ attached to this circular. Further para 5(a) of this 5th Exit Circular provides that the period of three months from 10.10.2016 i.e. date of the circular, is provided to the ELC to submit its plan of action to the designated stock exchange for providing exit to its public shareholders. The provision in Annexure A make it clear that the promoter of the Company shall acquire shares of such companies from public shareholders and a procedure outlining public announcement in at least one national daily newspaper with wide circulation and one regional language newspaper by the promoters of the company has also been stipulated. This announcement shall contain certain material information as stipulated in Annexure A and the exit offer has to remain open for a period of minimum 5 working days during which the public shareholders shall tender their shares. This entire process of providing exit to public shareholders has to be completed in 75 working days as per para (iii) of Annexure A starting from 10.10.2016.

We also note from the perusal of the application submitted by the Company under section 66 of the Companies Act, 2013 to NCLT regarding reduction of share capital in the process of providing exit to its public shareholders, that the various Exit Circulars issued by SEBI are mentioned in the application but curiously the application fails to mention Exit Circular dated 10.10.2016, which provides clarity about the procedure for providing exit to public shareholders. Moreover, while this application is made on 9.2.2017, the manner in which the public shareholders have been provided exit option, is through reduction of share capital and not in accordance with the stipulations in the various Exit Circulars of SEBI.

Regarding  the  issue  mentioned  in  para  13  (iv)  of  this judgment, the Learned Counsel for Respondent Company has claimed that the appointment of an independent valuer was done in the board meeting of the Company dated 5.10.2016 and the report of the valuer was received on 8.10.2016 which pre-dates the issue of Exit Circular dated 10.10.2016. He has also claimed that since the 18 months period given for providing exit to the public shareholders was expiring on 16.10.2016, the Company being mindful of this time period continued with the process to complete it by 16.10.2016 and it did not restart the process of providing exit to public shareholders, as was stipulated in the Exit Circular dated 10.10.2016 and Annexure A therein. We note that the Board meeting dated 13.10.2016 considered the valuation report of shares and decided and resolved to provide exit to its public shareholders through reduction of the Company’s paid-up equity capital from Rs.1,07,68,090 consisting of 10,76,809 equity shares of Rs. 10/- each fully paid up to Rs.43,48,470 consisting of 4,34,847 issued, subscribed and fully paid-up equity shares of Rs. 10 each by cancelling 6,41,962 issued, subscribed and paid up equity shares of Rs. 10/- each, which are the shares held by the non-promoters’ shareholders by paying against the each cancelled share a sum of Rs.107/- per equity share of Rs. 10/-. It is clear that while the circular dated 10.10.2016 of SEBI had already been issued, which the company should have known, the Company’s Board did not take note of this circular in its Board meeting on 13.10.2016 and followed a procedure that had not been stipulated by SEBI through its Exit Circulars, and which actually meant compulsory buy-back of shares rather than the opportunity of voluntary exit option.

The Learned Senior Counsel for Appellant has also pointed to certain assumptions and conditions stated in the valuation report, which make the valuation report itself not fully reflective of the correct valuation of shares. In particular, he has adverted to the following statements in the valuation report of the valuer P. Pattabiraman  &  Company  (attached  pp.  653-659  of  the  appeal paperbook, Vol IV) :-

‘5.  LIMITATIONS

Xx xx xx xx

o. We have not studied the Company’s statutory obligations and procedures to be complied with regard to exit opportunity.

Xx xx xx xx

Capital & Reserves:

An amount of Rs.11,00,000/- is transferred in general reserve every year in the future. This is the average of transfers made to general reserves during the past 5 years. The effect of share capital reduction and buy back is not considered.

Xx xx xx xx

Other assumptions:

a. The present available cash and bank balances, non-current investments and liabilities are not considered in the Enterprise value calculations. As on 31.03.2016, the balances are Rs.22,40,20,314/-, Rs. 49,91,472 and Rs. 65,91,693/- respectively. The impact of this on the share valuation shall be an incremental amount of Rs.207/- per equity share.

b. projected Non-operative Income and Expenses have been ignored by us in this valuation, since the details are not made available.”

Thus, it becomes clear that the valuer had itself pointed to severe and important deficiencies and drawbacks arising out of assumptions in making the valuation. (The valuation report can be seen at pp. 651-663 of the appeal paperbook. Vol. IV.) The valuation report also states that if the present available bank balances, investments, liabilities and cash reserves available with the company are taken into account, they would add an amount of Rs. 207/- per share to the valuation of Rs. 107 per share. The valuer has finally left it to the discretion of the Company’s Board to consider its report in the light of such observations/comments, but the Company’s Board does not seem to have considered such drawbacks and deficiencies in the valuation report, in the Board meeting dated 13.10.2016 which accepting the valuation of Rs.107/- per share. This makes the entire exercise of valuation of shares and its acceptance replete with fatal drawbacks and its hasty acceptance by the Board has no doubt adversely affected the interest of the Company’s exiting shareholders, rather than protecting the interest of such shareholders.

For the above stated reasons, we find it quite curious that when the company had a total available time of 75 days, which was stipulated in circular dated 10.10.2016, to provide exit to its public shareholders, why it did not take note of this stipulation, but on the contrary rushed through with the appointment of an auditor/valuer, who was not taken from the panel of valuers by SEBI, and thereafter, after receipt of the valuation report finalized payoff to the shareholders, all within a period of 7 days. In our view, once SEBI has issued very detailed and clear guidelines vide its circular dated 10.10.2016, it was incumbent on the Company to take it into consideration and restart the procedure, since it had a total time period of 75 days to provide exit option to its public shareholders starting from 10.10.2016. Such a move would have brought in greater confidence among its exiting shareholders, regarding transparency and fairness in the entire process, an obligation that the Company had towards its public shareholders, even if they were in minority. Moreover, the use of Premium Security Account by the Company to buy-back the shares instead of the buy-back by the promoters using their own funds, is also an infringement of the procedure laid down by the SEBI in its Exit Circular dated 10.10.2016 and it is clear that thereby the remaining promoter shareholders have been 100% owners of the company.

In  examining  and  answering  the  issue  no.  (iii)  stated  in paragraph 13, we have also examined the issue no. (v) in paragraph 13, which is whether the company's funds could have been used for buy-back of shares of the exiting non-promoter shareholders in view of the guidelines issued by SEBI for providing exit to public shareholders after de-recognition of the Regional Stock Exchange (Madras Stock Exchange in the present case). The Exit Circulars issued by SEBI dated 17.4.2015 and 10.10.2016 (with Annexure A) are in exercise of the powers conferred under Section 11(1) and 11(2)(j) of the Securities and Exchange Board of India Act, 1992. These circulars make it very clear that it is the responsibility of the promoters and directors of the exclusively listed companies in a de-recognized regional stock exchange to provide exit to the company's shareholders.

It is clear from the procedure outlined to provide exit to investors in Annexure A of the Exit Circular dated 10.10.2016 that the promoters of the company shall acquire shares of such companies from public shareholders by paying them such value determined by the valuer. Further, in Annexure A, a procedure has been laid down as to how the promoters of the company will make a public announcement, the material information to be included in the public announcement, liability of the promoter to acquire the shares of the shareholders, and the time period for which the exit offer shall remain open for the public shareholders to tender their shares is all very clearly stipulated. Further, Clause (viii) of Annexure A states that 'the promoter shall make payment of consideration within 15 working days from the date of completion of offer. Thus, two facts are clear from these Exit Circulars. viz (i) that the Exit Circulars have been issued in exercise of powers conferred under the Securities and Exchange Board of India Act, 1992 by SEBI to provide exit option to public shareholders of ELCs of a de-recognised Regional Stock Exchange, and (ii) the promoters of the ELCs shall be responsible for making payment of consideration to the exiting public shareholders.

Hence, we find that in the present case, where the company has used its Securities Premium Account to make payment to the exiting public shareholders, the procedure adopted is not in accordance with the procedure stipulated for providing exit to public shareholders by SEBI consequent to de-recognition of an exclusively listed company after de-recognition of a Madras Stock Exchange.

We also find that for ELCs exclusively listed companies that have moved to dissemination board and have been delisted, exit option is to be given to its public shareholders (other than promoters) at a value to be determined as per the methodology of valuation of share provided in Exit Circular dated 10.10.2016. This exit option to be given to the shareholders is voluntary, whereas the Special Resolution adopted by the company in its EGM held on 12.12.2016 under Section 100 of the Companies Act, 1956 provides for compulsory buyback of shares, which is not in consonance to SEBI guidelines issued for providing exit option to the public shareholders of ELCs of a de-recognized Regional Stock Exchange. Thus, we note that under the guise of providing an exit option to non-promoter shareholders in terms of the Exit Circulars issued by SEBI, the company has resorted to reduction of share capital under Section 66 of the Companies Act, 2013 leading to compulsory buyback of shares. By such an action the promoters have become 100% shareholders of Respondent No. 1 company by using company’s funds to buy-back the non-promoters’ share, which is certainly not the intention in providing voluntary exit to these shareholders.

The Learned Sr. Counsel for Appellant has also distinguished the judgment of Hon’ble Supreme Court in the matter of Hindustan Lever Employees Union (supra) and G.L Sultania (supra), by pointing out that the ruling of Hon’ble Supreme Court holds that valuation of shares being a technical and complex matter should not be interfered with. As opposed to this, in the present case, the valuer has himself mentioned serious drawbacks and assumptions while doing the valuation of shares which make the valuation unreliable and unauthentic. Moreover, the appointment of valuer in the manner stipulated by Exit Circular dated 10.10.2016 has not been done and hence the independent nature of the valuation exercise is itself doubtful and under question.

We also consider the point raised by Learned Counsel for Respondent No.1 Company that the principle of Res Judicata would apply in the case since Appellant’s contentions have already been rejected by Securities Appellate Tribunal vide its order dated 23.11 2017 passed against the Appellant. In this connection, we note that the principle of Res Judicata would apply if on the questions and issues raised by the Appellant, the Security’s Appellate Tribunal has given its finding. A perusal of the SAT order shows that the overall effect of SEBI’s Exit Circular and uncertainties in the valuation of share are not considered therence. That being the case, we are of the opinion that the principle of Res Judicata would not be applicable in the present case viz-a-viz the order of SAT dated 23.11. 2017.

The  Learned  Counsel  for  Respondent  No.1  Company  has cited the judgment of Delhi High Court on Reckitt Benchkiser (India) Ltd. (supra), and Hon’ble Bombay High Court in the matter of Sandvik Asia Limited (supra) to claim that there was no illegality/inequality in offering exit opportunity to non-promoter shareholders, because section 66 of the Companies Act, 2013 allows for reduction of share capital to be carried out in any way, and permits extinguishing some of its shares without dealing in the same manner with all the other shares of the same class. We note that in the present case, the exit option to be given to public shareholders is voluntary, and has to be undertaken in the manner provided in Exit Circular dated 10.10.2016 which is issued under the statutory mandate of SEBI. Therefore, we are of the opinion that the two judgments cited by Learned Counsel for Respondent No. 1 would not be applicable in the present case.

We also note that the judgment of Hon’ble Delhi High Court in the matter of Nestle India Limited (supra) and of Hon’ble Madras High Court in the matter of Parry’s Confectionaries Ltd. (supra) would also not apply in the present case because the use of promoters’ funds has been stipulated in the Exit Circular dated 10.10.2016 whereas in the cases cited the use of Securities Premium Account in paying off shareholders was found to be permitted under section 52 (1) of the Companies Act, 2013.

We also note that the judgment of Hon’ble Supreme Court in the matter of GL Sultania vs SEBI (supra) regarding non-interference by the court in the matter of valuation of shares would hold when the experts have valued the shares using their expertise and knowledge, whereas in the present case, the basis of selection of the valuer and the valuation of shares done by the selected valuer are both under question due to uncertainties in valuation arising out of many assumptions. The valuer has himself mentioned these drawbacks in the valuation report, and noted that in case the cash reserves, bank balance etc. of the company were to be taken into account, the valuation of shares by DCF method would be substantially different from that suggested without considering the cash reserves and bank balance of the company, and has left it to the discretion of the company to take a considered decision in the matter. We note that in the Board meeting dated 13.10.2016 as well as the EGM dated 12.12.2016, there is nothing in the minutes to show that the Board or the EGM took these drawbacks and assumptions into consideration and took an informed decision after due discussions.

We thus, find that the Respondent No. 1 company has not provided voluntary exit option to its public shareholders but resorted to compulsory buy-back of shares under section 100 – 104 of the Companies Act, 1956, when SEBI through its Exit Circulars, particularly the Circular dated 10.10.2016, had provided a very clear and unambiguous modality/ procedure for providing an exit to non-promoter, public shareholders. Moreover, in buying back the shares Respondent No.1 company used its own funds available in the Securities Premium Account, when the funds of the promoters were to be used for such purpose. Moreover, as a result of compulsory buy-back of all shares, promoters have become 100% shareholder of Respondent No.1 company and the shares held by the promoter/non-promoter shareholders have been cancelled/bought back without any option given to them whether to accept or reject the offer made by the company.

In view of the infirmities in the procedure employed by Respondent No. 1 company in providing purported exit to its public shareholders through compulsory buyback of their shares, we find that the interests of the public shareholders have not been duly protected and preserved, as was required to be done by complying with the various Exit Circulars issued by SEBI in this regard. The Impugned Order has erred grossly by not considering these factors when passing the Impugned Order.

We, therefore, set aside the impugned order and direct that the Respondent No.1 company shall provide voluntary exit to its non-promoter, public shareholders in the manner outlined in the Exit Circular of SEBI dated 10.10. 2016. Since it appears that a number of non-promoter shareholders have already availed of the buy-back of shares and accepted demand drafts/warrants in payment, the company shall now engage an independent valuer from amongst the SEBI approved panel and cause a valuation exercise to be undertaken based on financials as they existed on 10.10.2016. Those non-promoter shareholders shall be paid the difference amount if the valuation comes to be more than Rs. 107/- per share. The non-promoter shareholders who have not accepted any payment till now shall be entitled to receive the full value of their shareholding as per the accepted valuation. Further, the non-promoter shareholders shall be given interest @ 9% p.a. on the amount due to them for the period 10.10.2016 till the date of this order. This entire exercise shall be completed within 75 days from the date of this order. With the above directions, the appeal is disposed of.

In the facts and circumstances of the case, there is no order as to costs.