COMP/216/2007 1/35 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD COMPANY PETITION No. 216 of 2007 For Approval and Signature: HONOURABLE MR.JUSTICE K.A.PUJ ==================================== 1. Whether Reporters of Local Papers may be allowed to see the judgment ? 2. To be referred to the Reporter or not ? 3. Whether their Lordships wish to see the fair copy of the judgment ? 4. Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5. Whether it is to be circulated to the civil judge ? ==================================== THE ARVIND MILLS LIMITED - Petitioner Versus . - Respondent ==================================== Appearance : MRS SWATI SOPARKAR for Petitioner. MR HARIN P RAVAL, ASSISTANT SOLICITOR GENERAL WITH MR RASHMIN M CHHAYA for Respondent. ==================================== COMP/216/2007 2/35 JUDGMENT CORAM : HONOURABLE MR.JUSTICE K.A.PUJ Date : 16/05/2008 ORAL JUDGMENT 1. The petitioner has filed this petition for sanctioning the Scheme of Arrangement in the nature of De- merger and transfer of Public Mobile Radio Trunking Services Business Division (PMRTS Business Division) of the Arvind Mills Limited to Arya Omnitalk Radio Trunking Services Private Limited (AORTSPL). 2. The petitioner De-merged Company was registered on 01.06.1931 under the Indian Companies Act, 1913 as a limited Company in the office of Registrar of Companies, Mumbai. The petitioner De-merged Company started its business in the year 1931 and has been carrying on since then. The petitioner Company is a flagship Company of the Arvind Group, having business spanning across entire value chain of textiles. The main business of the petitioner Company was manufacturing and marketing of textile products and COMP/216/2007 3/35 JUDGMENT the petitioner Company got listed in the year 1956 with Ahmedabad Stock Exchange. It is one of the largest exporters in India, also one of the largest manufacturers of denim in the world. It also produces a range of premium cotton shirting and knits. The petitioner De-merged Company has been rapidly expanding its operations in garments. The turnover of the petitioner De-merged Company during the last financial year i.e. 2006-07 has been Rs.1844.91 Crores including the export turnover and the profit is Rs.119.56 Crores. 3. The petitioner De-merged Company had started its PMRTS Division in the year 1995-96 when it decided to venture into Telecom business. The Company was granted the operating licenses to provide Public Mobile Radio Trunking Service (PMRTS) in several cities in India viz. Delhi, Mumbai (including Vashi), Faridabad, Chennai, Bangalore, Ahmedabad, Vadodara and Surat. The Company as on today holds valid licenses in all the cities and is rendering the services of PMRTS to its many subscribers. It collects Airtime COMP/216/2007 4/35 JUDGMENT charges from its customers. However, considering from the viewpoint of the Company as a whole, at present, the PMRTS division forms a very small part of the business of Arvind. As per the Certificate issued by the Chartered Accountant of the Company , during the financial year 2006 – 07, the turnover of PMRTS division was only 0.27% of the total turnover of the Company and the profit contribution was only 0.36 Crore of the total profit of the Company of Rs.122 Crores. The Company, therefore, realized that in order to achieve a sustained growth and development of these two distinct business activities, it is necessary that the future growth strategies for them are devised separately. Accordingly, it has been proposed to spin off the PMRTS division to a different Company. The petitioner De-merged Company has also identified expansion possibilities for this business and has decided to enter into a joint venture with the Arya group who also has similar interests in this sector. 4. Arya Omnitalk Radio Trunking Services Private Limited, AORTSPL, (“the Resulting Company”) was COMP/216/2007 5/35 JUDGMENT incorporated on 22.07.2003 in the office of the Registrar of companies, Maharashtra under the provisions of the Companies Act, 1956. Since PMRTS division of Arvind and the Resulting Company are engaged in the similar line of business, the Board of Directors of both the Companies thought it appropriate to have an independent set up with specific objective of undertaking the Telecom business. The management of the petitioner De-merged Company considers that the demerger of the PMRTS Business of the Company into AORTSPL shall help to achieve the following objectives :- ➢ Consolidation of various licenses pertaining to the PMRTS Business for all cities / regions into one entity to enable ease of operation and introduce considerable synergies; ➢ To achieve economies of scale by curtailing unnecessary costs associated in carrying on of the PMRTS business separately; ➢ To ensure a focused approach towards expansion / diversification of the PMRTS Business, so as to become leading players of this business. COMP/216/2007 6/35 JUDGMENT ➢ To achieve administrative and operative efficiency and achieve cost effective operations. ➢ To achieve higher profitability due to optimum utilization of the combined resources of both the entities. 5. Considering the aforesaid objectives, it is anticipated that the proposed arrangement shall be advantageous to both the business groups. 6. In view of the above circumstances, the Board of Directors of the petitioner De-merged Company vide Resolution passed in the Board meeting dated 12.05.2007 resolved that subject to such approvals of both Equity and Preference Shareholders and subject to such directions and sanctions of the appropriate Court, as may be required in law, and subject to such consents and permissions of the Central Government and other authorities as may be necessary, the Scheme of Arrangement be made between ARVIND and AORTSPL on the broad basis referred to in the Scheme of Arrangement. COMP/216/2007 7/35 JUDGMENT 7. This Court vide its order dated 19.09.2007 directed the petitioner De-merged Company to convene separate meetings of the Equity Shareholders and Preference Shareholders of the Company for the purpose of considering and if thought fit, approving with or without modifications, the said Scheme of Arrangement and the said order directed that Shri Sanjay S. Lalbhai, the Director of the petitioner De- merged Company and failing him Shri Jayesh K. Shah, the Director of the petitioner De-merged Company and failing him Shri Anang Lalbhai, the Authorized Officer of the petitioner De-merged Company be appointed as Chairman of the meetings and to report the result thereof to this Court. The notice of the meetings was sent individually to all the Equity Shareholders and Preference Shareholders of the Company as required by the order together with copy of Scheme of Arrangement, the Explanatory Statement required under Section 393 (1) (a) of the Act and a Form of Proxy. The notice of the meetings was also advertised as directed by the said order in Indian COMP/216/2007 8/35 JUDGMENT Express – English Daily and Gujarat Samachar – Gujarati Daily – both Ahmedabad Editions dated 06.10.2007. It is directed in the order dated 19.09.2007 that separate meetings of the Equity Shareholders and Preference Shareholders were duly convened and held on 01.11.2007. Shri Anang Lalbhai, the Authorized Officer of the petitioner De- merged Company acted as Chairman of the same. Shri Anang Lalbhai has reported the result of the meetings to this Court along with the affidavit dated 06.11.2007. The said meeting of the Preference Shareholders of the Company convened on 1.11.2007 was attended by 4 Preference Shareholders of the said Company either personally or by proxy entitled together to Rs.33,30,00,000/- being 55,50,000/- Preference Shares of Rs.100/- each. The said Scheme of Arrangement was taken as read with the permission of all the Preference Shareholders present at the meeting. The detailed discussions and deliberations were made on the proposed Scheme. The poll was taken to ascertain the wishes of the Preference Shareholders, which showed that all the four Preference Shareholders COMP/216/2007 9/35 JUDGMENT present in person or through proxy representing the value of Rs.33,30,00,000/- participated in the voting and all of them voted in favour of the proposed Resolution. Thus, the resolution approving the Scheme of Arrangement was carried unanimously i.e. 100% in number and 100% in value of the Preference Shareholders present and voting at the said meeting. 8. The meeting of the Equity Shareholders of the Company convened on 1.11.2007 was attended to by 123 Equity Shareholders of the said Company either personally or by proxy entitled together to Rs.73,43,52,260/- being 7,34,35,226/- Equity Shares of Rs.10/- each. The said Scheme of Arrangement was taken as read with the permission of all the Equity Shareholders present at the meeting. The detailed discussions and deliberations were made on the proposed Scheme. The poll was taken to ascertain the wishes of the Equity Shareholders which showed that out of the Equity Shareholders present at the meeting, nine Shareholders abstained from voting. The vote of one Equity Shareholder holding shares of Rs.1000/- COMP/216/2007 10/35 JUDGMENT having voted in favour of the Resolution was found to be invalid as the poll paper was not signed. Votes of ten Equity Shareholders are having no balance in the Register of the Company. All the remaining 103 Shareholders present and casting valid votes having the value of their shares of Rs.73,43,39,620/- being 7,34,33,962 Equity Shares of Rs.10/- each voted in favour of the proposed Scheme. Thus, the Resolution approving the Scheme of Arrangement was carried unanimously i.e. 100% in number and 100% in value of the Equity Shareholders present and voting at the meeting. 9. Since the proposed Scheme of Arrangement has been duly approved unanimously by the Equity Shareholders and Preference Shareholders, the petitioner De- merged Company is required to move this Court for seeking sanction to the Scheme of Arrangement as and by way of this petition. 10.This Court after hearing Mr. S. N. Soparkar, learned Senior Counsel appearing with Mrs. Swati Soparkar COMP/216/2007 11/35 JUDGMENT for the petitioner De-merged Company, on 07.12.2007, admitted the petition and the petition was ordered to be heard on 28.12.2007. An order of advertisement was passed and the petitioner was directed to publish advertisement in Indian Express – English Daily and Gujarat Samachar – Gujarati Daily – both Ahmedabad Editions. Publication in Govt. Gazette was dispensed with. Notice was issued to the Central Government through Regional Director, Department of Company Affairs. 11.Pursuant to the order dated 07.12.2007, the notice of the petition has been got advertised in the two newspapers on 18.12.2007 as directed by this Court. Copies of the said publications are produced on the record along with the Affidavit dated 27.12.2007. Notice of the petition was also served upon the Regional Director and acknowledgment for the same was annexed along with the said Affidavit. 12.Pursuant to the notice issued to the Regional Director, an affidavit is filed by Mr. R. K. Dalmia, Dy. Registrar COMP/216/2007 12/35 JUDGMENT of Companies on 12.03.2008 along with which communication dated 10.03.2008 issued by the Joint Director (Technical) for Regional Director was annexed. It is stated therein that in view of Clause 6 of the Scheme, the petitioner Company could have opted for the provisions of Section 293 (1) (a) of the Companies Act, 1956 instead of Scheme of Arrangement under Section 391 / 394 of the Act. The petitioner Company was also directed to furnish latest financial position before this Court at the time of hearing. 13.In response to the affidavit of the Deputy Registrar, an additional affidavit was filed on behalf of the petitioner Company by Mr. R. V. Bhimani, Company Secretary and Authorized Signatory of the petitioner De-merged Company. With regard to the first observation made by the Regional Director, it was stated in the said affidavit that the said Section deals with the Powers of the Board to sell or dispose off whole or part of its undertaking with the consent of its shareholders at the general meeting. Though this is only an alternative, COMP/216/2007 13/35 JUDGMENT the Company is not statutorily required to follow only this option. Further, it was pertinent to note that particularly, in the present case, the undertaking proposed to be transferred viz. PMRTS Division is engaged in the telecom business under a specific license issued by the Government of India through Ministry of Communication and IT Department of Telecommunications. The said license being not transferable, the undertaking could not have been sold or transferred as envisaged under Section 293 (1) (a) of the Companies Act. Under the Circular issued by the Ministry of Communication & IT Department of Telecommunications on 02.06.2003, some relaxation was given for the transfer of an undertaking with such a license. It is specifically provided that such a license can be transferred when the undertaking is being transferred under a Scheme under Section 391 / 394 of the Companies Act, when the same is sanctioned by this Court. Considering the precondition attached to the said license under which the Company carries on it said activity, the Company could not have followed the provisions of Section 293 (1) (a) of the Companies Act, COMP/216/2007 14/35 JUDGMENT for the proposed transfer of the undertaking viz. PMRTS Division. The petitioner De-merged Company has also annexed the latest financial statement of the company in form of the Provisional Balance Sheet as at 31st December 2007 along with the affidavit of the Company Secretary. 14.After the objections raised by the Deputy Registrar of Companies and after the reply affidavit filed by the Company Secretary on behalf of the petitioner De- merged Company, further affidavit was filed by Mr. R. K. Dalmia, Deputy Registrar of Companies. Mr. Harin P. Raval, learned Assistant Solicitor General appearing with Mr. Rashmin M. Chhaya, for Central Government have made their submissions on one or two occasions. At the time of final hearing of this petition, Mr. Chhaya has submitted that further affidavit was filed by the Deputy Registrar to elaborate the observations and to point out even correct facts placed before this Court for consideration of the objection of the Central Government to the effect that the present Scheme in fact, is a camouflage, more particularly with a view to COMP/216/2007 15/35 JUDGMENT sell / transfer the license “Public Mobile Radio Trunk Service”. He has further submitted that pursuant to announcement of New Telecom Policy, 1999 (NTP-99), Government of India, Department of Telecom decided to migrate existing Public Mobile Ratio Trunk Service (PMRTS) licenses to NTP-99 regime and issue additional licenses. Thereunder, existing operators are allowed to migrate to digital technology at their option. The existing operators are also given preference for migration to digital technology. Therefore, fresh licenses are to be considered after verifying the requirement of frequency spectrum in a particular service area. That the following options under the migration for existing operators are open for PMRTS :- i. That the existing operators shall be required to give preference for migration to digital technology and, therefore, fresh licenses shall be considered after verifying the requirement of frequency spectrum in a particular service area. ii. All existing licensees were to intimate their willingness COMP/216/2007 16/35 JUDGMENT for migration to digital technology within a period of one month and may be required to sign a fresh license agreement in terms of the NTP-99. iii.The license of existing operators, who are not willing to migrate, to the new licensing regime, would be extended, if requested, up to another ten years so as to make the total license period upto 15 years for continuing with analoguc systems during which period the operators may change over to digital technology. However, no spectrum will be kept reserved for them. iv.In case of operators willing to migrate to the digital technology, they shall be allocated upto 1 Mhz additional frequency Spectrum Digital Technology and shall be directed to transfer their network positively within a period of two years from the date of letter of confirmation in this regard and in such cases, license agreement of these operators would be extended so as to make the total license period of 20 years. While this is done, these guidelines are contained in the letter No. 311-80/2000-VAS dated 01.11.2001 of the Licensing Cell (Value Added Service Group), Department of Telecommunications, Government of India. 15.Mr. Chhaya has further submitted that the said letter COMP/216/2007 17/35 JUDGMENT also simultaneously lays down detailed guidelines. It is laid down that fresh PMRTS licenses shall be granted after assessment of migration of existing operators to digital technology and availability of spare frequency spectrum in a particular service area since implementation of above policy is solely dependent on the availability of frequency spectrum. It lays down that new licenses for operation of PMRTS shall be granted on non-exclusive “first cum first serve” basis. It also lays down that one Mhz frequency spectrum shall be allotted at the time of grant of license, the period whereof shall be 20 years and it would bind the licensee to use only digital technology. It also envisages entry free and license fee. It provides that there would be no entry fee, but license fee for comer PMRTS system shall be 5% of the 'Adjusted Gross Revenue' (AGR) from the Service and for captive PMRTS system, the license fee shall be Rs.300/- p.a. per terminal with a minimum of Rs.25,000/- p.a. per licensed area. It also provides that there shall be separate charges for use of Radio Spectrum. COMP/216/2007 18/35 JUDGMENT 16.Mr. Chhaya has referred to para 10 of the guidelines which lays down the transfer of license. The same reads as under :- “10. Transfer of License : Without the prior written permission of licensor, the licensee will not assign or transfer its rights in any manner whatsoever under the license to a third party or enter into any agreement for sub-license and/or partnership relating to any subject matter of the license to any third party either in whole or in any part i.e. no sub-leasing / partnership / third party interest shall be created. However, transfer of PMRTS license may be permitted by the Licensor in case the proposed transferee Company meets the conditions of eligibility for grant of a fresh PMRTS license.” 17.Mr. Chhaya has, therefore, submitted that without prior permission of the licensor, the licensee is obliged under the said Policy not to assign or transfer its rights in any manner whatsoever under the license to a third party or enter into any agreement for sub-license and/or partnership relating to any subject matter of the license to any third party either in whole or in part, that is, there shall be no sub-leasing / partnership or third party interest created. It specifically provides COMP/216/2007 19/35 JUDGMENT that transfer of PMRTS license may be permitted by the Licensor only in case where the proposed transferee Company meets with the conditions of eligibility for grant of a fresh PMRTS license. Thus, in absence of fulfillment of eligibility conditions by the transferee, transfer is impermissible under the Policy. Further more, bare perusal of para 10 thereof indicates that prior written permission of licensor would be required for transfer of rights in any manner. Eligibility of criteria as discernible from the said Policy are as under :- A) Clearance of all dues of DoT in respect of all payments arising out of any license granted under Section 4 of Indian Telegraph At, 1885 (including Indian Wireless Telegraphy Act, 1933) to the Company or any promoter / partner or associate / sister concern thereof. 18.That vide letter No. 311-80/2001-VAS (Vol. II) dated 14.07.2006 of the Department of Telecommunications, Ministry of Communications & IT, Government of India, there has been amendment in the license agreements of PMRTS consequent to migration to new licensing regime under NTP-99. Paragraph 13 of the COMP/216/2007 20/35 JUDGMENT Policy contains the manner of transfer of license. The same reads as under :- 13. Transfer of License :- The Licensee may transfer or assign the License Agreement with prior written approval of the Licensor to be granted on fulfillment of the following conditions :- I. When Transfer or assignment is requested in accordance with the terms and conditions on fulfillment of procedures of Tripartite Agreement if already executed amongst the Licensor, Licensee and Lenders; or II. Whenever amalgamation or restructuring i.e. merger or de-merger is sanctioned and approved by the High Court or Tribunal as per the law in force; in accordance with the provisions; more particularly of Sections 391 to 394 of Companies Act, 1956; and III.The Transferee / Assignee is fully eligible in accordance with eligibility criteria contained in tender conditions or in any other document for grant of fresh license in that area and shows its willingness in writing to comply with the terms and conditions of the COMP/216/2007 21/35 JUDGMENT license agreement including past and future roll out obligations; and IV.All the past dues are fully paid till the date of transfer / assignment by the Transferor Company and thereafter the transferee Company undertakes to pay all future dues inclusive of anything remained unpaid of the past period by the outgoing Company.” 19.Mr. Chhaya has further submitted that on perusal of the above clearly shows that the licensee may transfer or assign the license agreement with prior written approval of the Licensor to be granted on fulfillment of the conditions. Essence of the prior written approval under the Policy for PMRTS transfer would be rendered meaningless if simply on the basis of the approval sought for to the present Scheme of De- merger that the application is to be necessarily granted by the concerned Authorities. That the eligibility criteria contained in the tender conditions or in any other documents for grant of fresh license in that area concerned is must. Prior approval would also be rendered meaningless if parties have to solely COMP/216/2007 22/35 JUDGMENT act on representation being made like present petitioner which would contain that simply because sanction has been accorded by this Court to the Scheme of De-merger. As a matter of course, such permission for transfer is to be granted. Such course can and would defeat the very object and purpose of having restriction in the matter of transfer of license. 20.Mr. Chhaya has further submitted that from the above submission, the facts of the present case show that the present Scheme of Arrangement / De-merger is sham so as to ostensibly cover up in the name of transfer of license simplicitor in the name of sanction order of arrangement / de-merger. This is apparent from para 7.2 of the Scheme of Arrangement. He has, therefore, submitted that the petitioner itself has stated that PMRTS Division was 0.27% of the total turnover of the Company and the profit contribution was only 0.36 Crore of the total profit of 122 Crores. This does not show any reasonable basis where from these figures are gathered. COMP/216/2007 23/35 JUDGMENT 21.Mr. Chhaya has further submitted that the resultant Company Arya Group Services Pvt. Limited, a Company incorporated under the Companies Act, 1956 is incorporated in the State of Maharashtra in Pune and its paid up share capital is only Rs.1.00 Lakh. Coupled with the fact that its paid up share capital is Rs.1.00 Lakh, it is apparent from the figures available that it had sustained loss of Rs.28,615/- as on 31.03.2007. The figures as discernible from the balance sheet show that it is not business of its own. He has, therefore, submitted that the present Scheme is a camouflage to sell / transfer license to defeat the policy of transfer. The figures placed before this Court show that the resulting Company AORTSPL has authorized paid up share capital of Rs.1.00 Lakh with loss of Rs.28,615/- as on 31.03.2007. There are no details as to how the amount of Rs.600 lacs would be procured for the purpose of paying up of the consideration. Furthermore, bare perusal of page 14 of the petition clearly shows that any question that may arise as to whether a specified asset or liability pertains to or does not pertain to the PMRTS Business COMP/216/2007 24/35 JUDGMENT Division or whether it arises out of the activities or operations of the PMRTS Business Division shall be decided by the Board of Directors of ARVIND and AORTSPL by mutual agreement will have no absolute grey area of unfettered discretion. Bare perusal of paragraph 13, page