1 CP-1037-09 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISIDICTION COMPANY PETITION NO.1037 OF 2009 CONNECTED WITH COMPANY APPLICATION NO. 1303 OF 2009. In the Matter of Reduction of Equity Share Capital of Wartsila India Limited. Wartsila India Limited. ..Petitioner Company. vs. Janak Mathuradas & Others. ..Intervenors/Opponents. .... Mr. Hemant Sethi, a/w Ms. Kamlesh Rajwani, a/w. Mr. Bhavin Shah, i/b Vigil Juris for the Petitioner. Mr. Janak Dwarkadas, Senior Counsel, a/w Mr. Ashish Kamat, i/b RMG Law Associates, for the Opponents/Intervenors. .... CORAM: S. J. KATHAWALLA, J. RESERVED ON: 25th September, 2010. PRONOUNCED ON: 15th November, 2010. JUDGMENT By this Company Petition, Wartsila India Limited (“WIL”) seeks approval and confirmation by this Court in terms of the Special Resolution passed by the shareholders of WIL in its “Extraordinary General Meeting” (“EGM”) held on 10th November, 2009 for the reduction of its equity share capital. 2 CP-1037-09 2. The authorized, issued, subscribed and paid-up capital of WIL as on 31st December 2008 is as under:- Particulars Amount in Rs. AUTHORISED 15,000,000 Equity Shares of Rs.10/- each 150,000,000 TOTAL 150,000,000 ISSUED & SUBSCRIBED & PAID-UP 12,034,000 Equity Shares of Rs.10/- each fully paid-up 1,20,340,000 TOTAL 1,20,340,000 3. Of the above, 98.88% of the Paid-up Equity Share Capital of WIL is held by 6 Promoter Shareholders and the balance of 1.12% of the Paid-up Equity Share Capital of WIL is held by 1463 shareholders. There has been no change in the shareholding from 31st December, 2008 till the date of filing the present Petition. 4. WIL is engaged in the business of manufacture and sale of diesel engines and diesel generating sets and providing solutions to the Power and Shipping Industry. The equity shares of WIL were listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Subsequently, an open offer was made by the Promoters under SEBI (Delisting of Securities) Guidelines, 2003 for acquisition of Equity Shares at Rs.622/- per equity share. 3 CP-1037-09 Since the public shareholding of the Petitioner Company fell below the 10% limit as provided under the Stock Exchange norms, the shares of WIL were delisted from the NSE and the BSE in June 2007. 5. According to WIL, subsequent to the delisting of its equity shares, there was no market to buy and sell the equity shares held by the holders of the equity shares (other than the promoters). The investments made by the public shareholders were locked up and they found it difficult to dispose off their shareholding. Many shareholders for various reasons including change of address, and expiry of offer date had missed the exit opportunity given by the promoters of WIL. Therefore in May 2009, after obtaining a valuation report from M/s. SSP and Company, Chartered Accountants, who valued the WIL Shares at Rs.162 per share, the promoters of WIL namely, Wartsila Technology Oy Ab had again made an offer to the holders of the equity shares (other than the promoters) to purchase their shares at a price of Rs.622/- per share between 15th May 2009 to 31st July, 2009 and thereafter, at a price of Rs.162/- per equity share, for the period 1st August to 15th August, 2009. 6. According to WIL, the holders of the equity shares (other than promoters) continued to face a lot of hardship and inconvenience in the absence of no liquidity/tradability to their shareholding. WIL was receiving requests from time to time from certain non-promoter shareholders to provide them with an exit opportunity. As an investor friendly gesture WIL decided to provide a one-time exit opportunity to the holders of the equity shares (other than the 4 CP-1037-09 promoters) being the shareholders holding 1,34,769 shares representing 1.12% of the total issued, subscribed and paid-up equity share capital of the company by reducing the entire issued and paid-up equity share capital held by all the shareholders other than the promoters, in accordance with Article 62 of the Articles of Association of WIL and the provisions of Section 100 to 104 of the Companies Act, 1956 (“the Act”). 7. The Petitioner Company obtained Valuation Report from KPMG India Private Limited (KPMG), an independent Valuer for determining the fair value of the Equity Shares of WIL. As per the Report dated 30th September, 2009 of KPMG, the fair value of every one fully paid-up equity share of WIL is Rs.377/- (Rupees Three Hundred and Seventy-seven only). 8. The Board of Directors of the Petitioner Company at the meeting held on 6th October, 2009 inter alia passed the following Resolution: “RESOLVED THAT pursuant to the provisions of Sections 100 to 104 and any other applicable provisions of the Companies Act, 1956 and Article 62 of the Article of Association of the Company and subject to the confirmation of the Honourable High Court of Judicature at Bombay and other appropriate authorities in this regards, if any, and the approval of the Members at the General Meeting, consent of the Board be and is hereby accorded to reduce the Issued, Subscribed and Paid-up Equity Share Capital of the Company from Rs.12,03,40,000/- (Rupees Twelve Crores Three Lacs and Forty Thousand only) divided into 1,20,34,000 (One Crore Twenty Lacs Thirty-four Thousand) equity shares of Rs.10/- each to 5 CP-1037-09 Rs.11,89,92,310/- (Rupees Eleven Crores Eighty-nine Lacs Ninety Two Thousand and Three Hundred Ten only) divided into 1,18,99,231 (One Crore Eighteen Lacs Ninety-nine Thousand Two Hundred and Thirty-one) equity shares of Rs.10/- each by cancellation of 1,34,769 (One Lac Thirty Four Thousand Seven Hundred and Sixty-nine) equity shares of Rs.10/- each and held by the holders of the equity shares other than the promoters.” “RESOLVED FURTHER THAT the aforesaid reduction shall be made by paying off /returning to the holders of the Equity Shares other than the promoters a price of Rs.532/- per share (including a premium of Rs.522/- per Equity Share), thereby extinguishing all such shares.” 9. Thus WIL sought to extinguish 1,34,769/- equity shares and reduce its paid-up share capital to Rs.11,89,92,310/-. Though, the fair value of a fully paid up equity share of WIL was valued at Rs.377/- by KPMG, WIL deemed it appropriate to value the equity shares of Rs.10/- each, fully paid-up, held by the holders of the equity shares (other than the promoters), at Rs.532/- (including a premium of Rs.522/- per share), which is at a premium of 41% over the fair value arrived at by KPMG. 10. The Board of Directors of WIL had sent a Notice and an Explanatory Statement dated 6th October 2009 to its shareholders in due compliance of the provisions of the Act, for convening an EGM of the Equity Shareholders of WIL on 10th November, 2009 to consider, inter alia, the passing of the Special Resolution, set out in Paragraph 8 above. 6 CP-1037-09 11. In the said explanatory statement, the reason for reduction of share capital was explained as under:- “Subsequent to the delisting of the Equity Shares of the Company, there is no market to buy and sell the Equity Shares held by the Equity shareholders other than the Promoters. The investments made by these shareholders are locked up and they find it difficult to dispose off their shareholding. This has put the holders of the Equity Shares (other than the Promoters) in a lot of hardship and inconvenience as there is no liquidity /tradability to their shareholding. Further, the Company has been receiving requests from certain non-promoter shareholders to provide them with an exit opportunity. As an Investor friendly gesture, the Company wants to provide an exit opportunity to the holders of the Equity Shares (other than the Promoters), being the shareholders holding 1,34,769 equity shares representing 1.12% of the total issued, subscribed and paid-up equity capital of the Company. As a result of reduction of share capital as mentioned in the Resolution, the entire shareholding in the Company will be held by the Promoters.” It is further provided in the Explanatory Statement as follows:- “Further the Company in accordance with the applicable provisions of the Income Tax Act, 1961 will be liable to pay Dividend Distribution Tax (DDT) @ 16.995% on the amount paid to the shareholders amounting to about Rs. 90/- per share at the above price. 7 CP-1037-09 Accordingly the non promoting shareholders will receive a consideration of Rs.532/- per equity share which may be tax free in their hands.” 12. The shareholders were further informed by the said Explanatory Statement that a copy of the Memorandum of Association and Articles of Association of the Company as amended from time to time and a copy of the valuation of the independent valuer i.e. KPMG, was available for their inspection and perusal at the registered office of WIL between 11.00 a.m. and 1.00 p.m. on any working day till the date of the meeting. 13. Accordingly the EGM of the shareholders of WIL was held on 10th November, 2009. At the said meeting 76 equity shareholders of WIL holding 11,903,307 equity shares of Rs.10/- each were present either in person or through proxy or through authorized representative under section 187 of the Act. Out of the 76 equity shareholders, 2 equity shareholders holding 30 equity shares of Rs.10/- each abstained from voting at the meeting. Out of the 74 equity shareholders who exercised their voting rights, ballot papers of 2 equity shareholders holding 125 equity shares of Rs.10/- each were found to be invalid. The ballot papers of the other 72 equity shareholders holding 11,903,152 equity shares were found to be valid. Out of these 72 equity shareholders who cast valid votes, 68 members holding 11,902,602 fully paid- up equity shares of Rs.10/- each, constituting about 99.9954% of the total valid votes cast, were in favour of the Special Resolution while 4 members holding 8 CP-1037-09 550 fully paid-up equity shares of Rs.10/- each constituting about 0.0046% of the total valid votes cast voted against the Special Resolution. 14. The Minutes of the said EGM dated 10th November, 2009 show that the Executive Director of M & A Tax KPMG India Private Limited was present by invitation. The said minutes further record the views expressed against the resolution by two of the shareholders, Mr. Arun Kejriwal and Mr. Janak Mathuradas, who are two out of the four intervenors opposing the present Petition. Their views are as follows:- “Mr. Arun Kejriwal expressed his comments on valuation based on book value and fair value. He requested for a copy of the valuation report and expressed his dissatisfaction on account of insufficiency of time for evaluating the valuation report and expressed his opposition for the proposed resolution. He stated that the same was not in the interest of non-promoter shareholders of the Company. He also referred to the earlier open offers made by the Promoters of the Company. Mr. Janak Mathuradas referred to the contents of the explanatory statement to the Notice reasoning the exit opportunity being offered to the minority shareholders. He stated that the resolution was not in the interest of the minority shareholders and the Company should buy the shares only from such shareholders who are willing to surrender their shares. In his opinion it did not necessitate to have a special resolution which would result in exit of all 9 CP-1037-09 the non-promoter shareholders. He also expressed the view that a separate meeting of the minority shareholders should have been held to consider this resolution. He also referred to the price of Rs.622/- per equity share being arrived at on reverse book value at the time of delisting and the exit opportunity provided by the promoters at the same price of Rs.622/- per equity share for a specific period and thereafter reducing to a much lower price and enquired whether the price of Rs.532/- per equity share now offered by the Company under the Resolution for reduction of capital was justifiable. He also enquired on the rationality of the Company treating the exit price as dividend for Income Tax purpose and requested for a copy of the tax opinion on which the Company was relying. He enquired about the total number of shareholders of the Company. He wanted to know whether Members other than Promoters had given proxies. He requested for inspection of the Proxy Register and corporate authorization, copy of valuation report, Memorandum & Articles and Annual Reports for last 3-4 years. He also requested the Chairman to record his objection to the resolution and provide a copy of the minutes of the meeting when recorded.” 15. It is pointed out on behalf of WIL that as on 31st October, 2009, WIL has five secured creditors and WIL has obtained written consent from all the five secured creditors agreeing to the reduction of capital. It is further pointed out that WIL has 405 unsecured creditors. The unsecured creditors, 10 CP-1037-09 comprise of statutory dues, trade creditors and advances received from customers. As on 31st October 2009, the aggregate amount due to them is Rs. 3,27,202,083/-. It is submitted that the unsecured creditors shall be paid as and when their dues become payable in the normal/ordinary course of business. Attention of this court is drawn to the Minutes of the Order dated 18th December, 2009, admitting the above Company Petition and passing of directions to inter alia advertise the hearing of the Petition on 8th January 2010 in Free Press Journal (English Edition) and Maharashtra Times (Marathi Edition) and also dispensing with the procedure prescribed by Section 101(ii) of the Act. WIL has advertised the hearing of the above Petition as directed by this Court. However, except for the four intervenors, none of the shareholders or creditors of the Company have come forward to oppose the above Petition. 16. When this Company Petition was called out for hearing before this Court on 15th January, 2010, this court had enquired as to what was the main ground on which the said Petition was being opposed by the intervenors. At that time, this Court was informed that the opposition mainly pertains to the valuation of the shares of WIL and the price offered by WIL to its shareholders (other than promoter shareholders) for their shares, which WIL proposed to reduce. At that point of time without going into the merits of the matter or any further details, this court had, in order to enable the parties to arrive at an amicable figure for each equity share of WIL, suggested that the parties approach one more independent valuer and obtain a second opinion in the 11 CP-1037-09 matter. WIL has therefore, subsequently obtained a valuation report also from M/s. R.M. Raiji and Company, Chartered Accountants. 17. The details of the valuation reports placed before this Court are as under: (i) Report of KPMG, independent valuer, dated 30 th September 2009 relied upon by WIL : The valuation methodology used by KPMG to arrive at a fair valuation of each equity share of WIL is the Discounted Cash Flow Methodology (“DCF”) and Comparable Company’s Method (“COCO”). It is a known fact that the Valuer for the purpose of valuation of equity shares uses different approaches like “Cost” Approach, “Market” Approach and “Income” Approach. KPMG for the purpose of valuing the equity shares of WIL has used the Income Approach and followed the DCF Method and the COCO Method. The rationale behind using the DCF and COCO Methods are explained by KPMG at Page 18 of its Report: “Income Approach a. Discounted Cash Flows (“DCF”) Under a DCF approach, forecast cash flows are discounted back to the present date, generating net present value for the cash flow stream of the business. A terminal value at the end of the explicit forecast period is then determined and that value is also discounted back to the valuation date to give an overall value for the business. 12 CP-1037-09 A Discounted cash flow methodology typically requires the forecash period to be of such a length to enable the business to achieve a stabilized level of earnings, or to be reflective of an entire operation cycle for more cyclical industries. We have used the DCF approach in the valuation of the Company. b. Comparable Companies (“Coco”) An earnings based approach estimates a sustainable level of future earnings for a business (“Maintainable Earnings”) and applies an appropriate multiple to those earnings, capitalizing them into a value for the business. The earnings bases to which a multiple is commonly applied include Revenue, EBITDA and PAT (P/E). The appropriate multiple is generally based on the performance of listed companies with similar business models and size. We have used the CoCos multiple (EBITDA and P/E) in our valuation analysis.” KPMG has given its working based on DCF Analysis and COCO Analysis at Pages 29 and 30 of its Report and has after considering an average of the methodology used, at Page 33 valued the share price of common equity of WIL at approximately INR 377/- per equity share. (ii) Report of N.M. Raiji and Company, Chartered Accountants, dated 4 th March 2010 relied upon by WIL. M/s. N. M. Raiji and Company has adopted the Net Asset Value and the Earning Capitalization Method to arrive at a fair value of each equity share of 13 CP-1037-09 WIL. According to M/s. N.M. Raiji and Company, the value per share of WIL on the valuation date as per the Net Asset Value Method comes to Rs.428/- and as per the Earnings Capitalization Method to Rs.449/-. In their opinion, therefore, the fair value of each equity share of WIL of the face value of Rs.10/- would be Rs.444/- as on 30th June 2009. M/s. N.M. Raiji and Company have also clarified that for an unquoted Company generally illiquidity discount of 10-20% is considered. However, they have not applied illiquidity discount for calculating fair value in view of the offer of reduction of capital of WIL. (iii) Report of A. Maheshwari and Company, Chartered Accountants, dated 1 st February 2010 relied upon by the intervenors: The intervenors have relied on the Report of A. Maheshwari & Company, Chartered Accountants dated 1st February 2010. The said Report follows 3 Methods namely, Price/Earning per Share (P/E) Method; Enterprise Value / EBITDA (EV/EBITDA) Method and Price/Book Value (P/BV) Method. According to the said Report of A. Maheshwari & Company, the average price of each equity share of WIL would be Rs.1,033/- per share. (iv) Report of Shailesh Haribhakti, Chairman, BDO Consulting Private Limited (BDO), dated 17 th March 2010, relied upon by WIL for analyzing the report of A. Maheshwari and Company, relied upon by the intervenors: WIL has relied upon a report of BDO dated 17th March, 2010 setting out the observations/ comments of Shri Shailesh Haribhakti, Chairman of BDO on the 14 CP-1037-09 valuation methodology used by A. Maheshwari and Company (valuer). In his report, Mr. Haribhakti has observed that the valuer has in his report relied upon only one approach i.e. “Relative Valuation Approach”. The valuer in the present case has used comparable company multiples instead of using comparable companies multiples for valuation method to value the equity shares of WIL viz., Price/Earning Per Share, Enterprise Value/EBITDA and Price/Book Value. The valuer has totally ignored other three generally accepted approaches to valuation i.e. “Cost” Approach, “Market” Approach and “Income” Approach. Mr. Haribhakti has pointed out that the Valuer has relied upon only one Company i.e. Cummins India Limited (CIL) for deriving the different multiples. The right approach would be to consider the comparable companies engaged in similar businesses. The comparable companies should be selected based on the size of the business, nature of business, products manufactured by the Company, stage in the business life cycle, etc. Considering only one company to derive at the multiples would mean comparing the company with another company’s management style for managing the business and company affairs, which can give skewed results. Also suitable discounts/premiums should be considered to adjust the size of the company, technology used, etc. of the comparable companies. Although CIL can be considered as a remotely comparable company, it cannot be considered as a close comparable company for the following reasons:- 15 CP-1037-09 (1) Size of the Company : Last two years average revenues of WIL are around 1/15 times that of CIL and the asset base of WIL is 1/6 times that of CIL. (2) Capital Structure : WIL is not levered company, whereas CIL is levered nominally. (3) Earning Before Interest, Depreciation, Tax and Amortization (EBIDTA) Margin : Last two years average EBIDTA Margins of WIL are nearly half that of CIL. (4) Return on Net Worth (RONW) : Last two years of RONW of WIL is less than half that of CIL. Mr. Haribhakti has therefore observed that the Valuer should have considered other comparable companies to reduce the ‘skewness effect’ associated with considering only one company and should have also applied suitable discounts to adjust to the size of the Company. (5) The observations of Shri Haribhakti on the multiple used by the valuer Shri A. Maheshewari and Company are reproduced hereunder: “Observations on Multiple Used Valuation as per P/E The valuer has not mentioned in the report the basis considered for deriving the Price and P/E ratio of CIL. Also, the basis for considering the forward P/E multiple by valuer is not clear. Earning Per Share (EPS): EPS should ideally be considered for Trailing Twelve Months (TTM) period to reflect the normalized EPS (EV). 16 CP-1037-09 As the above parameters were ignored while arriving the P/E multiple, in our view, P/E multiple derived by the valuer is higher than the ideal calculation of P/E. Valuation as per Enterprise Value (EBITDA (EV/EBITDA) The valuer has not mentioned in the report the basis considered for deriving the Enterprise Value (EV) and EBITDA of CIL. In deriving the EV of a Company, an average market capitalization of the company should be considered and thereafter add net debt (debt less cash & surplus investments) as per the last audited financial statements of the company. TTM EBITDA should be considered to reflect the normalized EBITDA. In our view, EV/EBITDA derived by the valuer is higher than the ideal calculation of EV/EBITDA as the market capitalization of particular day is considered. Valuation as per Price/Book Value (P/BV) WIL, being engaged in manufacturing sector, can be valued on an approach which considers asset base of the companies. However, while applying P/BV multiple of one company to another, suitable adjustments on account of difference in return on net worth needs to be considered. As mentioned earlier WIL’s RONW is around half of CIL, a suitable discount to P/BV multiple needs to be considered.” Mr. Haribhakti has in his analysis also observed that the valuer A. Maheshwari and Company has not referred to a valuation date in his report, which is the essence of any valuation report. 17 CP-1037-09 18. Mr. Sethi, the learned Advocate appearing for WIL, has submitted that although the reduction of share capital of WIL by payment to the holders of equity shares (other than promoters) as embodied in the Special Resolution involves return of paid-up capital and payment of premium out of reserves and surplus, it will not in any manner adversely affect or prejudice the interests of the shareholders, creditors or the public at large. Mr. Sethi has further submitted that during the previous financial years i.e. 2007 and 2008 open offers were made by the promoters of WIL in accordance with SEBI Delisting Regulations. The said price of Rs.622/- was paid by the promoters/acquirers having regard to the discovered price as per Reverse Book Building Method under the then applicable regulations of the SEBI and the same was not on the basis of Valuation of Shares which is normally followed for reduction of capital. The offer by the Promoters is on a different basis and under the regulations which govern the delisting process. The reduction of capital under Section 100 of the Act cannot be equated with the promoters offer. As there were many requests received by the promoters/acquirers in various forms, the promoters/acquirers provided further opportunity through