1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION COMPANY PETITION. NO. 293 OF 2009 CONNECTED WITH COMPANY APPLICATION NO.234 OF 2009 Hindalco Industries Limited, a Company ) incorporated under the provisions of the ) Companies Act, 1956 and having its Registered ) Office at Century Bhavan, 3rd floor. Dr. Annie ) Besant Road Worli Mumbai 400 030, ) Maharashtra. ) …Petitioner Company Mr. Janak Dwarkadas, Sr.Counsel alongwith Mr. Sharan Jagtiani i/b Chitnis & Co. for the Petitioners. Mr.Simil Purohit a/w. Mr.Vivek Khemka for Ram Niranjan Kedia-objector. Mr.Shaunak Thakkar a/w. Dr.Santosh Raje for Bhupendra Gandhi-Objector. Mr.C.J.Joy a/w. Mr.Y.R.Mishra & Mr.V.B.Tiwari i/b Mr. S.K. Mohopatra for Regional Director. Mr.Prashant Chavan a/w. Mr.Suhas Patil i/b. Navdeep Vora & Associates for MIDC Creditors. 2 CORAM:- A.M.KHANWILKAR, J DATED :- JUNE 22, 2009. JUDGMENT: 1. This is a composite Petition by the Company to obtain sanction to the scheme of arrangement involving financial restructuring of Hindalco Industries Ltd.(hereinafter referred to as HIL or the Company) and its Equity Shareholders under section 391 r/w Section 100 of the Companies Act, 1956(hereinafter referred to as the Act). 2. The Company is the flagship Company of the Aditya Biirla Group and a leading manufacturer of aluminium and copper. It is stated that over the years, the Company has grown into the largest vertically integrated non- ferrous metal company in the country and among the largest primary producers of aluminium and copper in Asia. It is further stated that in 2007, the acquisition of Novelis Inc., a world leader in aluminium rolling and can recycling, marked a significant milestone in the history of the aluminium industry in India. It is the case of the Company that an important element of HIL’s growth strategy has been to seek out opportunities for acquisitions and strategic partnerships in India as well as 3 overseas with a view to diversify its product portfolio, consolidation of customer base and to extend the presence of the Company in overseas markets. It is stated that such an endeavor by the Company would not only provide the Company with an opportunity to widen its international footprint but also enable the newly acquired companies to increase their margins through reduction of labour and other costs. It is further stated that the Company has been successful in enhancing its presence in the international markets. However, this has resulted in HIL incurring various costs relating to organic as well as inorganic growth projects. It is also stated that in its endeavor to grow further, HIL would continue to incur these costs in the future. It is the case of the Company that the present global economic scenario especially in the commodity space has had an adverse impact on HIL’s domestic and overseas operations, which may result in impairment/diminution in value of assets/investments of HIL and its subsidiaries. It is the case of the Company that these expenses/costs are inevitable for the growth of the Company and its shareholders. The Company now proposes to undertake the Financial Restructuring Exercise on terms and conditions spelt out in the proposed scheme, which is presented to this Court for approval with a view to provide greater level of transparency and openness and to secure full involvement of all the 4 shareholders/stakeholders. . 3. The composite scheme of arrangement is for undertaking financial restructuring exercise whereby HIL would create a “Reconstruction Reserve Account” from its Securities Premium Account balance to adjust expenses as defined in clause 1.4. of the Scheme. It also provides that as and when the Board of HIL determines that a part or whole of the balance remaining in the Reconstruction Reserve Account is no longer required, the same can be transferred to the Securities Premium Account of the Company as per the terms and conditions of the Scheme. 4. Since the scheme is essentially in respect of adjustment of expenses as defined in clause 1.4 of the proposed scheme, it may be apposite to refer to the definition of “Expenses” appearing therein, which reads thus: “1.4 “Expenses” means and without limiting the generality of the foregoing, includes inter-alia the following items accounted for in the financial statements of HIL. 1.4.1. Impairment, amortization and/or write off of goodwill and other intangible assets, if any, arising on preparation of consolidated accounts of HIL. 1.4.2. Interest and other financial charges paid/payable 5 on borrowings for acquisitions by HIL and/or any of its subsidiaries and interest and other financial charges paid/payable upon refinancing of such borrowings; 1.4.3. Impairment of assets/investments/intangibles in the Financial statements of HIL and/or any of its subsidiaries; 1.4.4. Diminution in the value of investments in subsidiary companies in the Financial Statements of HIL and/or any of its subsidiaries; 1.4.5. Costs associated with exiting projects/divisions in part and/or whole by HIL and/or any of its subsidiaries and financial costs associated with delay in projects; 1.4.6. Consultants/law firms fees and/or any fees payable towards professional services (say due diligence, etc.) in connection with financing/refinancing acquisitions.” Further, part III of the Scheme provides for Financial Restructuring of HIL and Accounting Treatment. Clause 3 pertains to creation and utilization of Business Reconstruction Reserve Account and the modalities therefor. Clause 4 provides for alteration in the Articles of Association, which is stated to be an integral part of this Scheme. Article 71 of the Articles of Association of the Company are intended to be amended to read “The words “Share Premium Account” shall be substituted with the words “Securities Premium Account” in Article 71(c) of the Articles of Association of the Company.” Clause 5 of the Scheme envisages that the 6 Scheme would result in the Company improving its financial status for the benefit of all the shareholders/stakeholders. It mentions that the parties to the Scheme agree and acknowledge the adequacy and sufficiency of the consideration. It is further agreed and acknowledged that the Scheme involves the creation of Business Reconstruction Reserve Account in the books of the Company on account of clause 3.1. and 3.2. and utilization of the same against the expenses defined in clause 1.4 and other terms and conditions of the scheme without any issue of shares or discharge of any consideration in cash or otherwise. Clause 6 of the scheme refers to the conduct of Business. It envisages that nothing in the Scheme shall affect the conduct of business of HIL and/or any deeds, bonds, contracts, agreements and any other instruments to which HIL is a party and/or all legal or other proceedings by or against HIL. It further provides that nothing in the scheme shall affect the existing rights of the workers and employees of HIL. Part IV of the Scheme provides for General Terms and Conditions of the modification or amendments to the Scheme, conditionality of the Scheme, binding effect, application to the High Court, effect of non-receipt of approvals and costs, charges and expenses. 5. The Company asserts that at a Board Meeting held on 14th February, 7 2009, the Board of Directors of the Petitioner company passed a resolution by which it was resolved that the Scheme of Arrangement placed before the Board be submitted to the High Court for its sanction for the financial restructuring as mentioned in the Scheme. The Petitioner then refers to the circumstances and/or reasons that have necessitated and or justify the propounding of the stated Scheme of Arrangement and advantages thereof. The silent features of the scheme are also highlighted in the Petition presented for approval of the scheme. It is stated that this Court by Order dated 27th February, 2009 passed in Company Application 234 of 2009 filed by the Petitioner company, directed to hold meeting of its Equity Shareholders. Accordingly, on 2nd April, 2009 at 10.00 a.m. at Ravindra Natya Mandir, P.I.Deshpande Maharashtra Kala Academy, Prabhadevi, Mumbai, meeting of the Equity shareholders was duly convened and held in accordance with the said Order, which meeting was chaired by Mr. A.K.Agarwala. In the said meeting 549 Equity Shareholders of the Petitioner Company representing 76,94,00,729 Equity Shares of Rs.1/- each attended personally or through Authorised Representatives or by proxy. After inviting debate on the proposed scheme, the resolution was put to vote by poll in the meeting, in which, 424 members holding 72,19,93,282 Equity Shares of Rs.1/- each of the aggregate value of Rs.72,19,93,282/- 8 voted in favour of the Scheme. 11 members holding 8,997 Equity shares of Rs.1/- each of the aggregate value of Rs.8997/- voted against the said Scheme. Votes of 58 members for aggregate 4,73,90,050 shares cast were declared invalid. In other words, the resolution was passed by requisite majority of Equity Shareholders supporting the same. The Chairman of the said meeting has submitted report recording these facts. It is further stated that pursuant to the order of this Court an Extra Ordinary General Meeting was held on the same date i.e. 2nd April, 2009, at the same place at Ravindra Natya Mandir, P.L.Deshpande Maharashtra Kala Academy, Prabhadevi, Mumbai at 12.00 p.m. which was again chaired by Mr. A.K.Agarwala. In the said meeting a special Resolution was proposed as per the provisions of Section 100 of the Companies Act for utilization of the Securities Premium Account of the Petitioner Company as stated in clause 3 of the proposed scheme. The Resolution was put to vote and carried out by the requisite majority by show of hands. It is stated that separate procedure under section 101(2) for reduction of Securities Premium Account was dispensed with by an Order of this Court in Company Application No.234 of 2009. 6. The Petitioner Company has asserted that the proposed scheme is arrangement between the Petitioner company and its Equity Shareholders 9 only in accordance with the provisions of Section 391(1)(b) and not in accordance with the provisions of Section 391(1) (a), as there is no arrangement and/or Compromise with the Creditors as no sacrifice is called for under the proposed scheme. It is reiterated that the proposed scheme envisages creation of Business Reconstruction Reserve Account by transfer of Securities Premium Accounts balance as on 31st December, 2008 to Business Reconstruction Reserve Account and utilisation of Business Reconstruction Reserve Account against the expenses defined in Clause 1.4 of the Scheme. It is stated that the proposed restructuring of deemed paid-up capital under the said scheme does not involve any financial outlay/outgo on the part of Petitioner and is only in the nature of a book entry. Besides, such reduction will not cause any prejudice to any of the creditors of the Petitioner. It is further stated that the financial restructuring proposed under the said scheme does not involve either diminution of any liability in respect of unpaid share Capital or payment to any shareholder of any paid-up capital and the same shall be carried out as an integral part of the Scheme. That the Creditors will not be effected by the proposed financial restructuring as there is no reduction in the amount payable to any of the Creditors, no compromise or arrangement is contemplated with the Creditors. It is further stated that the proposed adjustment would not in any 10 way adversely effect the ordinary operations of the Petitioner Company or the ability of the Petitioner Company to honour its commitments or to pay its debt in the ordinary course of business. It is the case of the Petitioner that the scheme is primarily entered into between the Petitioner Company and its Equity Shareholders and not between the Petitioner and other class of shareholders or creditors. It is stated that insofar as Preference Shareholders of the Petitioner Company are concerned, under the Scheme their interest is not affected at all as they are entitled to a fixed rate of dividend under the terms of the issue and also under the provisions of the Act. It is stated that the meeting of Preference shareholders was dispensed with by this Court vide order passed in Company Application No.234 of 2009 on the basis of undertaking given by the Petitioner company that all Preference shares will be redeemed and fully paid off by 1st April, 2009. It is stated that as per the said undertaking, all its Preference Shareholders have been redeemed by 1st April, 2009 and the Petitioner company has no Preference Shareholders on the date of presentation of the Petition. It is also stated that meeting of secured creditors and unsecured creditors has also been dispensed with by this Court. As on 31st January, 2009, the Petitioner company has had 57 Secured Creditors of the value of Rs. 5741.73 crores and 11646 Unsecured Creditors of the value of Rs.4561.02 11 crores. It is stated that the Secured Creditors will continue to hold charge over the respective assets even after the proposed Scheme is sanctioned. Further, there will be no dilution in securities/charge created on the assets of the Petitioner. The Petitioner has also stated that individual notices have been given to the secured and unsecured creditors of the value above Rs.10 Lakhs. 7. In this background, the present Petition is presented by the Petitioner company on 4th April, 2009. Notices were issued to the Regional director, Department of Company Affairs and the Registrar of Companies . They have stated on affidavit before this Court that the Scheme is not prejudicial to the interest of shareholders and public, for which reason the Court may pass appropriate orders, as it deems fit. Even the ROC and the Bombay Stock Exchange have given its consent for approving the scheme. However, the Regional Director has filed further affidavit on 17th June, 2009, in which he has referred to the objections raised by one Mr.Bhupendra Gandhi which were received under the cover of letter of Mr.Abani Roy, Member of Parliament for examination. After examining the grievance in the said complaint the Regional Director has opined that the objections were untenable. In paragraph-6 of the further affidavit, the 12 Regional Director has however, recommended that the Court may place time limit for implementation of the scheme so as to assuage the apprehension of the objector that the scheme allows the Board of Director of the Company unrestricted discretion to keep adjusting the expenses against the Securities Premium Account without any time limit. The Regional Director has recommended to limit write off of the expenses to the Securities Premium Accounts in the Books of Accounts up to 31st March, 2009 and not thereafter. However, except observing this, no justification has been offered by the Regional Director as to why such restriction is necessitated. No provision of law has been relied to justify this recommendation. 8. Besides, two objectors have appeared before this Court. One Mr.Ramniranjan Kedia of Tourism Services Pvt.Ltd. has filed affidavit dated 5th May, 2009 to oppose the proposed scheme. There is one more objection registered by one Mr.Bhupendra Gandhi by filing affidavit dated 5th May, 2009. Insofar as the first objector is concerned, he is neither a shareholder nor creditor of the Petitioner company. His objection is opposed by the Petitioner company, amongst others, on the ground of his locus. Insofar as objection filed by Bhupendra Gandhi, it is the case of the 13 Petitioner company that he is not a bonafide complainant. In that, on the date of meeting of the Equity Shareholders to consider the proposed scheme, the second objector had only one share of the Petitioner company. He participated in the meeting and registered his objection. But the Resolution was passed with overwhelming majority. Moreover, on the one hand he objected to the proposed scheme and on the other hand, after the meeting of the Equity Shareholders, he has purchased additional 50 Equity Shares of the Petitioner company, which reflects on his bonafide. According to the Company, his objection should be thrown out on this count alone. Besides raising issue of locus and bonafide of the objectors, the Petitioner company has also countered the grievance of the objectors on merits. On merits the issue raised by the objectors are broadly that the scheme if approved would result in allowing the Petitioner company to violate accounting standards by providing for adjustment against the Reserve Account instead of profit and loss account. Besides, it would give wide and unguided discretion to the Board of Directors by keeping the scheme open ended. Moreover, the scheme does not disclose the figures of expenses to be adjusted in the Reserve Account. Nor does the Scheme defines the non-operating and extra ordinary expenses. It was also emphasized on behalf of the objectors that the scheme intends to write off 14 the liability and losses of the subsidiaries, which cannot be permitted. The principal argument of the objectors is that on making adjustment of the expenses against the Reserve Account it would not be a fair and accurate representation of the financial position of the Petitioner company. In as much as, the stated expenses ought to be and are required to be shown in the profit and loss account and not against the Reserve Account. For that reason, the Court should not accord approval especially when such adjustment will also be in violation of accounting standards. It was also argued that the amount lying in Security if transferred would later on become unavailable for satisfying the direction to be issued in the pending proceedings. 9. If the aforesaid objections were to to be overruled, the Petitioner company would be entitled for the relief claimed in this Petition and the proposed scheme of the Petitioner Company will have to be approved. I shall straightaway examine the argument regarding locus of Ramniranjan Kedia. Admittedly, the said objector is neither a shareholder nor a creditor of the Petitioner company. If it is so, the Petitioner company is justified in contending that such person has no locus to raise objection in relation to the scheme propounded by the company under section 391 of the Act. This 15 issue is no more res integra. This Court in the case of ICICI LTD Vs.Financial & Management Services Ltd. reported in (1998) 29 CLA 372(Bom)(See paragraph 21), after adverting to the relevant reported decisions has unhesitatingly held that it is clear that under the provisions of the Act, as they stand, the persons who are interveners who are neither shareholders, members nor creditors of the company which is before the Court, have no locus to be heard in relation to the Scheme under section 391 of the Act. The Petitioner has also relied on the decision of the Division Bench of our High Court in the case of the Securities and Exchange Board of India(SEBI) Vs. Sterlite Industries (India) Ltd. reported in (2003) 113 CompCases 273(Bom)(see paragraphs- 8 and 9), in which this Court has had occasion to dismiss the appeal preferred by SEBI against the order passed under Section 391 on the ground that it had no locus in a Petition under section 391, not being shareholders or creditors of the company. Counsel for Mr.Kedia however, placed reliance on the decision of the Apex Court in the case of S.K.Gupta & Anr. V.K.P.Jain & Anr. Reported in (1979) 49 Comp.cases 342. He placed emphasis on the observations in the said decision at page 353 of the reported Judgment to contend that if the Court can suo motu act, it is immaterial as to who drew the attention of the Court to a situation which necessitated Court’s 16 intervention. Reliance placed on this decision is inapposite. Inasmuch as, the observations in this decision are in the context of proceedings under section 392 of the Act. As a matter of fact, the Supreme Court in the same Judgment has noted the distinction between the proceedings under section 391 and 392, as can be discerned from the observations at pages 350 to 352 of the reported decision. At page 352, the Apex Court has noted the distinction in the scheme of section 391 in contradiction to that of Section 392, as the legislature has used the expression “any person interested in the affairs of the company” in Section 392, which has wider denotation unlike the expression “a member or creditor or liquidator of a company” used in Section 391. Having regard to the fact that this is a composite Petition under section 391 as well as section 100 and 101 of the Act, the person who is neither a shareholder nor a creditor of the company would have no locus. However, since the objection is also taken by one of the shareholder, this Court would nevertheless address the objections on merits a little later. 10. Insofar as the second objector(Mr.Bhupendra Gandhi) is concerned, twofold grievance is made by the Petitioner company. Firstly, that he is not a bonafide complainant. He possessed only one share on the relevant date. He had participated in the meeting and his objections were overruled by the 17 overwhelming majority of Equity Shareholders. Significantly, he procured 50 additional shares of the Company after the meeting in which he had raised objection to the proposed scheme. In my opinion, the grievance of the Petitioner company is well-founded. Inasmuch as, no prudent person who had opposed the proposed scheme, would think of acquiring additional shares of the same company. Indeed, the fact that the objector possessed only one share on the relevant date does not mean that he is denuded of his right of raising objection. Nevertheless, I find substance in the stand taken by the Petitioner company that the complaint filed by this objector is not bonafide. Counsel for the Petitioner has rightly relied on the observations of the Securities Appellate Tribunal in decision dated 10th April, 2008 in Appeal No.25 of 2008 in the case of Shri Sukumar Chand Jain V/s. SEBI & Ors. That a person who has not approached with clean hands and have traded in the shares of the target company, cannot be heard to make grievance about the scheme. 11. Be that as it may, revering to the merits of the issues raised, it is argued that the Regional Director in his further affidavit dated 17th June, 2009 has opined that the scheme allows the Board of Directors of the company unrestricted discretion to keep adjusting the expenses against 18 Securities Premium Account without any time limit. The Regional Director has therefore, recommended placing time limit for implementation of the scheme and to limit write off of the expenses to Securities Premium Accounts in the Books of Account up to 31st March, 2009 and not thereafter. I am in agreement with the stand taken by the Petitioner company that this changed opinion of the Regional Director inspite of having found that the objections taken by the objector Mr.Bhupendra Gandhi were untenable was on account of intervention of the Member of Parliament at the behest of the objector-Bhupendra Gandhi, who had forwarded the complaint for reconsideration. Significantly, the Regional Director has not adverted to any provision of law which obligates the Petitioner company to limit the period to write off all the expenses in the Books of Account. It would have been a different matter, if the law obliged the company to do so within a particular time. In absence of such requirement, the Regional Director ought to have assigned tangible reason as to why it was still necessary to impose the outer limit for writing off the expenses. Even during the argument advanced on behalf of the Regional Director or for that matter the objectors, I was unable to discern any tangible reason to justify such restriction. Understood thus, taking any other view would be interfering with the commercial wisdom or business decision of the overwhelming 19 majority of stakeholders of the Company, who have reposed trust and confidence in the Board of Directors, who are expected to exercise their discretion with prudence. The Petitioner has justly relied on the observations of the Madras High Court in the case of Re:Parrys Confectionery Ltd. reported in (2004) 122 Comp.Cases 900(Mad). In paragraphs 13 and 14, the Madras High Court observed thus: “13. The short question that arises for consideration is whether this Court should grant approval for the reduction