IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION COMPANY PETITION NO.817 OF 2008 CONNECTED WITH COMPANY APPLICATION NO.662 OF 2008 Dharamshi Broking Private Limited. ...Petitioner / Transferor Company AND COMPANY PETITION NO.818 OF 2008 CONNECTED WITH COMPANY APPLICATION NO.663 OF 2008 Dharamshi Securities Private Limited. ...Petitioner / Transferee Company In the matter of the Companies Act 1956 AND In the matter of Section 391 and 394 of the Companies Act, 1956 AND In the matter of the Scheme of Amalgamation of Dharamshi Broking Private Limited with Dharamshi Securities Private Limited Mr. Hemant Sethi i/b Mr. S. V. Palsuledesai, Advocate for Petitioner Mr. S. Chandanamuthu, Dy. Official Liquidator, in Company Petition No.817 of 2008 present. Mr. C. J. Joy with Ms. Bharti Mahant with Ms. Lata Patne i/b Mr. S. K. Mohapatra for Regional Director in both the Petitions. 1 CORAM : S. J. KATHAWALLA, J DATE : 21st August, 2009 P.C.: 1. Heard learned Counsel for parties. 2. The sanction of the Court is sought under Section 394 of the Companies Act, 1956 to the Scheme of Amalgamation of Dharamshi Broking Private Limited, the Transferor Company, with Dharamshi Securities Private Limited, the Transferee Company. 3. Counsel appearing on behalf of the Petitioners has stated that the Petitioner has complied with all the requirements as per directions of the Court and they have filed necessary affidavits of compliance in the Court. Moreover, the Petitioners also undertake to comply with all other statutory requirements, if any, as required under the Companies Act, 1956 and the Rules made thereunder. 4. The Regional Director has filed his affidavit stating therein that the scheme is not prejudicial to the interest of creditors and shareholders and public. However, in paragraph 6(a) of the said affidavit, the Regional Director has stated that the Petitioner/Transferee Company may be directed to comply with the provisions of Section 94 and 97 read with Schedule ‘X’ of the Companies Act, 1956 in connection with the increase in authorised capital in respect of filing of necessary forms with the Registrar of Companies after payment of necessary ROC fees and Stamp Duty. The Counsel appearing for the Petitioner undertakes that the 2 Petitioner/Transferee Company will comply with the requirement of provisions of Section 94 and 97 read with Schedule ‘X’ of the Companies Act, 1956 in respect of filing of necessary forms with Registrar of Companies after payment of necessary ROC fees and Stamp Duty. The said undertaking is accepted. 5. In paragraph 6(b) of the said affidavit, the Regional Director has further stated that the Petitioner Companies may be directed to amend clause 11 of the Scheme suitably, by deleting the words “Chennai and/or” from the said clause as jurisdiction of the Petitioner Companies is under the Hon’ble High Court of Bombay. The counsel appearing on behalf of the Petitioners states that the said requisition has been complied with and necessary amendments have already been carried out in the Scheme. 6. The Official Liquidator in his report dated 18th March, 2009 has stated that on perusal of Chartered Accountant’s report and specifically the questionnaire relating to the same, prima facie, it is noticed that the affairs of the Transferor Company have not been conducted in a proper manner. He specifically invited my attention to a report of M/s Yogesh A. Oza & Co., Chartered Accountant, dated 16th February, 2009, wherein certain observations have been made stating that it is not in the public interest to approve Amalgamation. Although several allegations have been made, emphasis have been laid on the following main points: (a) Suspecting large scale multi fraudulent transactions have been carried out by the Transferor Company and the Transferee Company in collusion with 3 Securities Trading Corporation of India Limited (STCIL), Reliance Power Limited and HDFC Bank for acquiring shares of Reliance Power Ltd in Initial Public Offer (IPO) by obtaining loan from Securities Trading Corporation of India Limited, (STCIL being a Government company) by not paying any margin money. (b) Loan procured by the Petitioner/Transferor Company and the Transferee Company from STCIL is beyond the norms of Reserve Bank of India (RBI) as per circular of RBI dated 12th December, 2006 (Exhibit J Page 176) of his reply about the norms of lending limits of NBFC-ND-SI to single borrower and Group borrower interpreting that this has to be looked as the borrowing limits of the borrowers and not the lenders. (c) Defects in the loan documentation of STCIL titled as the facility Agreement is on a stamp paper which does not bear the name of the party and in the nutshell says that in his opinion a wide scale fraudulent practices have been observed which are against public interest. (d)On the issue of Loan/Facility agreement being not signed by the parties i.e STCIL and the Transferor/Petitioner Company. (e)Loan availed from STCIL without margin money being deposited by the Petitioner Company. (f) Breach of RBI norms by STCIL in lending financial aid to the Petitioner Company and the Transferee Company. (g) How STCIL could lend Rs.50 Crore to the Petitioner Company when its own capital was Rs.30 Crores? 4 7. In view of the above, this Court on 2nd May 2009 directed the Official Liquidator to independently examine issues raised by the Chartered Accountant. Accordingly, a report dated 7th May 2009 has been filed by the Official Liquidator. Upon perusal of the said report, the Official Liquidator has stated as under: (i) That on examination of these comments it is noticed that the loan under reference and the refund of money transaction are carried out through Electronic Fund Transfer and therefore the question of mentioning the cheque numbers does not arise. Similarly the margin money of Rs.5 Crores actually seems to have been paid on 18.1.2008 in account No.006003405225 of HDFC Bank. (ii) As regards alleged irregularities involved in refund order of allotment of shares before the listing are as per the SEBI norms and the company does not seem to have violated in that aspect. More so the aforesaid transaction which is in isolation is already concluded and cannot be taken to generalize and serve as a benchmark to conclude that the affairs of the company which consists of so many transactions be stated as carried out in a manner prejudicial to the interest of the public (iii) The Transferor Company is a closely held private company and it has no creditors as on 31.3.2008 and therefore there is hardly any question of creditors’ interest being hampered or jeopardized due to the proposed merger. (iv) The Transferor Company has not written off any amount as bad debts in its books of accounts and the statutory auditors of the Transferor Company have not made any adverse remark in any of the last 5 years audited balance sheets to that effect. 5 (v) There is no loss or substantial or speculative profits during the last 5 years. (vi) The shareholders of both the companies have duly consented to the merger. (vi) These are the aspects which it appear, probably lost sight of from the investigation report of the Chartered Accountant. The Official Liquidator has further submitted that the affairs of the Transferor Company have not been conducted in a manner prejudicial to the interest of its members or to the public and that the Transferor Company may be ordered to be dissolved without order of winding up. 8. When again this mater was called out on 16th July 2009, this Court (Coram: A. M. Khanwilkar, J.) after hearing the Chartered Accountant noticed one of the glaring objections about breach of RBI norms in lending financial aid to the Petitioner Company. The same is mentioned at page 176 of the said report of the Chartered Accountant. This Court, therefore, directed the concerned officer of R.B.I. to explain the position, so that objection raised by the Chartered Accountant can be addressed on its own merits and taken to its logical end. 9. Accordingly, a Report dated 24th July, 2009 of Mr. D. Rajagopala Rao, General Manager, Reserve Bank of India, has been filed. In his report, Mr. Rao has explained that the concentration of credit/investments norms contained in paragraph 12 of notification 6 No.119 were not applicable to Non Banking Finance Company (NBFC) which does not accept/hold public deposit. STCI, the lender in this case is registered with Reserve Bank of India as Non Deposits taking NBFC. It is exempted from the provisions of said notification. Further, it states that the norms of concentration of credit/investment issued by RBI are applicable to NBFCs-ND-SI, which are lenders and the limits have to be worked out based on owned funds of the lender, (STCI in the present case). In paragraph 5 of the said report it is further stated that as regards violations of concentration norms it is submitted that STCI’s owned fund as at March 31, 2009 stood at Rs.874.87 Crore as such, it was entitled to lend to single borrower upto Rs.131.23 Crore (i.e. 15% of owned fund) & Rs.218.72 crore to a single borrower group (i.e. 25% of its owned fund). As the loan given by STCI to Dharamshi Broking Private Limited & Dharamshi Securities Private Limited amounted to Rs.90 Crore only, there was no violation of RBI guidelines for single borrower & group borrower limits. 10. Moreover, this Court has also directed the Regional Director to examine independently the issues raised by the said Chartered Accountant. The Regional Director has accordingly filed his Affidavit and with regard to main allegation made by the Chartered Accountant has stated as under:- (a) RBI guidelines on lending by NBFC Companies vide circular dated 12-12-2006 which prima facie applies to STCIL an NBFC-ND(SI) and not to the borrowers (in this case the Transferor Company and the Transferee Company). Neither the Transferor nor the 7 lender (STCIL) appears to have violated the said guidelines. However, in order to be doubly cautious, the Department may be permitted to inform RBI of the details of the transaction for their examination, independent of present proceedings. (b) IPO financing where the lender is STCIL an NBFC Company and borrowers are the Transferor Company and the Transferee Company, it appears that STCIL an NBFC Company and the Transferor Company and the Transferee Company has followed the procedure for IPO funding in compliance of NBFC guidelines and finally loan amount has been repaid to the lender on 17th day i.e. on 4th February, 2008. (c) In a nutshell, that there was no financial fraud as alleged by the Chartered Accountant in the IPO financing as neither fictitious loan appear to have been introduced nor was any loan repayment evaded. (d) That Chartered Accountant has exceeded his mandate by investigating the affairs of the Transferee Company. 11. The Counsel appearing on behalf of the Petitioner states that the transaction was purely a commercial transaction in which loan was availed from STCIL to apply for shares of Reliance Power Limited in Initial Public Offer (IPO) on 18th January, 2008 and the said loan was repaid along with interest on 4th February, 2008 as per the agreed terms. Further, on this aspect the counsel appearing for the Petitioner draws my attention to the affidavit of the Regional Director at page 191 wherein he has stated that no fraud or such thing could be seen in this commercial transaction. 8 12. As regards allegations made by the Chartered Accountant that Loan / Facility Agreement has not been signed by the parties, my attention has been drawn to page 147 of the said agreement. On perusal of the same, it is seen that the agreement has been signed by the Authroised Signatory of STCIL and by the Director of the Petitioner in presence of a witness. 13. As regards the issue regarding utilising the entire margin money, the learned counsel for the Petitioner submitted that the margin money is to be understood as the amount of contribution required to be brought in by the borrower in this case being the Petitioner Company and the Transferee Company to get funding from the lender in this case being STCIL for the purpose of making application in Reliance Power IPO. In this case, the margin money required was 10% and balance 90% was funded by STCIL in making application for Reliance Power Limited IPO. Hence, there is no question of retaining any margin money as the entire money was debited from the joint bank account to make application in Reliance Power Limited. The counsel appearing for the Petitioner further invited my attention to page 108 of the Report of the Chartered Accountant wherein Bank Statement of HDFC Bank (as annexed by the Chartered Accountant) being the joint account of Petitioner and STCIL. It is seen that margin money of Rs.5 Crores has been credited to the account on 15th January, 2008. This fact has also been confirmed by the Official Liquidator in paragraph 4 of his report dated 7th May 2009 (page 181). 9 14. As regards breach of norms in lending financial aid to the Petitioner Company, the Counsel appearing for the Petitioner states that the Chartered Accountant is incorrect. These norms apply only to NBFC i.e. STCIL and not to the Petitioner/borrowers. Reliance has been placed upon circular of R.B.I. circular NO DNBS (COBW) NO CC 03/02.01/97 dated 2.1.98 which has clarified this position and subsequent report dated 24th July, 2009 of Mr. D. Rajagopala Rao, General Manager, Reserve Bank of India. 15 In so far as the question how STCIL could have lend and advanced huge sum of monies to a company i.e. the Petitioner with capital base of Rs.30 Crores only, the counsel appearing for the Petitioner states that the allegations made by Chartered accountant are not supported with any regulations which prevents the Petitioners to avail loan irrespective of their capital structure. 16. Taking overall view of the matter and in view of the above findings, the Court is satisfied and finds no reasons to reject the scheme. The report of the Official Liquidator dated 7th May 2009, affidavits dated 8th July 2009 and 15th July 2009 of the Regional Director and subsequent clarification of Reserve Bank of India vide report dated 24th July, 2009 do not support the view taken by the Chartered Accountant. The allegations made by the Chartered Accountant have to be rejected. Moreover, there is no response given by the Chartered Accountant to the queries raised by this Court as to why the Scheme of merger of Transferor Company with Transferee Company cannot be sanctioned. No satisfactory answer has come forward by the said Chartered Accountant. It appears that 10 the Chartered Accountant has exceeded his limits given to him by investigating into affairs of the Transferee Company and its Directors and making baseless allegations against Reliance Power, HDFC Bank and STCIL. The questionnaires appended to the Report of Official Liquidator clearly spells out the scope of inquiry which is self explanatory. 17. Upon perusal of the entire material on record, in my opinion the Scheme appears to be fair and reasonable and is not violative of any provisions of law and is not contrary to any public policy. Moreover, the Regional Director has also stated that the scheme as proposed is not prejudicial to the interest of shareholders and creditors and the public and the Official Liquidator in his further report dated 7th May 2009 has stated that the affairs of the Transferor Company have not been conducted in a manner prejudicial to the interest of its members or to the public and therefore the Transferor Company may be ordered to be dissolved without order of winding up. 18. Since all the requisite statutory compliances have been fulfilled Company Petition Nos.817 of 2008 and 818 of 2008 are made absolute in terms of prayer clause (a) respectively. 19. The Transferee Company to lodge copy of this order and the Scheme duly authenticated by the Company Registrar, High Court, (O.S.), Bombay, with the concerned Superintendent of Stamps for the purpose of adjudication of stamp duty payable, if any, on the same within 60 days from the date of issuance of this order. 11 20. The Petitioners in both the Company Petitions to pay costs of Rs.7,500/- each to the Regional Director. Petitioner in Company Petition No.817 of 2008 to pay to the Official Liquidator, High Court, Bombay, a sum of Rs.7,500/- towards his costs. Costs to be paid within four weeks from today. 21. Filing and issuance of the drawn up order is dispensed with. 22. All concerned authorities to act on a copy of this order and the Scheme duly authenticated by Company Registrar, High Court, (O.S.), Bombay. (S. J. KATHAWALLA, J) 12