Shiva Texyarn Limited Annamallai Finance Limited

K. Raviraja Pandian, J.—In the above Original Side Appeals, the appellants questioned the correctness of the Order of the learned Single

Judge dated 25.4.2002 made in C.P.No.227 of 2001 wherein the petitioner prayed for an order that the Scheme of Amalgamation as approved

unanimously by the shareholders of the appellant Company ie., Shiva Texyarn Limited at their meeting held on 8.9.2001 be sanctioned by this

Court so as to be binding on the appellant Company as well as the members and creditors of the appellant Company effective from 1.1.2001 and

that the appellant Company viz., Shiva Texyarn Limited be dissolved without winding up and C.P.No.228 of 2001 wherein the appellant Company

- the Annamallai Finance Limited praying for an order that the Scheme of amalgamation as approved unanimously by the shareholders of the

appellant Company in the meeting held on 8.9.2001 be sanctioned so as to binding on the appellant Company and all the members and creditors

of the appellant Company effective from 1.1.2001, have been rejected by the learned Single Judge.

The said Company petitions are filed u/s 391 and 394 of the Companies Act, 1956. Annamallai Finance Company Limited is the transferee

Company and Shiva Texyarn Limited is the transferor Company. In Company Application Nos.638 and 639 of 2001 taken out by the above said

Companies to hold and conduct a meeting of the shareholders of the Company for the purpose of considering and approving the scheme of

amalgamation, this Court directed the convening of the meeting of the equity shareholders of the transferor and transferee Companies u/s 391 of

the Companies Act on 8.9.2001 on 10.30 A.M at 252, Mettupalayam, Coimbatore at the place specified. This Court also directed publication of

the Company Petitions in leading English and Tamil dailies. After conducting the meeting of equity shareholders as directed by this Court, of both

the transferor and transferee Companies, the Chairman has filed the above applications with the prayer as stated above.

The Regional Director, Department of company Affairs on behalf of the Central Government in terms of Section 394-A of the Companies Act

raised the following objections.

i) In the valuation report, the valuers have recommended for every fully paid up equity shares of the transferor company, three paid; up equity

shares of the transferee company have to be allotted and that no premium has been recommended by the valuers, while the scheme of

amalgamation in para 4.1 Part-II, it has been approved that the transferee company shall allot to the share holders of the transferor company three

equity shares of Rs.10/- with a premium of Rs.5/- per share credited as fully paid up in the transferee company for every one equity share of

Rs.10/- held by the share holders in the transferor company.

ii) Para-8 Part-II of the scheme provides that the name of the transferee company shall be changed to Shiva Texyarn Ltd., and the same shall take

with effect from the date of dissolution of the transferor company. For such a change of name, the transferee company is required to com,ply with

the provisions of Sections 20, 21 and 23 of the Companies Act, 1956.

iii) The transferee company does not have any enabling clause in the object clause of its memorandum of association to carry on the business of the

transferor company, though an undertaking has been given that the other objects will be shifted to the main objects of the transferee company upon

sanctioning the scheme of amalgamation.

iv) The scheme provides for the conversion of transferee company from the status of NBFC to an industrial company engaged in the manufacture.

The learned Single Judge raised as many as fifteen points for consideration for passing orders in the said applications for approval of the scheme

for amalgamation.

The learned Single Judge after taking into consideration of the Scheme unanimously approved by the shareholders of the respective Companies,

found that the exchange ratio fixed in the proposed Scheme for the shares of the transferor Company, though all the shareholders have given the

consent by approving the proposal unanimously, it is rather strange as to why a premium has to be paid by the transferee company to the

shareholders of the transferor Company, more so, when even according to the valuation by the Chartered Accountant, it was assessed that the

three equity shares could be the conversion ratio for each equity share in the transferor Company, though a premium is proposed by the Directors

in the scheme at the rate of Rs.5/- per share, as to how the said amount has to be paid back and kept in reserve or kept in deposit or kept in

investment is not disclosed. Such premium amount as proposed is a substantial amount and it benefits the promoters of the Company and

directors, who hold the major portion of the shares as seen from the shareholding partners of both the Companies. Though there are thousands of

shareholders, the substantial number of shares will be in the hands of Shiva Distilleries, its Directors or Associates, who are also the subscribers of

the shares in the names of various companies of which either as share holder or a partner or a director as the case may be. The seven shareholders

of the Shiva Texyarn is enable to have an undue advantage and extraordinary concession in detriment of other shareholders in the transferee

company.

The learned Judge further found that the Shiva Texyarn became a separate company just within a year and within few months thereafter the

present move has been made and according to the learned Judge, it is a calculated design by few of the Directors who hold substantial number of

shares and for the said reason, the learned Judge declines to approve the scheme and dismissed both the applications.

Mr. Chidambaram, learned Senior Counsel appearing for the appellants has contended that the reasoning given by the learned Judge is not

correct, since the exchange ratio and the value of the shares of both the Companies have been arrived at by experts and they also recommended

the exchange ratio of 3 equity shares of Annamallai Finance Limited for every one equity share of Shiva Texyarn Limited, which is based on

materials. The scheme proposed has also only recommended the same ratio as suggested by the expert that inasmuch as the expert valuation of the

equity shares of Annamallai Finance Limited was Rs.15/- and since the face value of the shares was only Rs.10/- per share, it was decided to

charge the differential between the face value and the issue price to the premium account, that would be only the accounting course open to the

appellant and only in that context, the shares were recommended in the scheme to be issued in the ratio of 3:1 at the premium of Rs.5/- per share.

He further contended that the conclusion of the learned Single Judge that the Directors have not stated as to how the amount of premium has to be

paid or whether it is to be kept in reserve or kept in deposit or kept in investment, is not correct. The manner of accounting and the manner of

utilisation thereof are not matters of choice to be exercised by the Directors but is squarely and exhaustively regulated by Section 78 of the

Companies Act, which provides that ""Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate

amount or value of the premiums on those shares shall be transferred to an account, to be called the securities premium account; and the provisions

of the Companies Act relating to the reduction of the share capital of a company shall, except as provided in Section 78, apply as if the securities

premium account were paid-up share capital of the company."" and as such the premium charged is to be retained in the Books of Annamallai

Finance Limited and is available for application in the manner stipulated in Section 78(2) of the Companies Act, 1956. Hence, the learned Judge

went wrong in rejecting the applications.

We heard the learned counsel representing the Department of Company Affairs, who produced a letter from the Ministry of Law, Justice and

Company Affairs, Government of India, wherein the Regional Director has stated that the affidavit filed by him in C.P.Nos.227 and 228 of 2001 is

exhaustive in nature wherein the Department of Company Affairs has not objected the scheme and as such he has nothing to add further more than

what has been stated in the said affidavit.

In order to appreciate the controversy, a little more facts, which are relevant to the issue under consideration are necessary.

The appellant Annamallai Finance Limited, for brevity hereinafter referred to as ""the transferee Company"", was incorporated on 28.5.1980 as

a Private Limited Company and was subsequently converted into a Public Limited Company. The certificate of incorporation was issued on

25.11.1985 and the amended certificate of incorporation was issued on 3.12.1985 since the name of ""Annamalai Finance Limited"" was changed

as ""Annamallai Finance Limited"". The authorised share capital of the transferee Company is Rs.22,00,00,000/- divided into 2,20,00,000 equity

shares of Rs.10-/ each. The issue and paid-up capital is Rs.11,25,24,000/- divided into 1,12,52,400 equity shares of Rs.10/- each. The promoter

Group holds 54% of the paid-up capital in the transferee company. The balance is held by the Public. Of course, the shares of the transferee

Company are listed on Mumbai, Chennai, Coimbatore and National Stock Exchanges. The transferee company is a non-banking finance

Company. By resolution dated 27.9.1999 u/s 149(2)(a) of the Companies Act, the transferee Company was resolved to carry on textile business.

Shiva Texyarn Limited, for brevity, hereinafter referred to as ""the transferor company"", was incorporated as a Public Limited Company on

23.2.2000. This transferor company was incorporated with the main object of taking over the Textile Division of Shiva Distilleries Ltd and to carry

on textile business.

The Authorised Share Capital of the transferor Company is Rs.3,50,000/- divided into 35,00,000 Equity shares of Rs.10/- each. The

transferor Company was incorporated by the Promoters of Shiva Distilleries Limited. The transferor Company became a wholly owned Subsidiary

of SDL. The Board of Directors of both the transferor and transferee Companies decided to merge the two companies and approved the scheme

of amalgamation and filed C.A.Nos.638 and 639 of 2001 before the Company Court seeking permission to convene the General Body meetings

of both the Companies. On the Orders dated 23.7.2001, the meeting of the shareholders of both the Companies were held separately on

8.9.2001 under the Chairmanship of Sri P. R. Ramakrishnan, Advocate, Coimbatore as ordered by the Company Court. The members of both

the Companies unanimously approved the scheme. Thereafter both the Companies submitted scheme of amalgamation to the Company Court for

its approval by filing C.P.Nos.227 and 228 of 2001. The Order made in the said applications is the subject matter of the present appeals.

According to the appellants, the rationale for the merger and the salient features of the proposed scheme of amalgamation are as follows:

a) Majority of Directors in both Companies as also the Chairman and Managing Director are common. While performance of the Transferee

Company as an NBFC witnessed recessionary trend, performance of the textile business of the Transferor Company was good as far as this

Group was concerned. The Textile Undertaking of the Transferor Company is an existing profit making export oriented undertaking with 65%

exports and a positive net worth of Rs.1106.40 lakhs as at 31.12.2000. Further, 56 Wind Electric Generator owned by the Transferee Company

having an installed capacity of 13,445 Kilo Watts was among others utilised by the Transferor Company under an operational lease. Considering

all this, it was proposed to merge the textile business of the transferor Company with the Transferee Company and to give the Transferee

Company a better source of revenue and better business opportunity.

b) The scheme of Amalgamation was to be effective from 1-1-2001. Every equity shareholder of the Transferor Company was to get three equity

shares in the Transferee Company. The exchange ratio was determined based on report of Suri & Co., Chartered Accountants and K

Kandaswamy Associates, Registered valuers. The shares of the Transferor Company was valued at Rs.50.54 per share and the shares of the

Transferee Company was valued at Rs.16.46 per share. Though the valuer suggested higher value for the shares of the Transferor Company the

Board of Directors of both the companies decided to value the share as Rs.45 and Rs.15 respectively. Since the shares of the Transferee

Company was valued at Rs.15/-, the proposal was to allot shares at premium of Rs.5 per share in the exchange ratio of 1:3 as suggested by

Chartered Accountants. As a consequence of merger, the Transferee Company was to be converted into a manufacturing company and was to

lose its status as an NBFC on account of its predominant activity becoming manufacturing. Accordingly, once the Scheme is sanctioned, it would

become necessary to comply with the limits prescribed in Companies Acceptance of Deposit Rules. However, the Transferee Company has

complied with the limit even as early as on 30.11.2001. The result of the merger would be considerable addition of net worth to the transferee

Company and enhancement of the value of the shares of the Transferee Company. The name of the transferee Company was proposed to be

changed to Shiva Texyarn Limited, since the predominant business was to become textiles and to keep the goodwill of the name Shiva Texyarn

Limited which has already established a name in the international textile business.

The ICICI Limited, the Principal Financial Institution of both the Companies has also given its approval for the proposed merger. The Central

Government filed an affidavit and stated that the recommended exchange ratio is only 3:1 but the Scheme has proposed a premium of Rs.5/- per

share. That apart, for the change of name of transferee Company, requirement of Sections 20, 21 and 23 of Companies Act will have to be

complied with, that the transferee Company does not have a main object to carry on Textiles but an undertaking has been given by the Company

to shift the Clause from other object to main object.

As stated already, it is the argument of the learned Senior Counsel in respect of charging of premium at the rate of Rs.5/-, it is an accounting

necessity flowing out of the share value of transferee Company having been taken to be Rs.15/- and the par value being Rs.10/-. It is the

submission of the learned Senior Counsel that the merger of transferor Company with the transferee Company ie., the merger of unlisted Company

with the listed Company has the advantage of continued listing and this was an area which was essentially in the realm of decision making by

shareholders.

The net purchase consideration due as per paragraph 1.6 of the Scheme of Amalgamation for excess of asset over liabilities of the Textile

Undertaking is Rs.46,50,00,000/-. The same is charged as under:

a. Share Capital:

Allotment of 103,52,121

Equity shares of fully

paid-up (normal value

of Rs.10/ each allotted

in the ratio of 1:3) :Rs.10,35,21,210/-

b. Statutory Reserve -

Debenture Redemption

Reserve as per Books

of Transferor Company :Rs. 3,00,00,000/-

c. General Reserve -

retained in business as

reserve available to the

equity shareholders :Rs.27,97,18,185/-

d. Balance consideration adjusted

by Share Premium on 103,52,121

Equity Shares of Rs.5/- per share

(to be retained as Permanent

Capital) :Rs. 5,17,60,605/-

TOTAL :Rs.46,50,00,000/-

As a consequence of merger, the shares to be allotted to the shareholders of Shiva Texyarn Limited to be in the ratio of 1:3. Therefore, for

accounting purpose, the consideration of Rs.46,50,00,000/- after deducting the statutory Reserve and General Reserve is required to be

apportioned towards Share Capital by allotment of shares in the ratio of 1:3. While so allotting, in as much as the Equity Shares of Annamallai

Finance Limited are of the value of Rs.10/- each, the excess that arises as a consequence of the difference in the net consideration can be adjusted

only by apportioning Rs.5/- per share towards Share Premium Account. To put it differently, after allotting the shares in the ratio of 1:3 there still

remains net consideration of Rs.5,17,60,605/- which has to be adjusted for accounting purpose and the same can therefore be obviously adjusted

only against the Share Premium Account, which is in accordance with the Section 78. The share premium cannot be transferred by virtue of

Section 78 of the Companies Act to any account other than ""Securities Premium Account"". This premium can be utilised by the Company only for

the purpose enumerated in Sub Section 2 of Section 78. Accordingly, the repayment of the premium amount to the shareholders or crediting the

deposit of Loan Account does not arise.

The report of the valuation of the shares of the chartered Accountant is based on materials. The equity share of Annamallai Finance Limited

and Shiva Texyarn were valued by Suri & Co., the Chartered Accountants. They adopted the method of valuation prescribed in the guidelines

issued by the Ministry of Finance, Department of Economic Affairs, for valuing the shares of the Company. The net asset value and the profit

earning capacity of the Companies have been taken into consideration and the fair value of the equity share has been arrived at by taking the

average net asset value and the profit earning capacity value at 15% capitalization rate. The value so arrived in respect of Annamallai Finance

Limited as per the report of the Chartered Accountants was more than the average quoted value of the shares in the Stock Exchange and they

have furnished the fair value of one equity share of Annamallai Finance Limited, transferee Company as Rs.16.46ps and the Shiva Texyarn Limited

at Rs.50.54ps and recommended that for every fully paid up equity share of transferor company, three fully paid up equity share of Annamallai

Finance Limited might be issued. In the scheme, though the ratio has been accepted, the rate of equity share of the respective companies was

adopted as Rs.15/- and Rs.45/-. The share premium account is only a book entry, which would be available to all the shareholders of the

transferee Company. The exchange ratio of the shares as prescribed by the experts has not been opined by the learned Single Judge as to giving

extra advantage to the Directors or putting the other shareholders in a disadvantageous position, so also the value.

As per Section 78 of the Companies Act, the share premium cannot be transferred to any account other than security premium account and

this premium can be utilised by the Company only for the purpose enumerated in sub-section (2) of Section 78 ie., in paying the unused shares of

the company to be issued to members of the company as fully paid bonus shares, in writing off the preliminary expenses of the company; in writing

off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company; or in providing for the

premium payable on the redemption of any redeemable preference shares or of any debentures of the company. Hence, there is no question of

paying back or keeping in reserve or keeping in deposit or keeping in investment arises as concluded by the learned Judge. Further, the premium

has arisen only as a result of their peculiar difference in the net consideration remaining to be adjusted for allotment of share at par and after

deducting the reserve. Further, the shareholders neither obtain an advantage nor losing anything as a consequence of this entry. That is precisely the

reason the shareholders of both the Companies, who are parties to be concerned about the exchange ratio are satisfied about the allotment of

share at premium of Rs.5/- to the shareholders of Texyarn Limited.

Equally so, the merger of transferor Company Shiva Texyan Limited with Annamallai Finance Limited, the transferee Company is a prudent

one, because the Annamallai Finance Limited is a listed Company and the shares are listed in Mumbai, Chennai, Coimbatore and National Stock

Exchange. Its shares are regularly traded whereas the transferor Company is an unlisted Company and wholly owned subsidiary of Shiva

Distilleries Limited. The shareholders of Shiva Texyarn Limited is only 8. Out of these eight shareholders, one is Shiva Distilleries Limited itself and

seven others are the nominees of Shiva Distilleries Limited. If the merger is in vice versa, it would involve merger of a listed Company with an

unlisted Company. This would have the consequence of termination of listing agreement upon the merger since the share of Annamallai Finance

Limited would stand cancelled upon its merger into Shiva Texyarn Limited and thereby the shareholders of the Annamallai Finance Limited will

stand to lose a valuable right of trading, which is available to them. The consequence of de-listing would result in lack of marketability and liquidity

for the share. The shareholders would have rejected the proposal since they are losing the marketability and liquidity of the share. It is obvious that

the shareholders had given their unanimous approval for the scheme as the scheme is favourable and beneficial to them.

In respect of the decision, there cannot be any second opinion to the same. The sanctioning Court has to see that all the requisite statutory

procedure for supporting such scheme has to be complied with and the requisite meetings as contemplated u/s 391(A)(a) have been held. The

scheme put up for sanction of the Court is backed up by the requisite majority vote as required u/s 391(2)(iii). That all the necessary materials

indicated by Section 393(1)(a) is placed before the voters at the meeting concerned as contemplated by Section 391. The Company Court has to

apply its mind to the public interest involved in the merger and Section 394 cast upon an obligation to the Court to be satisfied to the scheme of

amalgamation or merger was not contrary to public interest.

In view of our discussion as to the exchange ratio of the shares of the transferee Company and transferor Company arrived at by the experts

are followed in the Scheme, there cannot be any complaint as to the exchange ratio i.e., 1:3 being against public interest. The premium of Rs.5/- for

each equity share as provided in the scheme and the provision for accounting the same and the purpose for which the amount so accounted could

be utilised are all governed by Section 78 of the Companies Act. Hence, the applications for approval of the Scheme in our considered view

deserve to be allowed.

In view of the above discussion, we are of the view that the reasoning given by the learned Judge is not in accordance with law and as such it is

not sustainable and it has to be set aside. Both the Original Side Appeals are allowed setting aside the Order dated 25.4.2002 made in the

Company Petitions in C.P.Nos.227 and 228 of 2001 and thereby the scheme as filed along with the applications are approved. The appellant

Companies do file with the Registrar of Companies, Chennai a certified copy of the Order within 30 days from the date of receipt of copy of this

order. The parties to the Scheme of amalgamation or other persons interested shall be at liberty to apply this Court for any direction that may be

necessary with regard to the carrying out of the Scheme.

Consequently, the connected C.M.P.Nos.6940, 6941 and 7700 of 2002 are also allowed and the appellant Companies are hereby granted time

for holding their respective Annual General Meetings and placing the annual accounts of the appellant Companies for the period ended 31.12.2001

before the Annual General Meeting of the Appellant Companies within 60 days from the date of the Order. C.M.P.No.7700 of 2002 is also

allowed granting extension of time to Annamallai Finance Limited for compliance with Clause 41 of the listing agreement for publishing the Audited

Annual Accounts of the Company for the period ended 31.12.2001 within the expiry of 60 days from the date of order. The transferee Company

herein is directed to pay a sum of Rs.2,500/- (Rupees two thousand and five hundred only) each to the Additional Central Government Standing

Counsel.

ORDER

Order of the Court was made by K. Raviraja Pandian, J.

These appeals are posted today for being mentioned in order to give certain directions to the Official Liquidator, which are as follows:

The Scheme of amalgamation as filed along with the application is sanctioned. The Scheme shall take effect from the date mentioned as the

effective date in the Scheme.

As regards the transferor Company Shiva Texyarn Limited, it shall make available all the records to the Official Liquidator. The Official

Liquidator shall submit his report to the Company Court within four weeks from today.

The transferee Company shall make available sufficient funds to the Official Liquidator to have the investigation carried out.

For further direction, it is open to the parties to approach the Company Court.