COMP/93/2007 1/447 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD COMPANY PETITION No. 93 of 2007 In COMPANY APPLICATION No. 126 of 2007 For Approval and Signature: HONOURABLE MR.JUSTICE K.M.MEHTA ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? YES 2 To be referred to the Reporter or not ? YES 3 Whether their Lordships wish to see the fair copy of the judgment ? NO 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 ? NO 5 Whether it is to be circulated to the civil judge ? NO ========================================================= INDIAN PETROCHEMICALS CORPORATION LIMITED - Petitioner(s) Versus . - Respondent(s) ========================================================= Appearance : MR. K.S. NANAVATI, MR. MIHIR THAKORE, MR. S.N. SOPARKAR, ld. Sr. counsel with Mr. Nandish Chudgar, learned advocate for the petitioner. Ms. Ami Yagnik, learned advocate for Official Liquidator Mr. Girish Patel, learned sr. counsel with Mr. Shalin N. Mehta, ld. Advocate for the objectors. MR HARIN P RAVAL for Central Government Mr. P.R. Thakkar, learned advocate for objector on behalf of Ancillary Industries , MR RAMNANDAN SINGH for objector on behalf of SC/ST employees ========================================================= COMP/93/2007 2/447 JUDGMENT CORAM : HONOURABLE MR.JUSTICE K.M.MEHTA Date : 16/8/2007 CAV JUDGMENT 1. Indian Petrochemicals Corporation Limited (hereinafter referred to as “IPCL”), the petitioner Company (Transferor Company) has filed this Company Petition under Section 391 read with Section 394 of the Companies Act, 1956, with a prayer that this Court may be pleased to sanction the Scheme of Amalgamation being Exh. “G” to the petition so as to be binding with effect from 1.4.2006, the appointed date, on the petitioner Company, the Reliance Industries Limited (hereinafter referred to as RIL), the Transferee Company and all their respective shareholders, creditors and all concerned persons. The said Scheme provides that the entire undertaking of the Transferor Company along with all its assets, debts, liabilities etc., shall stand COMP/93/2007 3/447 JUDGMENT transferred to the Transferee Company, all legal proceedings pending by or against the Transferor Company shall be continued by or against the Transferee Company, the employees of the Transferor Company shall become the employees of the transferee Company and the Transferor Company shall allot to the shareholders of the Transferor Company shares in the Transferee Company in the proportion mentioned in the Scheme. INDEX OF JUDGEMENT Particulars para page Nos. Nos. --------------------------------------------- 1. Basic Facts regarding 2 to 5.5H 3 to 41 amalgamation & merger 2. Objection by various 6 to 22.13 41 to 187 objectors 3. Submission of Company 23.1 to regarding objections 30.13 187 to 242 Observations of the Court COMP/93/2007 4/447 JUDGMENT 1. Regarding jurisdiction 31 to of Court 32.3 243 to 285 2. Finding regarding 33.1 to various objections 45.2 285 to 406 3. Scheme of Sections 391 45.3 to to 394 of the Companies 45.18 407 to 422 Act 4. Final Directions/opera- 47.1 to tive order 49 427 to 438 /445 -------------------------------------------- 2. The facts giving rise to this petition are as under: FACTS ABOUT THE TRANSFEROR COMPANY: 2.1 The petitioner Company was incorporated on 22.3.1969 in the State of Gujarat under the Companies Act, 1956 (hereinafter referred to as “the Act”). The petitioner Company has its registered office at P.O. Petrochemicals, Dist. Vadodara, Gujarat. COMP/93/2007 5/447 JUDGMENT 2.2 The objects for which the petitioner Company has been established are set out in its Memorandum of Association. One of the main objects is to carry on the business of processing, converting, producing, manufacturing, formulating, using, buying, acquiring, importing, storing, packaging, selling, transporting, distributing, exporting and disposing (a) all organic and inorganic chemicals derived from petroleum hydrocarbon elements, chemicals compounds and products of any nature and kind whatsoever including by- products, derivatives and mixtures thereof. 2.3 The authorized issued, subscribed and paid up share capital of the petitioner Company as on 31.3.2007 was as under: Rs Rs Authorised Share Capital COMP/93/2007 6/447 JUDGMENT Rs Rs (i) 40,00,00,000 equity shares of Rs. 10/- each 400,00,00,000 (ii) 40,00,00,000 Non- Convertible Redeemable Preference Shares of Rs. 10/- each 400,00,00,000 Total 800,00,00,000 Issued Share Capital 30,30,10,937 Equity Shares of Rs. 10/- each 303,01,09,370 Subscribed and paid up share capital 30,07,02,798 Equity Shares of Rs. 10/- each 300,70,27,980 Add : Shares Forfeited 82,72,495 Total 301,53,00,475 2.4 In showing the profitability of the Company, audited balance sheet of the petitioner Company for the year ended 31.3.2006 is annexed along with the petition. The last unaudited financial accounts of the petitioner Company as on 31.3.2007 are also annexed with the petition. 2.5 The equity shares of the petitioner Company are listed on the Bombay Stock COMP/93/2007 7/447 JUDGMENT Exchange Limited and the National Stock Exchange of India Limited. The Bombay Stock Exchange Limited vide its letter dated 13.3.2007 and the National Stock Exchange of India Limited vide its letter dated 14.3.2007 have issued their “No Objection” to the Scheme of Amalgamation. FACTS OF THE TRANSFEREE COMPANY: 3. The Transferee Company was incorporated as Mynylon Limited on 8.5.1973 in the State of Karnataka under the provisions of the Act. The name of the Transferee Company was subsequently changed to Reliance Textile Industries Limited on 11.3.1977. The place of the registered office of the Transferee Company was thereafter changed from the State of Karnataka to the State of Maharashtra on 2.7.1977. The name of the Transferee Company was again changed to Reliance Industries COMP/93/2007 8/447 JUDGMENT Limited on 27.6.1985. It appears that the address of the registered office of the Transferee Company is : 3rd floor, Maker Chambers IV, 222, Nariman Point, Mumbai 400 021, Maharashtra. The objects for which the Transferee Company has been established are set out in its Memorandum of Association. The main objects are reproduced hereinafter: 3.1 “To carry on the business of manufacturers, dealers, agents, factors, importers, exporters, merchants and financiers of all kinds of man made fibres and man made fibre yarns of all kinds, man made fibre cords of all kinds and man made fibre fabrics of all kinds, mixed with or without mixing, materials like woolen, cotton, metallic or any other fibres of vegetable, mineral or animal origin, manufacturing such man made COMP/93/2007 9/447 JUDGMENT fibres and man made fibre products of all description and kinds with or without mixing fibres of other origin as described above, by any process using petrochemicals of all description or by using vegetable or mineral oils or products of all description required to produce such man made fibres.” 3.2 The authorised, issued, subscribed and paid up share capital of the transferee Company as on 31.3.2007 was as under: Rs. Rs. Authorised Share Capital 250,00,00,000 Equity Shares of Rs. 10 each 2500,00,00,000 50,00,00,000 Preference Shares of Rs. 10 each 500,00,00,000 Total 3000,00,00,000 Issued, Subscribed and paid up Share Capital: 139,35,0,041 Equity Shares of Rs. 10/- each fully paid up 1393,50,80,410 COMP/93/2007 10/447 JUDGMENT Rs. Rs. Less: Call in arrears – by others 31,27,380 Total 1393,19,53,030 3.3 The equity shares of the Transferee Company are listed in Bombay Stock Exchange Limited and the National Stock Exchange of India Limited. The Bombay Stock Exchange Limited vide its letter dated 13.3.2007 and the National Stock Exchange of India Limited vide its letter dated 14.3.2007 have issued their “No Objection” to the Scheme of Amalgamation. The GDRs representing the underlying equity shares of the Transferee Company are listed on Luxembourg Stock Exchange and traded on the PORAL Market of the United States National Association of Securities Dealers Inc and SEAQ (London Stock Exchange). The non-convertible debentures of the Transferee Company are listed on the Wholesale Debt Market segment of the National Stock Exchange of India Limited. COMP/93/2007 11/447 JUDGMENT 3.4 The petitioner Transferor Company (IPCL) is a leading Indian integrated manufacturer of petrochemicals products. Its primary products are polymers, fibre intermediates and chemicals. It operates three integrated petrochemicals complexes in India – a naphtha based cracker complex at Vadodara; a gas based cracker complex at Dahej; and a gas based cracker complex at Nagothane. The polymer business of the petitioner Company encompasses commodity plastic raw materials namely Polypropylene (PP), Polyethylene (PE) and Poly Vinyl Chloride (PVC). 3.5 The Transferee Company (RIL) is one of India's largest private Sector Industrial enterprises in terms of net turnover, total assets, net worth and net profit and is a fortune 500 Company. The transferee Company ranks amongst the world's top 10 producers for COMP/93/2007 12/447 JUDGMENT most of its products. Over the years, the Transferee Company's strategy has been to build leading market share in the domestic market, pursue export opportunities, implement vertical, forward and backward integration and at the same time, to achieve economies of scale, focus on financial management and invest in infrastructure projects. RE: AMALGAMATION OF TRANSFEROR COMPANY WITH TRANSFEREE COMPANY: 3.6 Both the Transferor Company and the Transferee Company decided upon the Scheme of their Amalgamation. The Board of Directors of the Transferor Company passed a Resolution at its meeting held on 10.3.2007 approved the said Scheme subject to obtaining of all requisite approvals, if any, of the appropriate authorities and subject to the approval of the High Court of Judicature at COMP/93/2007 13/447 JUDGMENT Bombay and the High Court of Gujarat at Ahmedabad. 3.7 The Board of Directors of the Transferee Company (Reliance Industries Limited) has also passed a similar Resolution at its meeting held on 10.3.2007. 3.8 Accordingly, the Scheme of Amalgamation was prepared. The rationale for the Scheme is stated as under: “The amalgamation of the Transferor Company with the Transferee Company would, inter alia, have the following benefits: (a) Greater size, scale, integration and greater financial strength and flexibility for the amalgamated entity, which would result in COMP/93/2007 14/447 JUDGMENT maximising overall shareholder value; (b) Strengthening leadership in the industry, not only in terms of the assets base, revenues, product range, production volumes and market share, but also in terms of total shareholder return; (c ) The synergies that exist between the two entities in terms of the products, processes and resources can be put to the best advantage of all stakeholders; (d) The amalgamated entity will have the ability to leverage on its large asset base, diverse range of products and services and vast pool of intellectual capital, to COMP/93/2007 15/447 JUDGMENT enhance shareholder value; (e) The amalgamation will result in increased financial strength and flexibility, and enhance the ability of the amalgamated entity to undertake large projects, thereby contributing to enhancement of future business potential; (f) The integration of the manufacturing and other facilities of IPCL and RIL will contribute to enhanced global competitiveness for the amalgamated entity, thereby increasing its ability to compete with its peer group in domestic and international markets; COMP/93/2007 16/447 JUDGMENT (g) The amalgamated entity will benefit from improved organizational capability and leadership, arising from the combination of people from IPCL and RIL who have the diverse skills, talent and vast experience to compete successfully in an increasingly competitive industry; and (h) Cost savings are expected to flow from more focused operational efforts, rationalization, standardization and simplification of business processes, productivity mprovements, improved procurement and the elimination of duplication.” 3.9 The Transferor Company had filed an COMP/93/2007 17/447 JUDGMENT application being Company Application No. 126 of 2007 before this Court. This Court (Coram: M.R. Shah, J) passed order dated 16.3.2007 giving directions for convening meetings of the equity shareholders, Secured Creditors, unsecured creditors of the applicant Company (Transferor Company). It was stated that at least 21 clear days before the meetings to be held as aforesaid, notices convening the said meetings, indicating the day, the date, the place and time together with a copy of Scheme of Amalgamation, copy of the Explanatory Statement required to be sent under Section 393 of the Companies Act, 1956 and the prescribed Form of Proxy shall be sent under Certificate of Posting addressed to each of the equity shareholders, secured creditors (including debenture holders) and unsecured creditors of the applicant company at their last known address. It was stated that Mr. Justice S.D. Dave (Retd.) and in his absence COMP/93/2007 18/447 JUDGMENT Mr. Lalit Bhasin shall be the Chairman of the said meetings. The ancillary and incidental directions relating to the said meetings were also given by the said order. 3.10 The above referred meetings were accordingly held after issuing required notices and voting had taken place on the proposed resolution supporting amalgamation. Scrutineers appointed at the meeting had submitted their reports which are as under: RE: SHAREHOLDERS' MEETING: (a) Voted in favour of the resolution: Number of members present (in person or by proxy) and voting Number of votes cast by them % of the total number of members present (in person or by proxy) and voting % of total number of votes cast by them. 7632 20,37,73,286 97.04 99.89 COMP/93/2007 19/447 JUDGMENT (b) Voted against the resolution: Number of members present (in person or by proxy) and voting Number of votes cast by them % of the total number of members present (in person or by proxy) and voting % of total number of votes cast by them. 233 2,28,705 2.95 0.11% (c ) Invalid votes Total number of members whose votes were declared invalid Total number of votes cast by them 54 11,74,879 RE: SECURED CREDITORS (INCLUDING DEBENTURE HOLDERS) MEETING: (a) Voted in favour of the resolution: Number of secured creditors (including debenture holders) present (in person or by proxy) and voting Value of Secured Debt of those present and voting (Rs. in crores) % of the total number of Secured Creditors (including Debenture holders) present (in person or by proxy) and voting. % of total value of Secured Debt of those present and voting. 51 355.34 100% 100% COMP/93/2007 20/447 JUDGMENT (b) Voted against the resolution Number of secured creditors (including debenture holders) present (in person or by proxy) and voting Value of Secured Debt of those present and voting (Rs. in crores) % of the total number of Secured Creditors (including Debenture holders) present (in person or by proxy) and voting. % of total value of Secured Debt of those present and voting. Nil Nil Nil Nil ( c) Invalid votes Total number of Secured Creditors whose votes were declared invalid Total value (Rs. in Crore) 3 0.25 RE: UNSECURED CREDITORS' MEETING: (a) Voted in favour of the resolution: COMP/93/2007 21/447 JUDGMENT Number of unsecure d creditors present (in person or by proxy) and voting Value of Unsecure d Debt of those present and voting (Rs. in crores) % of the total number of Unsecure d Creditors present (in person or by proxy) and voting. % of total value of Unsecure d Debt of those present and voting. 635 687.48 100% 100% (b) Voted against the resolution: Number of unsecure d creditors present (in person or by proxy) and voting Value of Unsecure d Debt of those present and voting (Rs. in crores) % of the total number of Unsecure d Creditors present (in person or by proxy) and voting. % of total value of Unsecure d Debt of those present and voting. Nil Nil Nil Nil (c ) Invalid votes: Total number of unsecured creditors whose votes were declared invalid Total value (Rs. in crore) 4 Nil COMP/93/2007 22/447 JUDGMENT 3.11 Thus as per the report, the Scheme was approved by an overwhelming majority of secured creditors (including debenture holders), unsecured creditors, equity shareholders and the resolution was passed by members constituting more than a majority in number and representing more than three- fourths in value of the shareholding of the equity shareholders present and voting either in person or by proxy at the meeting. 3.12 Thus in view of the report of the Scrutineers, the Chairman, Justice S.D. Dave (Retd.), made a report dated 18.4.2007 which is at page 114 and reported the above results. The Chairman has also filed an affidavit in support of the said report. Shashikala Rao, Company Secretary of the Transferor Company also filed an affidavit verifying the petition. COMP/93/2007 23/447 JUDGMENT PRESENT CONTROVERSY: 4.1 In view of the same, the Transferor Company filed Company Petition No. 93 of 2007 before this Court under Sections 391 to 394 of the Act in connection with the Scheme of amalgamation of the Transferor Company (IPCL) and the Transferee Company (RIL). DETAILS ABOUT THE SCHEME: 4.2 Under the Scheme, the appointed date means 1st April, 2006 which has been mentioned in Part I Definitions and Share capital of the Scheme. Effective date is given in clause 1.3 which means the last of the dates on which the conditions referred to in Clause 18.1 of the Scheme have been fulfilled. Clause 1.12 defines the term “undertaking”. The word “undertaking” shall mean the whole of the COMP/93/2007 24/447 JUDGMENT undertaking and entire business of the Transferor Company as a going concern, including all the assets and properties. 4.3 It also provides in part II clause 4 Transfer of undertaking. Clause 4.1 provides general transfer of undertaking; Clause 4.2 provides transfer of assets; Clause 4.3 provides transfer of liabilities. The Scheme also provides when the Transferor Company merges with the Transferee Company, the Transferee Company will issue new equity shares of the Transferee Company to the equity shareholders of the Transferor Company in the ratio of 1 (one) equity share of the face value of Rs. 10/- (Rupees ten only) of the transferee Company with rights attached thereto as mentioned in the Scheme for every 5 (five) equity shares of the face value of Rs. 10/- (Rupees ten only) each credited as fully paid up held by such equity shareholders or COMP/93/2007 25/447 JUDGMENT their respective heirs, executors or as the case may be, successors in the Transferor Company. The ratio in which equity shares of the Transferee Company are to be issued and allotted to the shareholders of the Transferor Company is hereinafter referred to as the “Share Exchange Ratio”). The Scheme also provides for various other aspects namely new equity shares, obtaining of approvals, fractional entitlement, exemption from registration, scheme conditional upon sanction. In para III of General, Description of Companies, the rationale for the Scheme is given which I have quoted earlier. 4.4 After the aforesaid procedure in connection with convening the aforesaid meetings was complied with, the present petition for amalgamation was filed in April, 2007 seeking directions for publication of public notice of date of hearing. It is stated COMP/93/2007 26/447 JUDGMENT in the petition that no investigation proceedings have been instituted and/or are pending in relation to the petitioner Company under Sections 235 to 251 of the Act. 4.5 This Court admitted the petition on 23.4.2007 and fixed its hearing on 19.6.2007. Pursuant to that order the petitioner Company has served notice to the Official Liquidator on 30.4.2007 and also to the Regional Director, Department of Company Affairs, Western Region, 5th Floor, “Everest”, 100, Netaji Subhash Road, Mumbai and for that purpose affidavit of service has been filed on 4.5.2007. The petitioner Company pursuant to the order of this Court, published the notice in Times of India 21.5.2007 and Gujarat Samachar, Ahmedabad and Vadodara editions, on 21.5.2007. The Company Secretary has also filed affidavit of advertisement dated 9.6.2007. Thus, the requisite affidavits COMP/93/2007 27/447 JUDGMENT before this Court in compliance with the aforesaid order have been filed. 4.6 Pursuant to the aforesaid order, the Official Liquidator has filed report dated 18.6.2007. 4.6A That in view of the said order, the Official Liquidator had appointed one M/s. Malay J. Dalal, Chartered Accountants, for carrying out the investigation work of the Transferor Company. M/s. Malay J. Dalal, Chartered Accountants, after scrutiny of the books of accounts and affairs of the above Company have submitted their investigation report dated 4.6.2007 which has been annexed with the report of the Official Liquidator at Annexure-A. 4.6B In the meanwhile, the Official Liquidator has also written to the petitioner COMP/93/2007 28/447 JUDGMENT Company requesting him to furnish certain particulars and informations regarding the affairs of the Company. The said Company accordingly has submitted the required details to the Official liquidator which is annexed with the report at Annexure-B. 4.6C The Chartered Accountants (i.e. Shri Malay J. Dalal) have considered Tax Audit, Income-tax, Sales-tax, Excise Duty, Professional Tax, Provident Fund / Superannuation / Gratuity / ESIC, Summarized financial position, year-wise summarized profit and loss account, details of transferee Company, advantages of amalgamation, salient features of the Scheme of Amalgamation. The Chartered Accountants have come to the conclusion that on the basis of their comments in the report and according to the explanations given to them and books of accounts produced before them, they report COMP/93/2007 29/447 JUDGMENT that the acts and transactions of IPCL were conducted within the objects mentioned in the Memorandum of Association of the Company and that the affairs of the Company have not been conducted in a manner prejudicial to the interest of its members or the public interest. 4.7 Along with the report of the Official Liquidator, details of transferor and transferee Companies were produced and balance sheets of IPCL and RIL for the years 2001-2002, 2002-2003, 2003-2004, 2004-2005, 2005-2006 were annexed. 4.8 The Official Liquidator has filed report dated 18.6.2007 before this Court. Along with the report, the Official Liquidator has annexed report of auditor Pricewaterhouse Coopers Private Limited and Ernst & Young Private Limited. Both these Chartered COMP/93/2007 30/447 JUDGMENT Accountant firms are very reputed and eminent firms. The two Chartered Accountants firms have expressed their opinion as to the fair exchange ratio of equity shares on the proposed amalgamation of IPCL into Reliance Industries Limited on a going concern basis was produced. REPORT OF THESE TWO AUDITORS (PRICEWATERHOUSE COOPERS PRIVATE LIMITED AND ERNST & YOUNG PRIVATE LIMITED: 4.8A They addressed a letter to both the Companies about the exchange ratio of equity shares. In para 2 of the said letter they have stated the procedures used in the analysis included such substantive steps as are considered necessary under the circumstances, including but not necessarily limited to certain aspects. They have also relied upon the information, data and explanations COMP/93/2007 31/447 JUDGMENT detailed in paragraph 2 in the said letter for the purpose of determining the exchange ratio of the equity shares of RIL and IPCL in connected with proposed amalgamation. They have also valued the assets and liabilities of RIL and IPCL which were reflected in the balance sheet of the Company. For the purpose of determination of the exchange ratio, they have used financial and other information provided by the management of both the Companies. Along with the said letter they have also annexed Schedule-I which shows factors considered in determining the exchange ratio of the equity shares of both the Companies. In the earlier part they have given information and background of both the Transferor Company and Transferee Company and in paragraph No. 2 they have given what is methodology. They have adopted the method in valuing of the shares. They have considered the method of Net Assets Value, Earnings COMP/93/2007 32/447 JUDGMENT Value, Market value and thereafter they have determined the value of the shares of both the Companies. They have also indicated that the market value of RIL has been computed by averaging the value and the volume of shares traded for the last three months. They have also stated that the market value of IPCL has been computed by averaging the value and the volume of shares traded for the last three months. Ultimately, they have given their opinion about exchange ratio. 4.8B Pursuant to the notice issued by this Court to the Regional Director, Shri P.L. Malik, Assistant Registrar of Companies, has filed affidavit dated 1.6.2007 (page 136) where he has stated that he is filing this affidavit as authorized by Regional Director, Western Region, Ministry of Company Affairs, Government of India, Mumbai. In the said affidavit it has been stated that the COMP/93/2007 33/447 JUDGMENT petitioner may be directed to submit proof of filing of affidavit of publication of notice of final hearing of the petition. He has also annexed original/letter dated 31.5.2007 sent by the Regional Director,