1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION COMPANY PETITION NO.296 OF 2009 CONNECTED WITH COMPANY APPLICATION NO.288 OF 2009 Reliance Industries Ltd. ..Petitioner. . Mr.I.M.Chagla, Sr.Counsel a/w Mr.Janak Dwarkadas, Sr.Counsel a/w. Virag Tulzapurkar, Sr.Counsel, Mr.Tapan Deshpande, Mr.Aditya Mehta i/b. Amarchand Mangal Das & S.A.Shroff & Co. for petitioner. Mr. Vinod Joshi, Ms.Lata Pate, Mr.S.C. Pal & C.J.Joy i/b. S.K.Mohapatra for Regional Director. Mr.Rohit Kapadia a/w. Yash Kapadia i/b. Vivek M. Sharma for objector- Shailesh Mehta. Mr.F.E.D’Vetre a/w Sandeep Parikh and Ms.Swati Bamugad i/b. India Law Alliance for objector Mr.Anookumar Seth. Mr.Vishvesh Mahadeorao Raste- in person-objector. CORAM: A.M.KHANWILKAR,J DATE : JUNE 29, 2009. 2 JUDGMENT : 1. This Petition is moved by Reliance Industries Ltd. to obtain sanction to the scheme of Amalgamation of Reliance Petroleum Ltd. (Transferor company) with Reliance Industries Limited (Transferee Company). The Transferor Company is 75% subsidiary of the Transferee Company. 2. The Petitioner Company was incorporated as Mynylon Limited sometime on 8th May, 1973 in the State of Karnataka under the provisions of Companies Act, 1956. That name was subsequently changed to Reliance Textile Industries Limited on 11th March, 1977. Later on, the place of registered office of the Petitioner company was changed from State of Karnataka to State of Maharashtra, on the 2nd day of July, 1977. Thereafter, the name of the Petitioner Company was changed to Reliance Industries Limited on 27th June, 1985. The shares of the Petitioner Company are listed on the Bombay Stock Exchange and the National Stock Exchange of India. 3. The Petitioner Company has been established to carry on 3 business set out in the Memorandum of Association, which is appended to the Petition. The Board of Directors of both the Transferor as well as Transferee Company in their respective Board Meetings approved the proposed scheme, keeping in mind the exchange ratio suggested by M/s. Ernst & Young Private Limited and M/s. Morgan Stanley India Company Private Limited. The said swap ratio was approved by other two consultants appointed to give their fairness report namely Merrill Lynch and City Group Global Market India Ltd.. 4. The Board of Directors of the Petitioner Company in its meeting on 2nd March, 2009 approved the scheme. The Scheme also received approval from the Bombay Stock Exchange and National Stock Exchange on 2nd March, 2009. On the basis of the said approval, the Petitioner Company filed Company Application No.288 of 2009 in this Court seeking direction to convene meetings of its Equity Shareholders, Secured Creditors(including Debenture holders) and unsecured Creditors to seek their approval to the Scheme. That application was filed on 3rd March, 2009. This Court, by Order dated 6th March, 2009, directed the Petitioner Company to convene requisite meetings on 4th April, 2009. Accordingly, separate meetings of the Equity Shareholders, Secured Creditors(including Debenture Holders) and unsecured Creditors of the 4 Petitioner Company were convened and held on 4th April, 2009. In the meeting of the Equity Shareholders, 5813 Equity Shareholders holding 106,76,27,438 Equity Shares attended either personally or by proxy or by authorized representatives. Out of these 5642 Equity Shareholders holding in aggregate 106,75,59,806 equity shares constituting 98.861% in number and representing 99.9998% in holding Equity Shares were present in person or by proxy and voting at the meeting, voted in favour of the Scheme. On the other hand, 65 equity shareholders holding in aggregate 2143 equity shares constituting 1.139% in number and representing 0.0002% in holding of the equity shares, present in person or by proxy and voting at the meeting, voted against the Scheme. Besides, 106 Equity shareholders holding 65,489 votes were declared invalid. As a result, the Scheme was approved by overwhelming majority of the Equity Shareholders, present and voting either in person or by proxy at the said meeting. In the meeting of Secured Creditors held on the same day on 4th April, 2009, it was attended by 39 Secured Creditors (including debenture holders) either personally or by proxy or by authorized representative. Out of them 38 Secured Creditors(including debenture holders) having aggregate outstanding value of Rs.5878 Crore and constituting 100% in number representing 100% in value, present in person or by proxy and voting at the meeting, voted in favour of the 5 Scheme. No Secured Creditors(including debenture holders) present in person or by proxy and voting at the meeting, voted against the Scheme. The vote of one secured creditor (including debenture holders) having aggregate outstanding value of Rs.12 Crore was declared invalid. Accordingly, the scheme was approved unanimously by the Secured creditors(including debenture holders) present and voting, either in person or by proxy at the said meeting. In the meeting of unsecured Creditors, 994 unsecured creditors either personally or by proxy or authorized representative attended the said meeting. Out of them 801 unsecured creditors having aggregate outstanding value of Rs.566.76 Crore and constituting 100% in number representing 100% in value, present in person or by proxy and voting at the meeting, voted in favour of the Scheme. No unsecured creditors present in person or by proxy and voting at the meeting, voted against the Scheme. Whereas, votes of 193 unsecured creditors having outstanding value of Rs.13.37 crores were declared invalid. Accordingly, the scheme was approved unanimously by the unsecured creditors present either in person or by proxy and voting at the said meetings. 5. After the Scheme was duly approved by overwhelming majority of the Equity shareholders and unanimously by the Secured and 6 unsecured Creditors, present Petition has been moved by the Transferee Company for sanction of the scheme of amalgamation under section 391/394 of the Companies Act, on 6th April, 2009. The Petition was admitted on 9th April, 2009 and fixed for final hearing on 8th May, 2009. The record indicates that Notice of hearing of the Petition was duly served on the Regional Director, Registrar of Company and Central Government Advocate, as can be discerned from the affidavit of service filed in this Court. Besides, notice of hearing was published in specified newspapers as is stated in the affidavit of service. After publication of notice, three objectors have come forward to oppose the scheme. One Mr.Anup Kumar Seth filed his affidavit to oppose the scheme, on 6th May, 2009. Similarly, one Mr.Jayendra M. Shah filed his affidavit to oppose the scheme, on 6th May, 2009. The third objector Mr.Shailesh Mehta filed his affidavit on 7th May, 2009. When the Petition came up for hearing on 8th May, 2009, it was adjourned as the Regional Director did not file his report. Later on, the matter was directed to be listed on 19th June, 2009 when the objector Mr.Shailesh P. Mehta submitted his affidavit titled as Revised limited Affidavit of objection, which he wanted to be taken on record and to ignore his previous affidavit already filed on record . That request was accepted. Matter was then taken up for hearing on 25th June, 2009. On that date, the above said objectors were 7 represented by Counsel. After the Counsel for the said Objectors were fully heard, one Mr.Vishvesh M. Raste appeared in person and wanted to hand over his affidavit to oppose the present scheme. That request was rejected keeping in mind that his objection was not filed within the time prescribed by Rule 34 of the Company Court Rules. The arguments were then concluded and the Petition deferred for pronouncement of order. However, on 26th June, 2009, the Company Registrar drew my attention to the fact that one more objection has been received in the Registry by post from one Mr. Rasiklal S. Mardia. For the same reason noted in my order dated June 25, 2009, I would not take cognizance of this objection received by post; and especially because it has been brought to my notice(in chamber)after conclusion of the hearing of the Petition. 6. Be that as it may, it is noticed from the record that the Petitioner company has complied with all the statutory formalities. In that, the Board of Directors of the Petitioner Company as well as the Transferor Company in their respective Board meetings held on 2nd March, 2009, have approved the proposed scheme. Both the Transferor and Transferee companies being listed Companies, have obtained approval from the concerned Stock Exchanges. The Petitioner thereafter filed application seeking direction from this Court to hold meeting of its 8 shareholders and creditors to seek their approval to the scheme. This Court issued certain directions on 6th March, 2009, including to hold meetings on 4th April, 2009. The Petitioner Company has complied with the directions given by this Court. It is noticed that all the relevant documents including valuation report and fairness opinion issued in relation to the scheme were kept for inspection of the shareholders and creditors of the Petitioner Company upto the date of meetings. In the meeting of the Equity Shareholders, Secured Creditors(including debenture holders) and Unsecured Creditors of the Petitioner company convened on 4th April, 2009, the Scheme was approved with overwhelming majority of the Equity Shareholders and unanimously by the Secured Creditors(including debenture holders) and Unsecured Creditors of the Petitioner Company, present and voting at the respective meetings. Significantly, the Regional Director and the Registrar of Companies have also consented for approving the proposed scheme. Ordinarily, in this backdrop, the Court would readily accord approval to the proposed scheme keeping in mind, the well established position restated in the case of Mafatlal Industries Ltd. reported in (1996)87 Comp. Cases page 792. The Supreme Court has expounded the broad contours to be borne in mind while considering the request for sanction of the scheme. It is well established that the Court cannot undertake the 9 exercise of scrutinising the scheme placed for its sanction with a view to find out whether a better scheme could have been adopted by the parties. In the same decision, the Apex Court has observed that such exercise remains only for the parties and is in the realm of commercial democracy permeating the activities of the concerned creditors and members of the company who in their best commercial and economic interest of majority agree to give green signal to such a compromise or arrangement. 7. However, the objectors who appeared before this Court through Counsel have vehementally argued that the Court should decline to exercise its discretion in according approval to the proposed scheme. Although the objectors have filed detailed affidavit in this Court, however, the points agitated before the Court at the time of argument by the learned Counsel were as follows. 8. Firstly, it was contended that the act of the Petitioner Company smacks of undue haste, as can be seen from the admitted dates. In that, the Board Meeting of the Transferee Company was held on 27th February, 2009, in which decision to amalgamate two companies was taken. It was a Friday. It is intriguing that in a short interval of only two days during the weekend, valuation report was prepared by Morgan 10 Stanley on Monday the 2nd March, 2009. Not only that, the fairness report of other two experts was obtained on the same day on 2nd March, 2009 and the Board of Directors proceeded to pass resolution at 10.15 a.m. on the same day on 2nd March, 2009. These circumstances clearly indicate that the matter was hastened by the Petitioner Company for reasons best known to them. It is also possible to suggest, contends the Learned Counsel that it is a clear case of non-application of mind-not only of the Board of Directors, but also by the valuers appointed by the Petitioner Company. The next criticism by the Counsel for objector Shailesh Mehta was in relation to the contents of the valuation report. He was at pains to point out that the valuers’ report if read clause by clause or as a whole clearly indicates that no details are forthcoming. Forecast is not given, nor the valuation of the shares of the Transferee Company and the basis on which the same is done can be discerned. He submits that the Report clearly admits of the fact that due diligence has not been carried out. In his submission, the report gives conflicting opinion, without disclosing any logic. Besides, it is only a document stating the conclusion of the valuers. Even with regard to the contents of the fairness report, similar criticism was made. It was stated that the basis on which the report is founded is not disclosed in any of this report. Adopting the same argument Counsel for the other objector Mr.Anup 11 Kumar Seth, additionally argued that valuation done by the third Valuer M/s. City Group has not been produced by the Petitioner Company. The Valuation/Fairness Reports, according to him, fail to give arithmetical calculation on the basis of which the final conclusion has been reached by the concerned expert. It is argued that the reports are unintelligible. In that, no relevant and material information is made available to the Court by the experts regarding the justification of swap ratio. The report is a veiled document so as to deny the relevant information in relation to the subject matter on hand. That would disable the Court to reach at a correct conclusion. It is further submitted that objectors have suggested different methods, which would benefit the shareholders. Moreover, it is contended that crucial fact that there are some proceedings pending regarding Gas Supply Agreement between the Petitioner Company and M/s.Reliance Natural Resources Ltd, have not been taken into account. For, the impact due to the outcome of the said proceedings qua the Petitioner Company has not been reckoned at all though relevant. Indeed, the reply filed by the Petitioner company records that the same has been duly considered, which fact, however, cannot be substantiated from the reports. It was then argued that 41% shares of the Petitioner Company have been acquired by group companies. It was argued that the swap ratio determined was unfair to the Shareholders of the Petitioner 12 Company. Counsel for the said objectors in the alternative submitted that the Court may direct revaluation and invite fresh report from an independent valuer. It was argued that the two companies ought to prepare separate books of accounts which alone would facilitate the true valuation of the shares of the respective companies. Relying on the averments in the affidavit filed by the Regional Director that all inter- company transactions between the Transferor Company and Petitioner company will be eliminated in the Books of Account, it was argued that even Regional Director has taken exception to grant of approval to the proposed scheme. It was also argued that there are certain proceedings and investigations pending against the Petitioner company before the Regulatory Authority. The attempt of propounding the present scheme was to frustrate the said pending action. For all these reasons, it was argued that the Court may reject the present Petition. These are the broad arguments which were canvassed across the bar and in my Judgment I would deal with the same a little later. 9. As aforesaid, the scope of intervention by the Company Judge while considering the scheme of amalgamation such as the present one, is no more res integra. The objections which are canvassed before this Court in my opinion, would not militate against the Petitioner 13 Company. For, it cannot be said that any requisite statutory procedure has not been complied with. Nor it is a case where the scheme is not supported by requisite majority of votes of class of stakeholders. Significantly, in the present case the Companies appointed a renowned firm to undertake the determination of swap ratio of the respective shares. No one has doubted the integrity or honesty of the said expert. Moreover, the Company got checked and approved the opinion of the former by two other independent firms, who in turn have agreed with the said determination to be fair. It is also not possible to take the view that the concerned meetings of the Creditors or members or any class of them were not furnished with the relevant material to enable them to arrive at an informed decision for approving the scheme in question. On the other hand, it is noticed that requisite majority of the concerned class of voters have found the scheme to be just and fair to the class as a whole. If so, their decision would legitimately bind even the dissenting members of that class. It is not the case of the objector that necessary material indicated under section 393 was not placed before the voters at the concerned meeting, as was required to be held in terms of Section 391 and directions given by this Court. Moreover, all the requisite material envisaged under section 391(2) have been placed before the Court by the Petitioner Company. Going by the said material, it is not possible to take 14 the view that the scheme is prejudicial either to the shareholders or the public. As a matter of fact, the Registrar of Companies as well as the Regional Director including the concerned Stock Exchanges have given approval/consent to the proposed scheme. Nothing has been brought to my notice so as to take the view that the scheme is violative of any provisions of law or against the public policy. The scheme as a whole is found to be just, fair and reasonable from the point of view of taking commercial decision which is beneficial to class represented by them for whom the scheme is made. 10. In other words, all parameters to be borne in mind have been fulfilled in the present case. It necessarily follows that the Court will have no jurisdiction to sit over the commercial wisdom of the majority of the class of persons, who with their open eyes have given approval to the scheme. The Apex Court in the case of Hindustan Lever Employees’ Union Vs. Hindustan Lever Ltd[AIR 1995 SC 470] has rejected similar argument of the Petitioner therein-that if some other method was to be adopted, probably the determination of valuation could have been bit more in favour of the shareholders. In other words, merely because some other method of valuation could be resorted to and would be bit favourable to the shareholders, that alone cannot militate against granting 15 approval to the scheme propounded by the Company. The Court expounded that what is imperative is that the determination should not contrary to law and/or unfair for the Shareholders of the Company which was being merged. The Court’s obligation is to be satisfied that valuation was in accordance with law and it was carried out by an independent body. 11. In the case of Re Tata Oil Mills Co.Ltd. in (1994) 81 Comp.Cases 754(Bom)]. This Court while considering objection of the shareholders that alternative share exchange ratio would have been appropriate and that the exchange ratio arrived at by the Company was incorrect, observed thus: “In my opinion, the exchange ratio as arrived at by Mr.Malegam has received the approval of shareholders holding more than 99 per cert.(in number and value) shares at the meetings. No one except the shareholders holding minimum percentage of shares have complained before me. The valuation has been confirmed to be fair by two eminent firms of auditors. It would be extremely difficult to hold that the same is unfair. In any case, it has been approved by an overwhelming majority of persons affected and there is no basis to doubt their judgment. I, therefore, do not find any substance in this objection.” 16 This view taken by the High Court has been approved by the Apex Court in the case of Hindustan Lever Employees’ Union(Supra). As observed earlier, the Apex Court went on to hold that what is imperative is that such determination of valuation or determination done by the company should not be contrary to the provisions of law or unfair to the class of stakeholder of the Company, which was being merged. If it was a case covered by such situation, the Court would be within its power to refuse approval to the proposed scheme. Reliance is rightly placed on the exposition in the decision of our High Court in the case of Re: German Remedies Ltd reported in (2003) 4 Com.L.J.89(Bom.), which reads thus: “The valuers had made valuation by considering three methods of valuation namely the Net Asset value, Profit Earning Value and the Market Value of the shares of the companies as quoted on the Stock Exchange. The valuers have arrived at the valuation on the basis of relative valuation of shares of both the companies based on the aforesaid methodologies and various qualitative factors relating to each company, business dynamics and growth potential of business. Valuation is not an exact science. Different methods are applied for valuation. Valuations made by different methods may widely differ and valuers generally consider appropriate to adopt weighted average of the valuation determined by different methodologies to arrive at the fair market value. What weightage should be given to which factor would depend upon the facts and circumstances of the case. ... ... As stated earlier, it 17 is again to be kept in mind that the exchange ratio is in the realm of commercial wisdom of well- informed equity share holders. It is not for the court to sit in appeal over th valued judgment of the equity share holders who are supposed to be commercial men. Commercial men who know their common benefit and interests underlying the proposed scheme, with open eyes, have okayed the swap ratio of 7 to 4 as above by an overwhelming majority of 90 per cent in numbers and 99 per cent in value of the members present and voting. The limited jurisdiction of the Court is only to see whether the ratio is so wrong or the error is so gross as would make the scheme unfair or unjust or oppressive to the majority of the members or any class of them.” 12. That takes me to the grievance of the objectors that the Petitioner Company has introduced the scheme with undue haste, or for that matter it is a case of non-application of mind. If, the meeting of the transferee company was held on 27th February, 2009 and the reports of the experts were made ready on 2nd March, 2009 coupled with the fact that the Board of Directors approved the proposed scheme on the same day on 2nd March, 2009, that, by itself, in my opinion, does not mean that it is a case of non-application of mind. The report of the valuers either prepared by Morgan Stanley or the fairness report prepared by Merrill Lynch if read as a whole, it takes into account all the relevant factors which ought to be kept in mind to form an opinion about the swap ratio. 18 The valuers have indicated the approach and the basis of the amalgamation. It has referred to four possible methods that could be borne in mind for arrival of the decision. Each method has been analysed in the report. Insofar as net asset value methodology is concerned, it is mentioned that the valuers have computed net asset value of equity shares of both the Companies. They have used the provisional consolidated balance sheet as at December 31, 2008 of RIL, and provisional balance sheet as at December 31, 2008 of RPL to make suitable adjustment as deemed appropriate. The valuers have adverted to the Comparable Companies’ Multiple (CCM) Method. It is noted in the report that the valuers have used Enterprises Value(EV) to EBITDA valuation multiple of comparable listed companies for the purpose of the valuation analysis. They have then considered Historical and Current Market Price Method which is with reference to the equity shares quoted on a Stock Exchange. Significantly, the valuers have adverted to the exposition of the Apex Court in the case of CWT vs. Mahadev Jalan [86 ITR 621], as to the basis on which valuation of shares needs to be done. Relevant extract of