IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION COMPANY PETITION NO.639 OF 2009 CONNECTED WITH COMPANY APPLICATION NO.597 OF 2009 STRIDES ARCOLAB LIMITED …Petitioner / Transferee Company. In the matter of Sections 391 to 394 read with Sections 78, 100 to 104 of the Companies Act, 1956. AND In the matter of Composite Scheme of Arrangement of Global Remedies Limited (‘the First Transferor Company’) AND Grandix Pharmaceuticals Limited (‘the Second Transferor Company’) AND Grandix Laboratories Limited (‘the Third Transferor Company’) AND Quantum Remedies Private Limited (‘the Fourth Transferor Company’) AND Strides Arcolab Limited (‘the Transferee Company’) AND their respective Shareholders and Creditors Mr Virag Tulzapurkar, Senior Counsel with Mr. Rajesh Shah i/b Rajesh Shah & Co., for the Petitioners. Mr. C.J. Joy with Mr. D. A. Dube i/b Mr. S.K. Mohapatra for Regional Director. CORAM: S. J. Kathawalla, J. DATE: 30th September, 2009 PC: 1. Heard learned counsels for the parties. 2. The sanction of the Court is sought under Sections 391 to 394 read with Sections 78, 100 to 104 of the Companies Act, 1956, to the Composite Scheme of Arrangement of Global Remedies Limited, the First Transferor Company, 2 Grandix Pharmaceuticals Limited the Second Transferor Company, Grandix Laboratories Limited the Third Transferor Company, Quantum Remedies Private Limited, the Fourth Transferor Company and Strides Arcolab Limited, the Petitioner / Transferee Company and their respective Shareholders and Creditors. 3. The learned Counsel appearing on behalf of the Petitioner has stated that they have complied with all requirements as per directions of this Court and they have filed necessary affidavits of compliance in the Court. Moreover, Petitioner Companies also undertake to comply with all statutory requirements, if any, as required under the Companies Act, 1956 and the Rules made thereunder. 4. The Regional Director has filed Affidavit stating therein that save and except as stated in paragraph 6 of the said Affidavit, the scheme does not appear to be prejudicial to the interest of shareholders and public. 3 5. The Counsel appearing for the Regional Director has drawn my attention to paragraph 6 of the affidavit of the Regional Director which states as under: “ (a) One complaint is reported by the Registrar of Companies, Mumbai as pending against the Transferee Company alleging non-receipt of dividend by a member and the said company appears to be in process of resolving the grievance as it asked the said company to furnish the said details. The related correspondence has been enclosed to the Registrar of Companies, Mumbai’s report dated 25/08/2009. (b) The foreign equity holding in the Transferee Company is around 53.02%. Hence, Transferee Company may be directed to file a copy of the scheme along with a copy of this Hon’ble Court’s order thereon, within 30 days of passing of the order with the Reserve Bank of India. 4 (c) From the details of the related party transactions submitted by the Transferee Company, it is seen that it had given a deposit of Rs. 8.50 crores to M/s Atma Projects, a firm in which the Key Management Personnel of the Transferee Company is interested, which prima facie attracts the provisions of section 295 of the Companies Act, 1956. This deposit is given to Atma Projects for construction of an office complex which is proposed to be taken on lease by the Transferee Company on the terms to be negotiated. Since, the Transferee Company did not obtain prior approval of the Central Government for placing the deposit, it is liable for violation of Section 295 of the Companies Act, 1956. Similarly, it had given deposit of Rs.4.48 crores to M/s Chayadeep Properties Private Limited, a director related company, which appears to violate provisions of section 295. The Registrar of Companies, Mumbai 5 is being advised to take necessary penal action in the above matter. (d) The Transferee Company had paid excess managerial remuneration amounting to Rs.27.05 million and Rs.24.39 million to its Key Managerial Personnel for the year ending 31/12/2007 and 31/12/2008 and for which the approval of the Central Government have not been obtained as on the dates of approval of the Balance Sheets as at 31/12/2007 and 31/12/2008 by the Board of the Transferee Company. (e) The scheme proposes to account the amalgamation by purchase method and hence, the surplus, if any, on account of the same shall be credited to Capital Reserve in the Books of the Transferee, whereas, the scheme envisages, the same to credit General Reserve which is not in conformity with the provisions of Accounting Standard No.14. 6 (f) A combined reading of the provisions of clause 11.9 to 11.15 of the Scheme show that the Transferee Company proposes to write off revenue losses like general impairment in assets / diminution in investments, financial charges paid / payable and other interest cost etc to Securities Premium Account through a Business Restructuring Account and thereafter, in case any balance remains thereof, to transfer the same to General Reserve. This treatment does not appear to be in conformity with the requirements of Accounting Standard 14 read with section 78 and section 211 of the Companies Act, 1956. The above, in effect, would effect the financials of the Transferee Company as follows:- (i) While the past losses could be written off to the Securities Premium Account, the current Revenue expenses and losses are also proposed to be written off to the Securities 7 Premium Account; which may not reflect the current and future financial performance of the Company. (ii) Transfer of the balance in Business Restructuring Account after adjusting the “expenses” as defined in the Scheme, to general reserve would enable the Transferee Company to use the same for declaring dividends, which is not in conformity with the law. (iii) That the time line for implementation of the Scheme as also the maximum amount of losses / expenses that could be written off are not mentioned in the Scheme. The Advocate for the petitioner company in his letter dated 27/08/2009 had stated that petitioner companies have no transactions falling under section 269 and 295 of the Companies Act, 1956 during the last three years. This appears to be an 8 incorrect statement in the light of the facts mentioned as Para 6 (c) & (d) above.” 6. In this regard, the Petitioner Company has filed its affidavit dated 24th day of September, 2009 in reply to the above observations made by the Regional Director and categorically dealt with all the objections the details of the same are as under: (a) With respect to paragraph 6(a) of the Regional Director’s Affidavit, the Petitioner Company in paragraph 3 of its affidavit has undertaken to redress the said grievance immediately on receipt of further information from a shareholder / member. (b) With respect to paragraph 6(b) of the Regional Director’s Affidavit, the Petitioner Company in paragraph 5 of its affidavit, has undertaken to file a copy of the Scheme and the Order of this Court sanctioning the Scheme with the Reserve Bank of India within 30 days of the date of the order. 9 (c) With regard to paragraph 6(c) of the Regional Director’s Affidavit, the Petitioner Company in paragraph 7 of its affidavit, has submitted that these are not violations per se for reasons cited therein. Notwithstanding the same, the Petitioner Company has undertaken to co-operate and provide the necessary clarification in support of its contention to the concerned authority, as may be required. (d) With respect to paragraph 6(d) of the Regional Director’s Affidavit, the Petitioner Company in paragraph 10 of its affidavit has submitted that it has obtained approval of Central Government for waiver of recovery of excess managerial remuneration paid for the year 2007 on 22nd July, 2009. On receipt of the approval for 2007, the Petitioner Company as required under section 309 (5B) of the Companies Act, 1956, applied to the Central Government for waiver of recovery of the 10 excess remuneration so paid for the year 2008. This application is pending with the Central Government. Accordingly, the Petitioner Company has complied with the provisions of section 309 for excess managerial remuneration paid by the Petitioner Company. (e) With regard to paragraph 6(e) of the Regional Director’s Affidavit, the Petitioner Company has made its detailed submissions in paragraph 12 to 19 of its affidavit dated September 24, 2009. The Petitioner Company has further relied upon decision of this Court made on 11th September, 2009 in Company Petition No. 300 of 2009 in the matter of Laxmi Udyog Components Private Limited wherein a similar objection raised by the Regional Director was held as untenable. The Petitioner Company has also relied on the judgment of this Court (A. M. Khanwilkar, J) delivered on 22nd June, 2009 11 in Company Petition No.293 of 2009 in the matter of Hindalco Industries Limited, wherein similar issue was raised by some of the shareholders who had opposed the Petition, inter- alia, on the ground of violation of Accounting Standards. In view of the above, the Petitioner Company has submitted that there is no violation of AS 14 as an accounting treatment different from paragraph 37 is permissible under AS 14 provided disclosure as stipulated under paragraph 42 is made. Under clause 11.8 of the Scheme, it is proposed that surplus arising on amalgamation shall be transferred to Reserve for Business Restructuring and the balance, if any, shall be transferred to General Reserve. Such accounting treatment does not appear to be in violation of AS 14 if adequate disclosures are made in this regard. The Petitioner Company has undertaken that it shall make necessary disclosures as 12 contemplated in paragraph 42 of Accounting Standards (AS-14) issued by Institute of Chartered Accountants of India. (f) With respect to the paragraph 6(f) of the Regional Director’s Affidavit, the Petitioner Company in paragraph 24 of its affidavit has submitted that the Petitioner Company propose to utilize the amount lying in the Securities Premium Account for the purposes as mentioned in Para 11.12 of the Scheme, which does not fall under the ambit of section 78(2) and therefore the Petitioner Company is required to comply with the provisions relating to reduction of share capital under section 100 of the Companies Act, 1956. It has been further stated that a separate meeting of the equity shareholders of the Petitioner Company was held on Wednesday, the 24th day of June 2009 for the purpose of considering and if thought fit approving with or without modification 13 the special resolution under section 100 read with section 78 of the Companies Act, 1956 for carrying out the reduction of capital of the Petitioner Company arising out of and as an integral part of the Scheme. In the said meeting, the equity shareholders of the Petitioner Company have approved the special resolution with requisite majority approving the transfer of balance of Securities Premium Account of the Petitioner Company to Reserve for Business Restructuring. Therefore, the Petitioner Company has complied with the provisions of section 78 read with section 100 of the Companies Act, 1956. (g) With respect to the observation of the Regional Director in paragraph 6(f)(i) of the Regional Director’s affidavit on writing off revenue losses against the Securities Premium Account, the 14 Petitioner Company in paragraph 28 of its affidavit has stated that as per paragraph 5 of the Accounting Standard 5 on Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies issued by ICAI, all items of income and expense which are recognised in a period should be included in the determination of net profit or loss for the period unless an Accounting Standard requires or permits otherwise. Essentially, it requires all revenue expenses to be debited to Profit & Loss Account for arriving at net profit or net loss for the concerned period. However, as described in para 17, as per section 211 of the Companies Act, 1956, deviation from the accounting standard is permissible subject to compliance with disclosure requirement as required under section 211(3B). The Petitioner Company has undertaken that complete disclosure of the amounts adjusted 15 against Reserve for Business Restructuring would be made so that the shareholders of the company are kept informed about the adjustments made by the Petitioner Company. (h) With respect to the submission made by Regional Director in paragraph 6(f)(ii) of the Regional Director’s affidavit, the Petitioner Company has undertaken in paragraph 31 of its affidavit, to transfer the balance in the Reserve for Business Restructuring to the Securities Premium Account. (i) With respect to the observation made by Regional Director in paragraph 6(f)(iii) of the Regional Director’s affidavit, the Petitioner Company has submitted that maximum amount of losses that could be written off against the Reserve for Business Restructuring would be restricted to the balance in Reserve for Business Restructuring and not beyond that. Therefore, it is not considered necessary to mention the maximum amount in 16 the Scheme. 7. The Counsel for the Regional Director states that it is necessary that the Scheme should provide for the time line for implementation of the Scheme. The learned Counsel for the Petitioner Company, on behalf the Company, states that the Petitioner Company has no difficulty in providing for the timeline for implementation of the Scheme. The learned Counsel for the Petitioner Company, based on the instructions from the Petitioner Company has proposed amendments in clause 11.13 and clause 11.15 of the Scheme. Accordingly, clause 11.13 and clause 11.15 of the Scheme stands substituted as under: “11.13 For the preparation of Financial Statements of Strides Arcolab, expenses illustrated in clause 11.12, incurred by Strides Arcolab or its subsidiaries to the extent 17 applicable, shall be adjusted against the Reserve for Business Restructuring created pursuant to the Scheme, instead of being debited to Profit & Loss Account of Strides Arcolab on or at any time after January 1, 2009 but on or before December 31, 2012, as the case may be. 11.15 As and when the Board of Strides Arcolab determines that a part or whole of the balance remaining in the Reserve for Business Restructuring is no longer required to adjust the expenses illustrated in clause 11.12, then such part or whole of the balance so determined shall be transferred to the Securities Premium Account of Strides Arcolab. In any case, on or before December 31, 2012, the remaining balance in the Reserve for Business Restructuring shall be transferred to the Securities Premium Account of Strides Arcolab.” 18 8. One of the shareholders of the Petitioner Company, Mrs. Homayun B. Pouredehi has filed her objections vide affidavit dated 2nd July, 2009 and her principal objections are as follows: (a) That she could not contact the Petitioner Company before the Court convened Meeting as the telephone numbers of the Petitioner Company was not mentioned in the Notice convening the meeting of the Equity Shareholders of the Petitioner Company. (b) That she was not appointed as Scrutinizer for the above said meeting in spite of her application to be appointed as Scrutinizer. (c) That the Chairman for the above said meeting could not answer any questions put to him by the shareholders. Further the Chairman could not answer how the Scheme of Amalgamation was going to benefit the minority shareholders and 19 how the liabilities of the Subsidiary Transferor Companies would be reflected in the Balance Sheet of the Petitioner Company. (d) That the Valuation Report on the Share Exchange Ratio was not provided to her. (e) That the Valuation Ratio was not justified and the same is not theoretically correct and not explained by the directors. (f) That with the exception of the CFO and the Company Secretary of the Petitioner Company and no directors were present at the above said meeting (g) That the copies of the accounts of the four Transferor Companies have not been provided to her. (h) That the address of the Chartered Accountant Firm which did the Valuation, was not provided to her. (i) That the Fairness Opinion on the Share Swap 20 Ratio was not made available to the shareholders. (j) That the details of the fees paid to the two Scrutinizers were not shared with her. (k) That the results of the poll for the above said meeting were not provided to her. 9. In this regard, the Petitioner Company has filed its affidavit dated 24th September, 2009 in reply to the above objections made by the said intervener and categorically dealt with all the objections, the submissions of the Petitioner Company are as under: (a) With regard to the objection of the intervening shareholder as per paragraph 8(a) above, the Petitioner Company has submitted that it was open for all the shareholders to check the contact number and e-mail address of the officer-in- charge of investor relations on the Petitioner Company’s website. Further, the contact information for the Petitioner Company is 21 available in the public domain. (b) With regard to the objection of the intervening shareholder as per paragraph 8(b) above, the Petitioner Company has submitted that the Petitioner Company has acknowledged that at 02.15 p.m. on the day of the Court Convened Meeting, the intervening shareholder made a written application to be appointed as Scrutinizer. The Petitioner Company had appointed Mr. Nilesh Shah, Practicing Company Secretary as First Scrutinizer. Upon a request received in writing from Mrs. C.E Mascarenhas through fax on June 2, 2009 evincing her interest to be appointed as scrutinizer, the Petitioner Company had appointed her as the Second Scrutinizer for the poll. (c) With regard to the objection of the intervening shareholder as per paragraph 8(c) above, the Petitioner Company has submitted that the shareholders queries were answered jointly by the 22 Mr. T.S. Rangan, Group – CFO acting as Chairman of the meeting and the Company Secretary assisting the discussions. A detailed power point presentation was made to shareholders before putting the resolution to vote and all questions raised by the shareholders were answered to their satisfaction. Further, there was a specific slide in the presentation titled ‘What is it for me’ which covered the impact of the Scheme to minority shareholders. The Scheme is to merge four of the subsidiaries of the Petitioner Company with itself and on a consolidated basis there will not be any change in the financials of the Petitioner Company except for issuance of approximately 20,000 new shares which constitute 0.0005% of the paid up capital of the Petitioner Company. (d) With regard to the objection of the intervening shareholder as per paragraph 8(d) above, the Petitioner Company has submitted that the 23 valuation report was sent to the intervening shareholder through courier and the same was received by the shareholder. (e) With regard to the objection of the intervening shareholder as per paragraph 8(e) above, the Petitioner Company has submitted that the valuation of shares was carried out by independent Chartered Accountant and as required under law, a fairness opinion on the valuation was also obtained. It is further submitted that the Stock Exchanges where the shares are listed, i.e., Bombay Stock Exchange Limited and National Stock Exchange of India Limited has also given their No objection to the Scheme. (f) With regard to the objection of the intervening shareholder as per paragraph 8(f) above, the Petitioner Company has submitted that the Court had appointed Mr. T.S. Rangan, Group CFO of the 24 Petitioner Company, as one of the Chairman for conducting the proceedings and presence of Director in a court convened meeting is not mandatory. (g) With regard to the objection of the intervening shareholder as per paragraph 8(g) above, the Petitioner Company has submitted that the copies of the accounts of the Transferor Companies were sent to the intervening shareholder through courier and the same was received by her. (h) With regard to the objection of the intervening shareholder as per paragraph 8(h) above, the Petitioner Company has submitted that as the valuation report was sent to the intervening shareholder, the intervening shareholder could always obtain the address from the copy of the valuation report. (i) With regard to the objection of the intervening shareholder as per paragraph 8(i) above, the 25 Petitioner Company has submitted that the fairness opinion was made available for inspection at the registered office of the Petitioner Company and the same was mentioned in the notice convening the above said meeting. (j) With regard to the objection of the intervening shareholder as per paragraph 8(j) above, the Petitioner Company has provided the details of fees paid to the two Scrutinizers in its affidavit, the copy of the same was served upon the intervening shareholder. (k) With regard to the objection of the intervening shareholder as per paragraph 8(k) above, the Petitioner Company has submitted that the result of the postal ballot was announced to the Stock Exchanges around 06.30 p.m. on the same day after counting of results. The outcome of poll was also mailed to the intervening shareholder on the 26th day of June, 2009. 26 10. I have perused the grounds raised by the intervener in her affidavit dated 2nd July, 2009 and the submissions made by the Petitioner Company in their affidavit dated 24th September, 2009. The intervening shareholder has filed an affidavit in rejoinder in reply to the affidavit filed by the Petitioner Company on the date of the hearing, the cognizance of the same is not considered necessary. The learned Counsel appearing on behalf of the Petitioner Company has drawn my attention to the said rejoinder and has submitted that the same is baseless. I do not see any reason for not sanctioning the proposed scheme. I am rejecting the objections raised by way of affidavits filed by the said intervener. 11. Taking overall view of the above matter and upon perusal of the entire material placed on records, the Scheme appears to be fair and reasonable and is not violative of any provisions of law and is not contrary to any public policy. None of the parties concerned has come forward to oppose the Scheme except the affidavits filed by the 27 intervener. Moreover, the Regional Director has stated that the Scheme as proposed is not prejudicial to the interest of shareholders, creditors and the public save and except as stated in paragraph 6(a) to (f) of the affidavit filed by him. 12. As far as the Transferor Companies are concerned, there are four Transferor Companies, which are Global Remedies Limited, Grandix Pharmaceuticals Limited, Grandix Laboratories Limited and Quantum Remedies Private Limited. The company petitions of Global Remedies Limited, Grandix Pharmaceuticals Limited and Grandix Laboratories Limited have been admitted by the High Court of Judicature at Madras and the same are due for final hearing on 7th October, 2009. The company petition of the fourth transferor company viz. Quantum Remedies Private Limited has been admitted by the High Court of Karnataka and the final hearing is already scheduled on 22nd October, 2009. 28 13. There is no objection to the Scheme save and except as stated in paragraphs 8 hereinabove since all the requisite statutory compliances have been fulfilled and the Petitioner Company has given undertakings with respect to the observations made by the Regional Director to comply with all the statutory requirements, Company Petition No. 639 of 2009, filed by the Petitioner Company is made absolute in terms of prayer clauses (a) to (c) of the Petition. The undertakings given hereinabove are accepted. Further, the Registrar of Companies and the Regional Director shall have liberty to take any legal action in respect of any violations as mentioned in the affidavit of the Regional Director, in accordance with law as may be advised. 14. The Petitioner Company to lodge a copy of this order and the Scheme duly authenticated by the Company Registrar, High Court (O.S.), Bombay with the concerned Superintendent of Stamps for the purpose of adjudication 29 of stamp duty payable, if any, on the same within 60 days from the date of the order. 15. The Petitioner in Company Petition to pay costs of Rs.7,500/- to the