COMP/67/2006 1/94 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD COMPANY PETITION No. 67 of 2006 In COMPANY APPLICATION No. 216 of 2006 With COMPANY PETITION No. 68 of 2006 In COMPANY APPLICATION No. 220 of 2006 With COMPANY PETITION No. 69 of 2006 In COMPANY APPLICATION No. 221 of 2006 With COMPANY PETITION No. 70 of 2006 In COMPANY APPLICATION No. 222 of 2006 For Approval and Signature: HONOURABLE MR.JUSTICE ANANT S.DAVE ========================================================= 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 ? ========================================================= TORRENT POWER AEC LTD. - Petitioner(s) Versus ... - Respondent(s) ========================================================= Appearance : MR S.N.SOPARKAR, Ld.Senior Counsel appearing with Mrs. SWATI SOPARKAR for Petitioner(s) : 1, MR SUNIL L MEHTA for Respondent(s) : 1, MR PURVISH J MALKAN for Respondent(s) : 1, MR.VARUN K.PATEL for Respondent(s) : 1, ========================================================= COMP/67/2006 2/94 JUDGMENT CORAM : HONOURABLE MR.JUSTICE ANANT S.DAVE Date : 12/07/2006 ORAL JUDGMENT 1. All these petitions are filed for sanction of the Scheme of arrangement under Sections 100, 101 and 391 to 394 of the Companies Act, 1956. The Company Petition No. 67 of 2006 is for a Scheme of Arrangement including Amalgamation to be made between Torrent Power AEC Limited (TAPL) (hereinafter referred to as “the petitioner company” or “the Transferor Company”) and Torrent Power Limited (TPL) (hereinafter referred to as “the Transferee Company”) as well as the Reorganization of the Share Capital of the Transferee Company since the petitioner being a Public Limited Company within the meaning of Companies Act, 1956. 2. So far as the Company Petition No.68 of 2006 is concerned, it is for the sanction of this COMP/67/2006 3/94 JUDGMENT Court to a Scheme of Arrangement including the Amalgamation to be made between Torrent Power SEC Limited (TPSL) (hereinafter referred to as “the petitioner company” or “the Transferor Company”) and Torrent Power Limited (TPL) (hereinafter referred to as “the Transferee Company”) as well as the Reorganization of the Share Capital of the Transferee Company, since the petitioner being a Public Limited Company within the meaning of Companies Act, 1956. Company Petition No. 69 of 2006 is concerned, it is for the sanction of this Court to a Scheme of Arrangement including the Amalgamation to be made between Torrent Power Generation Limited (TPGL) (hereinafter referred to as “the petitioner company” or “the Transferor Company”) and Torrent Power Limited (TPL) (hereinafter referred to as Transferee Company) as well as the Reorganization of the Share Capital of the COMP/67/2006 4/94 JUDGMENT Transferee Company since company being a Public Limited Company within the meaning of Companies Act, 1956. So far as the Company Petition No.70 of 2006 is concerned, it is for the sanction of a Scheme of Arrangement including the Amalgamation of Torrent Power AEC Limited (TPAL), Torrent Power SEC Limited (TPSL) and Torrent Power Generation Limited (TPGL) (hereinafter referred to as “the Transferor Companies”) with Torrent Power Limited (TPL) (hereinafter referred to as “the petitioner company” or “the Transferee Company”) as well as for the Reorganization of the Share Capital of the petitioner Company, being a Public Limited Company within the meaning of Companies Act, 1956. Thus, TPAL, TPSL and TPGL are the Transferor Companies and TPL is the Transferee Company. There is consensus COMP/67/2006 5/94 JUDGMENT amongst learned advocates appearing for respective parties to hear this case finally today. 3. It is the case of the petitioner Company that on 28th day of May, 1913, the Ahmedabad Electricity Company Limited, under the provisions of Indian Companies Act, VI of 1882 of the Legislative Council of India came to be incorporated. The name of the company was subsequently changed to Torrent Power AEC Limited on 28th October, 2004. As per the Audited Balance Sheet on 31.03.2005, the authorized share capital is Rs.50,000 lacs issued Rs.11,327.58 lacs and Subscribed and Paid-up Share Capital is Rs.6327.44 lacs. The Memorandum and Articles of Association of the petitioner Company is annexed with Annexure-'A' to the petition, which broadly enumerates business of the Company to be carried out and so as to generate, develop COMP/67/2006 6/94 JUDGMENT and accumulate electrical power and also to transmit, distribute and supply such power at various places. It also mentions incidental or ancillary object to the attainment of main objects which clearly provided for entering into any arrangement from sharing profits, amalgamation, union of interests, co- operation or otherwise with any person or company engaged in any business etc. It is stated that petitioner Company i.e. Torrent Power AEC Limited (TPAL) and earlier known as Ahmedabad Electricity Company Limited, is 93 year old integrated power generation, transmission and distribution power and the company listed on Bombay Stock Exchange Limited and National Stock Exchange of India Limited, with generating capacity of 500 MW and supplier of 4 billion units of power to around 1.3 million customers. The Company for the financial year 2004-05 has total income of approximately Rs.1335 crores and the net COMP/67/2006 7/94 JUDGMENT profit was nearly Rs.106.71 crores and built up reserves of nearly Rs.632 crores. 4. The Transferee Company Torrent Power Limited (TPL) was incorporated as a Private Limited Company on 29th April, 2004, on a change of name it is known after conversion into a Public Limited Company as a Torrent Power Limited. A Fresh Certificate of Incorporation was obtained on 08.02.2006 which is also to undertake consolidated operation of the three Transferor Companies of the Torrent Group in the power sector. 5. The reasons narrated for Scheme of arrangement is with a view to consolidate the power business of the Torrent Group of amalgamating three Companies i.e. TPAL, TPSL and TPGL into TPL and considering the scenario prevailing in the energy sector, it was thought fit that in order to enable the COMP/67/2006 8/94 JUDGMENT group to be more competitive and for better growth opportunities so as to capitalize on the strength of these three companies in a systematic, integrated and optimized fashion. The Board of Directors has decided for amalgamation so that twin objectives of sustainability of the existing efficiency parameters and future growth can be achieved. It also narrates strategic, financial, Organizational and Operational advantage so that proposed amalgamation could enable the group to leverage its existing assets and human resources for enhancing the value of its stakeholders. It has also in its mind certain other commercial advantages and better investments opportunities in the power sector in this Country. 6. It is further stated about determination of exchange ratio to be provided in the scheme, to the shareholders of three COMP/67/2006 9/94 JUDGMENT transferor companies and it was thought broadly to downsize the resultant equity capital of the amalgamated company to maintain/approve the earning per share and also to maintain reasonable trading float ensuring better price discovery so that stakeholders can have certain benefits and the difference so arising out of proposed reduction is to be transferred to general reserve. That reorganisation of the share capital of the transferee company being consequential it is stated that amalgamation proposed is an integral part of the scheme. 7. The salient features of the Scheme of arrangement, Part-I, annexed at Annexure:-'C' after referring to various definitions mentioned about appointed date as dtd.01st April, 2005 is in Clause 2.2. Clause 2.3 mentions about “Assets” and includes undertakings of each of the transferor COMP/67/2006 10/94 JUDGMENT company. It also states about Transfer and vesting of undertaking of the transferor companies to transferee companies from the appointed date. Clause-3 refers to operative date. That Clause-4 of Part-II is for share capital. Part-III is about Amalgamation. So far as legal proceedings are concerned, it is clearly stated in Clause-7 that all suits, actions and proceedings of whatever nature by or against the Transferor Companies pending and/or arising on or before the Effective Date shall not abate, or be discontinued or be in any way prejudicially affected by reason of the transfer of the business of the Transferor Companies pursuant to the scheme as proposed. It is further stated that such legal proceedings if any, to be continued, prosecuted and enforce by or against the Transferee Company as effectually as if the same had been pending and/or arising against the Transferee Company, so if the provisions COMP/67/2006 11/94 JUDGMENT and undertaking by the Transferee Company about the legal proceedings. 8. The scheme makes specific provisions in Clause-12 are as under:- “Clause 12: ISSUE OF SHARES BY THE TRANSFEREE COMPANY AND REORGANISATION OF ITS SHARE CAPITAL:- Clause-12.1:-The Board of Directors of the Transferor Companies and the Transferee Company appointed M/s. N.M.Raiji & Co., Chartered Accountants as the valuer for determination of fair exchange ratio for issue of shares to the shareholders of the Transferor Companies by the Transferee Company pursuant to the amalgamation of the Transferor Companies with the Transferee Company. A fairness opinion has also been provided by M/s Ernst & Young Private Limited on the valuation done by M/s. N.M.Raiji & Co. COMP/67/2006 12/94 JUDGMENT Clause-12.2:- Upon coming into effect of this Scheme and in consideration of the transfer and vesting of the Undertaking of the Transferor Companies in the Transferee Company the Transferee Company shall, subject to the subsequent provisions of the Scheme and without any further application or deed, be required to issue and allot to the equity shareholders of the Transferor Companies whose names appear in the Register of Members of the Transferor Companies as on the Record Date, equity shares of the face value of Rs.10/- each in the Transferee Company, credited as fully paid-up, (hereinafter referred to as the “Exchange Shares”), in the following manner. (a) 22 (Twenty Two) equity shares of Rs.10/- each fully paid-up of Torrent Power Limited for every 1 (one) equity COMP/67/2006 13/94 JUDGMENT shares of Rs.10/- each fully paid-up held in Torrent Power AEC Limited. (b) 47 (Forty Seven) equity shares of Rs.10/- each fully paid-up of Torrent Power Limited for every 1 (one) equity shares of Rs.10/- each fully paid-up held in Torrent Power SEC Limited. (c) 1 (One) equity shares of Rs.10/- each fully paid-up of Torrent Power Limited for every 1 (one) equity shares of Rs.10/- each fully paid-up held in Torrent Power Generation Limited. It is clarified that on the scheme being effective, the shares of TPGL held by TPAL and TPSL shall be cancelled and no shares shall be issued by the Transferee Company against these shares.” COMP/67/2006 14/94 JUDGMENT Clause:12.3:- Upon the Scheme becoming effective, the issued, subscribed and paid up equity share capital of the Transferee Company shall stand reduced with effect from the Appointed Date, in accordance with Section 100 and all other applicable provisions of the Act, if any, in the manner as provided hereunder: a) The issued, subscribed and paid up equity share capital of the Transferee Company including the Exchange Shares shall be reduced by reducing the face value and paid up value of the said shares from Rs.10/- each to Rs.2.50/- each. Consequent to such reduction in the value of the shares from Rs.10/- each to Rs.2.50/- each, value of the shareholding of the shareholders of the Transferee Company, including the COMP/67/2006 15/94 JUDGMENT allotees of the Exchange Shares, shall be reduced proportionately. b) Simultaneously, 4 (four) equity shares (including the Exchange Shares), each of Rs.2.50/-shall be consolidated into 1 (One) share of Rs.10/- fully paid up. c) It is hereby clarified that the amount of Rs.1417.35 Crore by which the share capital of the Transferee Company including the Exchange Shares is reduced in terms of Clause 12.3 (a) of the Scheme, shall not be paid to the shareholders of the Transferee Company but shall be credited to the “General Reserve” account of the Transferee Company. Clause-12.4:-. In view of Clauses 12.1, 12.2 and 12.3 of the Scheme, upon coming into effect of this Scheme and in COMP/67/2006 16/94 JUDGMENT consideration of the transfer and vesting of the Undertaking of the Transferor Companies in the Transferee Company, the Transferee Company shall actually issue and allot to the equity shareholders of the Transferor Companies whose names appear in the Register of Members of the Transferor Companies as on the Record Date, equity shares mentioned hereunder (hereinafter called the “New Equity Shares”) of the face value of Rs.10/- each in the Transferee Company credited as fully paid-up, in the following manner: a) 5.5 (Five and Half) equity shares of Rs.10/- each fully paid-up of Torrent Power Limited for every 1 (one) equity shares of Rs.10/- each fully paid-up held in Torrent Power AEC Limited. b) 11.75 (Eleven and Three Fourth) equity shares of Rs.10/- each fully COMP/67/2006 17/94 JUDGMENT paid-up Torrent Power Limited for every 1 (one) equity shares of Rs.10/- each fully paid-up held in Torrent Power SEC Limited. c) 0.25 (One Fourth) equity shares of Rs.10/- each fully paid-up of Torrent Power Limited for every 1 (One) equity shares of Rs.10/- each fully paid-up held in Torrent Power Generation Limited.” It is clarified that on the scheme being effective, the shares of TPGL held by TPAL and TPSL shall be cancelled and no shares shall be issued by the Transferee Company against these shares.” Clause:12.5:- The Scheme makes provision that reduction of capital of Transferee Company pursuant to the scheme shall be given effect as an COMP/67/2006 18/94 JUDGMENT integral part of the scheme and the consent given to the scheme by the shareholders and creditors of the Transferee Company shall be deemed to be their consent under the provisions of Section 100 and all other applicable provisions of the Act to such reduction of the capital of the Transferee Company and the Transferee Company shall not be required to convene any separate meeting for such purpose. It is also stated that the order of the Hon'ble High Court sanctioning the Scheme shall be deemed to be an Order under Section 102 of the Act. 9. In Clause:-12.6 (a) to (g), it is stated that Transferee Company shall take steps for listing of shares and the listing agreement with the stock exchange where the shares of the Transferor Companies are listed is on COMP/67/2006 19/94 JUDGMENT record and it assures listing of these shares on the stock exchange where the agreement exists in accordance with the SEBI (Disclosure and Investor Protection) Guidelines, 2000. New equity shares to be issue to shareholders of Transferor company to rank parri passu with the existing equity shares of the Transferee Company in respect of dividend, bonus, right shares, voting rights and other corporate benefits. Until the Effective Date, the holders of the equity shares of the Transferor Companies shall continue to enjoy their rights under their Articles of Association, including the right to receive dividend if any, declared in accordance with the Act and the Articles of Association of the Transferor Companies. Clause 13 is pertaining to amendment to memorandum and articles of association of the transferee company. COMP/67/2006 20/94 JUDGMENT 10. It is also stated that by an order dated 01st May, 2006, the learned Company Judge had directed the petitioner company to convene the separate meetings of equity shareholders, unsecured creditors and secured creditors of the company for considering the scheme and if thought to approve with or without modification and accordingly Chairman of the meetings came to be appointed and report of the Chairman dated 10th June, 2006 is on record at Annexure:-'E' to the petition. 11. With the above backdrop of the facts, the petitioner has submitted the scheme for sanction before this Court so as to bind on all equity shareholders, unsecured creditors and secured creditors of the Petitioner Company and also on the petitioner company. 12. At the outset, three objectors have raised their objections against sanction granted by this Court. Objections filed by COMP/67/2006 21/94 JUDGMENT Dr. Arvind Gupta, a shareholder is placed on record so as another objector Shri Pravinsinh Jadeja, also a shareholder and the third objector has also filed his objection in Company Petition No.67 of 2006. All the objectors have common grievances and they have relied on submissions of Shri K.M.Patel, learned advocate appearing on behalf of second objector. 13. As per the objectors, one of the main objections is that being shareholder, he has challenged the Government Resolution dated 16.07.1997, whereby a sale transaction and ownership of 28.89% of equity shares in the Torrent Power AEC limited is questioned. According to him, the above Special Civil Application No.8936 of 1998 is admitted by this Court and is pending for final hearing. The second objection is with regard to the outcome of the scheme if sanctioned would COMP/67/2006 22/94 JUDGMENT result into erosion of share capital of the shareholders since reduction in the face value of the shares would effectively result in the issue of new shares and the offer made in the scheme is illusive and amounts an eyewash. 14. The third objection is raised to the effect that that public institution like Government of Gujarat, Gujarat State Investments Ltd., Life Insurance Corporation of India Limited, The Oriental Insurance Company Limited, National Insurance Company Limited, General Insurance Corporation of India Ltd. have acted contrary to the public interest and failed to protect interest of different class of investors and tax-payers for the country. According to the objector if the scheme is unfair, unreasonable and detrimental to the shareholders, the Court can certainly judiciously x-ray the scheme by COMP/67/2006 23/94 JUDGMENT lifting the veil and reject the same. It is the fourth objection that determination of exchange ratio is not recommended by the firm of Chartered Accountant. According to the objector, evaluation of the shares by two different experts i.e. M/s.N.M.Raiji and Company and M/s. C.C.Choksi and Company, firms of the Chartered Accountant, there is price difference between two valuations within the very short span and the difference is Rs.107 per share since on March 10th, 2006 shares of Torrent Power AEC Limited (TPAL) was evaluated at Rs.327/- as per M/s.C.C.Choksi & Co. and later on in the scheme, the value of the same share is shown as Rs.220/- on March, 22, 2006 as per M/s.N.M.Raiji & Co. which is contrary to the interest of the public at large. The fifth objection is raised that the mandatory provisions of Sections 101 and 102 of the Companies Act, 1956 have been by-passed and COMP/67/2006 24/94 JUDGMENT reduction in share capital need not be permitted. The sixth objection is raised by relying on the explanatory statement that sufficient material is not disclosed about status of Transferee Company and sanctioning of scheme would ultimately create monopoly at the hand of the directors who will be exclusively in a control of the affairs of the Transferee Company, which is at a nascent stage and having equity of Rs.5 lakhs and virtually controlled by the directors. Lastly accumulation of free reserve by Rs.1417.35 Crores, will be at disposal of the Directors of the Transferee Company will create monopoly and thus it will be against public interest. 15. Objections raised by the second and third objectors are of the similar nature and need not require reproduction. Shri Sunil Mehta, learned advocate has adopted submissions of COMP/67/2006 25/94 JUDGMENT learned advocate Shri K.M.Patel appearing for another objectors. 16. It is also to be noted that the objections placed on record are denied by the petitioner company by filing affidavit-in- rejoinder and it is stated that the shareholders representing around 85% of the total value of shares, attended the meeting and 97.12% in number and 99.999 % in value agreed to the scheme. Thus, the scheme was approved 97.12% in number and 99.999% in value by members present and voting by overwhelming majority of the shareholders in number and in value of shares. It is also stated that voting of Government of Gujarat and its industrial investment agency and other financial institution is in accordance with law. It is further stated that Special Civil Application filed by objector is admitted and the issue being subjudice COMP/67/2006 26/94 JUDGMENT further comments were not offered except denial of certain allegations leveled by the objector. By and large the rejoinder reflects incorrect understanding of the objectors about the exchange ratio, wrong comparison of market and book value of the shares of Transferor Company and Transferee Company as wrongly understood by the objector. The provision of general reserved fund, reduction of shares, valuation by the expert in the field are elaborately dealt with in this and another rejoinder filed by the transferor company. 17. Shri S.N.Soparkar, learned Senior Counsel appearing for the petitioner has broadly referred to the background of the Transferor Companies, activities carried out, financial structuring, business transactions, provisions of newly enacted Electricity Act, 2003 and Gujarat Electricity Industry COMP/67/2006 27/94 JUDGMENT (Reorganisation and Reg.) Act, 2003, ingredients of Sections 391 to 394 of the Companies Act, 1956 earlier orders passed by this Court ordering convening of the meetings by publishing same in widely circulated two daily news papers i.e. Times of India and Gujarat Samachar, and, thereafter, he has also drawn my attention to the broad features of the Scheme and rationale behind the arrangement of share capital. 18. According to his submission, at the outset, notice of meeting with Explanatory statement under Section 393 of Companies Act, 1956, was sent with all requisite informations and record was kept for inspection at the Registered Office of the companies. Out of 249 equity shareholders who has attended the meeting either personally or by proxy, two shareholders holding 78 shares abstained from voting and 4 ballots entitled COMP/67/2006 28/94 JUDGMENT to 127 shares were found invalid. Out of 243 valid ballots cast representing Rs.53,52,23,730/- being 5,35,22,373 shares of Rs.10/ each, 236 votes were found to be in favour of the proposed scheme of arrangement whereas 7 ballots representing Rs.4,010/- were found against the proposed scheme. Thus, resolution came to be passed approving the scheme was carried out by requisite statutory majority of 97.12% in number and 99.999% in value and it was resolved accordingly. Even in the meeting of un-secured creditors which was attended by 32 and the total value of their debts was Rs.41,38,15,141.38 had given their consent. They were thus 100% in number and 100% in value. The meeting of the secured creditors of the company was attended by the sole creditor which valued at Rs.91,84,21,052/- and accordingly it was resolved. He has further submitted that the meeting was convened in accordance with the COMP/67/2006 29/94 JUDGMENT statutory requirement under the Act and the Rules and the report is submitted by the Chairman is annexed and affidavit in reply is also filed by the Chairman. According to him, except the objections of objectors of present proceedings, no other person have raised any objection to the approval of the scheme. 19. He has drawn my attention to the report of the Official Liquidator who has submitted report on the basis of the recommendations of the Chartered Accountant appointed from the penal maintained by him which reveals that they have no objection to the scheme. Even report of the Regional Director, Western Region, Ministry of Company Affairs, Government of India dated 03rd July, 2006 is placed alongwith affidavit which indicates furnishing of latest balance-sheet as on 31.03.2005 for the latest financial position and to increase authorized capital of the COMP/67/2006 30/94 JUDGMENT Transferee Company by complying Section 94/97 of the Companies Act, 1956. 20. According to Shri Soparkar, learned Senior Counsel appearing for the company, latest financial position of the company as required is placed on record and about second objection he has submitted that in view of the resolution passed increasing in the share capital is integral part of the scheme and the provisions made therein and in view of certain judgments no further procedure is required to be followed. Shri Soparkar, learned Senior