Co. Pet. 228/2010 Page 1 of 36 $~ * IN THE HIGH COURT OF DELHI AT NEW DELHI + CO.PET. 228/2010 & CO. APPLS. 1008/2010 AND 2486/2010 IN THE MATTER OF M/S. RECKITT BENCKISER (INDIA) LTD. ..... Petitioner Through: Mrs. Pallavi S. Shroff, Advocate with Mr. Anirudh Das, Advocate for petitioner-company. Mr. Chander Bhan Gandhi, Objector in person. Mr. Ankit Shah, Advocate. Reserved on : 21st September, 2011. % Date of Decision: 3rd October, 2011. CORAM: HON'BLE MR. JUSTICE MANMOHAN 1. Whether the Reporters of local papers may be allowed to see the judgment? Yes. 2. To be referred to the Reporter or not? Yes. 3. Whether the judgment should be reported in the Digest? Yes. J U D G M E N T MANMOHAN, J : 1. Present petition has been filed under Sections 100 to 105 of the Companies Act, 1956 (for short ‘Act’) read with Rule 46 of the Companies (Court) Rules, 1959 (for short ‘Rules, 1959) for confirming the reduction of share capital of the petitioner-company. Co. Pet. 228/2010 Page 2 of 36 2. The relevant facts of the present case are that on 5th July, 1951, the petitioner-company was incorporated as a public limited company under the name of M/s. Reckitt & Colman of India Limited. On 18th December, 2000, the name of the petitioner-company was changed to M/s. Reckitt Benckiser (India) Limited. 3. Between 14th February, 2003 and 19th May, 2005, the equity shares of petitioner-company were delisted from Bombay, Calcutta and National Stock Exchanges in accordance with Regulation 21(3)(a) of Substantial Acquisition of Shares and Takeovers Regulations, 1997. In fact, in view of the directions received from the said Stock Exchanges, M/s. Reckitt Benckiser Plc’s subsidiary company, namely, Lancaster Square Holdings SL made an exit offer to acquire shares in petitioner- company under the aforesaid Regulations. 4. Post delisting, the petitioner-company filed a petition being CP No. 206 of 2004 for reduction of its paid up equity share capital from ` 32,91,31,880/- divided into 3,29,13,188 fully paid up equity shares of ` 10/- each to ` 26,27,96,120/- divided into 2,62,79,612 fully paid up equity shares of ` 10/- each. This Court vide its order dated 31st May, 2005 approved the said Scheme of Reduction. The relevant portion of Co. Pet. 228/2010 Page 3 of 36 the said order is reproduced hereinbelow:- “36. To summarize, when in the instant case 99.97% shareholders have supported the resolution of reduction of share capital; the valuation of the share is arrived at in a reasonable manner and lucrative price for the share is offered; and above all the petitioner has agreed that the objectors may retain their shares, I do not find any legal impediment or any valid reason for not accepting the proposed scheme of reduction of share capital. It is allowed accordingly………” 5. Though Mr. Janak Mathuradas, an equity shareholder of petitioner-company filed an appeal being Co. Appeal No. 105 of 2005 against the aforesaid judgment and order dated 31st May, 2005, yet the same was subsequently withdrawn. 6. A chart indicating the shareholding pattern of petitioner-company after approval of the first Scheme of Reduction is reproduced hereinbelow:- Sl. No. Shareholder(s) Details of shareholding Amount (in Rupees) Shareholding Percentage (appx) 1. Reckitt Benckiser Plc 1,67,85,722 Equity Shares of Rs.10/- each fully paid-up constituting about 63.87% of the issued and paid-up share capital of the Company 16,78,57,220 63.87% Co. Pet. 228/2010 Page 4 of 36 2. Lancaster Square Holdings SL 94,65,355 Equity Shares of Rs.10/- each fully paid-up constituting about 36.02% of the issued and paid-up share capital of the Company. 9,46,53,550 36.02% 3. Public Shareholders 28,531 Equity Shares of Rs.10/- each fully paid-up constituting about 0.11% of the issued and paid-up share capital of the Company. 2,85,310 0.11% 4. Employee Shareholders 4 Equity Shares of Rs.10/- each fully paid- up constituting about -- % of the issued and paid-up share capital of the Company. 40 -- 7. Since in 2010, petitioner-company was of the opinion that its equity capital was still in excess, it decided to reduce 1.55% of its issued and paid-up equity share capital by canceling and extinguishing 3,78,614 equity shares held by Lancaster Square Holdings SL (Lancaster) constituting about 1.44% of the issued and paid-up equity share capital of the petitioner company and 28,531 equity shares held by the public constituting about 0.11% of the issued and paid-up equity Co. Pet. 228/2010 Page 5 of 36 share capital of the petitioner company both aggregating to 4,07,145 equity shares. The petitioner-company appointed M/s. T.R. Chadha & Co., Chartered Accountants to determine the fair value of its equity shares. 8. On 3rd March, 2010, the Board of Directors of petitioner- company approved further reduction in its paid up share capital, subject to approval of its equity shareholders and confirmation by this Court. At the said Board Meeting, the Valuation Report of M/s. T.R. Chadha & Co. was considered and the Board approved the payment of ` 940/- per equity share as against the value of ` 836/- recommended by the Valuer, M/s. T.R. Chadha & Co. 9. On 26th March, 2010, the largest shareholder of the petitioner- company, namely, M/s. Reckitt Benckiser Plc wrote to petitioner that it had no objection to the new Scheme for Reduction of share capital. The relevant portion of the said letter dated 26th March, 2010 is reproduced hereinbelow:- “…….This is also to confirm that as Promoter shareholder of your Company, we would like to retain our shareholding in the Company and in line with the Co. Pet. 228/2010 Page 6 of 36 „first in and last out‟ principle, we will continue to hold the capital till the final exit of all other shareholders.” (emphasis supplied) 10. In pursuance to the decision taken by the Board on 3rd March, 2010, a Notice along with Explanatory Statement was sent to the equity shareholders of petitioner-company informing them that an Extra- Ordinary General Meeting (for short ‘EOGM’) was to be held on 24th April, 2010 to consider the proposed reduction of share capital of the petitioner-company. The relevant extract of said Notice as well as Explanatory Statement is reproduced hereinbelow:- a) Notice to the Members dated 27th March, 2010 “Special Business: To consider and, if thought fit, to pass with or without modification(s), the following resolution as a special resolution, referred to as a “resolution for reduction of share capital”: “RESOLVED THAT pursuant to the Articles of Association of the Company and Section 100 of the Companies Act, 1956, and subject to confirmation by the Hon‟ble High Court of Delhi at New Delhi, the issued and paid up equity capital of the company be reduced from Rs. 26,27,96,120 (consisting of 2,62,79,612 equity Co. Pet. 228/2010 Page 7 of 36 shares of Rs.10 each fully paid up) to Rs. 25,87,24,670/- (consisting of 2,58,72,467 equity shares of Rs.10 each fully paid up), the amount by which the equity capital is so reduced being in excess of the requirements of the Company and that such reduction be effected by canceling and extinguishing 378,614 equity shares held by Lancaster Square Holdings SL (“Lancaster”) constituting about 1.44% of the issued and paid-up equity share capital of the Company and 28,531 equity shares held by the public constituting about 0.11% of the issued and paid-up equity share capital of the Company, both aggregating to 407,145 equity shares of Rs. 10 each fully paid up constituting about 1.55% of the issued and paid- up equity share capital of the Company.” b) Explanatory Statement xxx xxx xxx xxx “The management of your Company has focused on profitability and its emphasis on financial discipline including effective management of net working capital has resulted in the capital requirements of the Company having appreciably reduced. The Company‟s concentration on quality and performance as well as approach to the market has resulted in good growth numbers. Keeping in view the excess capital available with the Company the Board has evaluated the various options available for the utilization of the same. However, even after taking into account all the capital expenditures for its future growth plans, upgradation of existing product lines, investments in research and development, the Company has more capital resources Co. Pet. 228/2010 Page 8 of 36 than it can profitably utilize giving rise to the need to readjust the relation between capital and assets and to accurately and fairly reflect the liabilities and assets of the Company in its books of accounts. After a close examination and analysis of the various options available to the company and in the absence of adequately attractive acquisition opportunities, the restructuring of the Company‟s existing capital structure becomes imperative. After detailed deliberations, the Board of Directors of the Company are of the view that the reduction of the equity share capital in accordance with Section 100 of the Companies Act, 1956 (the “Act”) is the only practical and economically efficient legal option available to the Company. As such, the Board proposes to return capital to identified equity shareholders in accordance with Section 100 of the Act, whereby the paid-up equity share capital in excess of its requirements be reduced and that such reduction be effected by canceling and extinguishing of 378,614 equity shares held by Lancaster, constituting about 4% of Lancaster‟s equity shareholding in the Company, and 28,531 equity shares held by the public, constituting 100% of the equity shareholding of the public in the Company………. The Board has recommended that Reckitt Benckiser Plc being the promoter shareholder should not be returned any of its equity capital contribution before the public equity shareholders or Lancaster are returned their equity capital contribution. Reckitt Benckiser Plc being the promoter shareholder of your Company has agreed vide its letter dated 26th March, 2010 to retain its Co. Pet. 228/2010 Page 9 of 36 shareholding in the Company as the promoter while enabling the other equity shareholders to exit from the Company prior to any impairment of share value. Pursuant to the reduction of the issued and paid-up equity share capital of the Company as mentioned above, the issued and paid-up share capital of the Company would be held by Reckitt Benckiser Plc and Lancaster or their nominees. Your Company is engaged in business industry where there is no sectoral cap and non-resident shareholders are permitted to hold 100% of the issued and paid-up equity share capital of the Company in accordance with applicable laws and regulations……” 11. On 24th April, 2010, an EOGM of petitioner-company was held in accordance with the Notice and Explanatory Statement dated 27th March, 2010. The special resolution proposing the reduction of equity share capital of petitioner-company was passed by special majority of equity shareholders holding 2,62,51,081 equity shares of ` 10/- each. The equity shareholders holding 536 equity shares of ` 10/- each voted against the resolution. In fact, out of the public shareholders, only one shareholder, namely, Mr. Chander Bhan Gandhi, holding 536 equity shares attended and voted against the motion at the EOGM. 12. Initially in this Court, twenty-four shareholders had filed their objections to the present Scheme of Reduction. However, upon the Co. Pet. 228/2010 Page 10 of 36 petitioner company offering to pay to the public shareholders an amount of ` 1500/- per equity share, Mr. Janak Mathuradas and twenty- two other objectors accepted the offer and unconditionally withdrew their objections as well as affidavits along with the valuation report of J.C. Desai & Co. filed before this Court. The order dated 16th September, 2011 is reproduced hereinbelow:- “In the present case, Mr. Janak Mathuradas has filed objections to the Scheme of Reduction. 22 other public shareholders have filed one page affidavit supporting the objection of Mr. Mathuradas. Learned counsel for the petitioner submits that without prejudice to its rights and contentions, petitioner is willing to pay to the Indian public shareholders an amount of Rs.1500/- per equity share. In view of the aforesaid offer, Mr. Ankit Shah, learned counsel for Mr. Janak Mathuradas and 22 other objectors, upon instruction of Mr. Janak Mathuradas, who is personally present in Court, states that he would like to withdraw the objections filed by Mr. Mathuradas and 22 other public shareholders. Mr. Shah, learned counsel further wishes to withdraw the affidavit filed by Mr. Janak Mathuradas in the month of February, 2011 along with the valuation report of J.C. Desai & Co. Keeping in view of aforesaid agreement between the petitioner and all the objectors, except Mr. Chander Bhan Gandhi, petitioner is directed to pay an amount of Rs. 1500/- per equity shares to public shareholders of petitioner-company. The objections filed by Mr. Janak Mathuradas and 22 other shareholders along with the Co. Pet. 228/2010 Page 11 of 36 affidavits of Mr. Mathuradas and valuation report of J.C. Desai & Co. are dismissed as withdrawn. List the matter for arguments in the objections filed by Mr. Chander Bhan Gandhi, the only remaining objector, on 21st September, 2011 at 2:15 p.m.” 13. The only remaining objector Mr. Chander Bhan Gandhi submits that the Government policy of removing sectoral caps in personal care and health sector is illegal. According to him, the present Scheme of Reduction is nothing but a product of wrong economic policies being followed by the Government of India. 14. Mr. Gandhi further submits that the proposed Reduction of Share capital by the petitioner company amounts to ‘forcible acquisition’ of shares of public shareholders as only their shares are being extinguished, whereas the shares of the promoter group remain unaffected. According to him, the actual intent and reason for reduction of share capital is only to ‘eliminate’ the minority public shareholders as members of the company and is thus, wholly unfair, discriminatory and mala fide. In this connection, he relies upon the Explanatory Statement attached to the Notice to Members dated 27th March, 2010 wherein it is stated that Reckitt Benckiser Plc being the Co. Pet. 228/2010 Page 12 of 36 promoter shareholder of the company has agreed by its letter dated 26th March, 2010 to retain its shareholding in the company as promoter, while enabling the other shareholders to exit from the company. Mr. Gandhi submits that reduction, if any, should be spread equally over all the different classes of shareholders of petitioner-company. 15. Mr. Gandhi submits that the Scheme of Reduction proposed by the petitioner-company does not fall within any of the three modes of reduction of share capital provided for in Section 100(1) of the Act. According to him, this Court is empowered to look into the petitioner’s proposal for reduction of share capital and decide whether the same is legal, fair and equitable. In this connection, he relies upon the judgments of Supreme Court in Sesa Industries Limited vs. Krishna H. Bajaj and Others (2011) 3 SCC 218 and Miheer H. Mafatlal vs. Mafatlal Industries Ltd. (1997) 1 SCC 579; and Andhra Pradesh High Court’s judgments in Aurbindo Pharma Ltd., In re., (2011) 105 SCL 71 (AP) and Chetan G. Cholera and Another vs. Rockwool (India) Ltd., (2010) 155 Comp Cas 605 (AP). 16. According to Mr. Gandhi, the petitioner’s shares are invaluable. He emphasizes that the shares of the petitioner-company are at par with Co. Pet. 228/2010 Page 13 of 36 a ‘Kohinoor Diamond’. He states that the valuation report of M/s. T.R. Chadha & Co. is improper and has been filed with an intent to evaluate the shares at a lower value. In this connection, Mr. Gandhi relies upon the report of M/s. J.C. Desai & Co. filed by Mr. Janak Mathuradas. 17. He also submits that the petitioner has acted in a mala fide manner by clubbing the minority shareholders whose rights are being affected by the proposal to reduce the share capital along with petitioner’s own subsidiary namely, Lancaster Square holdings SL. He submits that such artificial classification of the class of shareholders for holding class meetings of shareholders for reduction of share capital by the petitioner is absolutely wrong and irrational and it has been made only with a view to ensure that the special resolution is passed. He states that had the petitioner company constituted the true minority shareholders that means, the public shareholders as a separate class of shareholders, then it would have been impossible for the petitioner company to pass the special resolution for ‘extinguishing’ their shares. 18. Mr. Gandhi points out that a similar previous attempt by the petitioner had been given up by the petitioner itself, upon objections raised by objectors like him, as would be apparent from the judgment Co. Pet. 228/2010 Page 14 of 36 dated 31st May, 2005 passed by this Court in CP No. 206/2004 wherein the petitioner agreed to let the objectors continue to be shareholders and it was only thereupon that this Court permitted reduction of petitioner’s share capital. He submits that res judicata is attracted to the facts of the present case and, therefore, the petitioner-company should not be allowed to go back on its statement as recorded in the judgment dated 31st May, 2005. The relevant portion of the judgment dated 31st May, 2005 relied upon by Mr. Gandhi is as under:- “33. ……However, it is not necessary to deal with this question any further and record any definite findings in view of the offer given by learned counsel for the petitioner during the proceedings namely, allowing the objectors and others to intervene later on to retain their shares…..” 19. Mr. Gandhi submits that the reduction of share capital proposed by the petitioner is in effect a buy-back of the shares by the petitioner under Section 77A of the Act. Consequently, he submits that reduction of share capital has to be done on proportionate basis in accordance with Section 77A(5) of the Act. 20. Mr. Gandhi also contends that forms of representation executed by Reckitt Benckiser Plc and Lancaster Square Holdings SL for EOGM held on 24th April, 2010 are invalid as the same have not been Co. Pet. 228/2010 Page 15 of 36 notarised. In this connection, Mr. Gandhi draws attention of this Court to the letter given by him to the Chairman of the EOGM wherein it is stated „My joint report of polling today subject to my reservation that the form of representation executed by the board of directors under seal of company for appointment of proxy should have or not the seal of notary public. This may be got verified‟. 21. At the outset, Mrs. Pallavi S. Shroff, learned counsel for the petitioner-company submits that it is not within the domain of this Court to inquire as to whether a particular economic policy is wise or whether a better economic policy can be evolved. 22. Mrs. Shroff further submits that Section 100 of the Act permits a company to reduce its share capital in any manner. She also submits that it does not contemplate class meetings. According to her, it only requires passing of a special resolution by the equity shareholders. She points out that equity shares of Lancaster Square Holdings SL are also being reduced and, therefore, they were also entitled to vote at the EOGM. 23. Mrs. Shroff submits that shares of Reckitt Benckiser (India) Ltd., being the promoter, are not being reduced on the principle of „first in Co. Pet. 228/2010 Page 16 of 36 and last out‟. Mrs. Shroff also submits that the objections with regard to ‘forcible acquisition’ and ‘elimination’ are no longer res integra as identical objections have been rejected in similar cases of reduction by Bombay High Court in Sandvik Asia Limited vs. Bharat Kumar Padamsi and Ors. (2009) 92 SCL 272 (Bom) and Organon (India) Ltd., In Re.(2010) 98 CLA 480 (Bom.). 24. Mrs. Shroff points out that the valuation with respect to the entire value of the petitioner’s equity shares has been done by a reputed firm of Chartered Accountants, i.e., M/s. T.R. Chadha & Co. She states that the valuation has been done with reference to the position as on 31st December, 2009 and the Valuer has considered the future stream of earnings of the petitioner-company. According to her, as the report of M/s. J.C. Desai & Co. had been filed at the instance of Mr. Janak Mathuradas who has now withdrawn his objections, the same cannot be relied upon in the present proceedings. In any event, she points out that M/s. T.R. Chadha & Co. has used both the income approach and the market approach for its Valuation, whereas M/s. J.C. Desai & Co. has used only the market approach. 25. Without prejudice to the aforesaid, Mrs. Shroff states that the Co. Pet. 228/2010 Page 17 of 36 report of M/s. J.C. Desai & Co. considers datas and transaction that occurred after the date of M/s. T.R. Chadha & Co. valuation as also after the passing of the shareholder’s resolution approving the reduction. Mrs. Shroff points out many irregularities in the valuation report such as though the equity shares of the petitioner company are not listed, yet M/s. J.C. Desai & Co. has provided a mobility discount. According to her, the report of M/s. T.R. Chadha & Co. should not be lightly interfered with. In this connection, Ms. Shroff relies upon the judgments of Supreme Court in Miheer H. Mafatlal (supra); Hindustan Lever Employees' Union v. Hindustan Lever Ltd. & Ors., 1995 Supp (1) SCC 499 and Gujarat High Court’s judgment in Reliance Petroleum Ltd., In re., (2010) 96 CLA 305 (Guj.). 26. Mrs. Shroff contends that the judgment and order dated 31st May, 2005 passed by this Court in Company Petition 206/2004 records that the earlier Scheme for Reduction of share capital of the petitioner company has been accepted without any modification. She states that objections raised by the objector in that matter were not considered or adjudicated upon by this Court in view of the petitioner’s statement allowing the then objectors to retain their shareholding. Consequently, Co. Pet. 228/2010 Page 18 of 36 according to her, the concept of res judicata is not attracted to the present case. 27. Mrs. Shroff submits that Section 77A of Act cannot be read into Section 100 of the Act. In this connection she relies upon the judgment of the Bombay High Court in The Securities & Exchange Board of India vs. Sterlite Industries (India) Ltd. (2003) 113 Com.Cas 273 (Bom). 28. Mrs. Shroff states that the EOGM was conducted in a fair and transparent manner. According to her, objections of Mr. Gandhi were duly recorded in the minutes of the EOGM and he was also given an opportunity to examine the valuation report. Mrs. Shroff points out that Reckitt Benckiser Plc. by resolution dated 12th April, 2010 authorised the execution of form of representation for meeting of 24th April, 2010. She states, similarly Lancaster Square Holdings SL at its meeting on 9th April, 2010 appointed Mr. S.N. Kannan to represent the company at the EOGM. He submits, there is no requirement in law for an Indian subsidiary to maintain specimen signatures of Directors of its holding company. Co. Pet. 228/2010 Page 19 of 36 29. Having heard the parties at length, this Court is of the view that it is first essential to analyze Section 100 of the Act. Section 100 of the Act reads as under:- “100. Special resolution for reduction of share capital.— (1) Subject to confirmation by the [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 especial 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 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