IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 21.04.2011 CORAM THE HONOURABLE MR. JUSTICE VINOD K.SHARMA C.P.No.340 and 3410 of 2010 and C.A.Nos.310, 311, 312, 313 and 314 of 2011 M/s.Essar Telecommunications Holdings Private Ltd., Rep. By Mr.V.Parthasarathy Authorised Signatory New No.77/56, C.P.Ramasamy road, Abhiramapuram, Chennai 600 018. ... Petitioner/Transferor Company (C.P.No.340 of 2010) M/s.India Securities Limited, Rep. By Mr.V.Parthasarathy Authorised Signatory New No.77/56, C.P.Ramasamy road, Abhiramapuram, Chennai 600 018. ... Petitioner/Transferee Company (C.P.No.341 of 2010) Company petitions are filed under sections 391 and 394 of the Companies Act, 1956 to sanction the Scheme of Amalgamation. For petitioners : Mr.C.A.Sundaram, S.C. for M/s.P.H.Arvind Pandian For Official Liquidator : Mr.Jeyakumar Dy. Official Liquidator For Regional Director : Mr.B.Manoharan Ministry of Corporate Addl. Central Govt. affairs, Chennai Standing Counsel ***** C O M M O N O R D E R M/s.Essar Telecommunication Holdings Private Ltd., Transferor Company and M/s.India Securities Limited, Transferee Company have filed these company petitions to sanction the Scheme of Amalgamation annexed to the petitions so as to be binding on all the shareholders and creditors of the Transferor and Transferee Companies and on the said Companies, with effect from 01.04.2010. 2 M/s.Essar Telecommunication Holdings Private Limited is a company registered under the Companies Act with its registered office at New No.77/56, C.P.Ramasamy road, Abhiramapuram, Chennai 600 018. This company was originally incorporated on 10.03.2008 in the State of Maharashtra. The registered office of the Transferor company was thereafter shifted to the State of Tamil Nadu. 3 The authorised capital of the Transferor company as on 31.03.2010 is Rs.2,00,00,000/- (Rupees two crores only) divided into 20,00,000 equity shares of Rs.10/- each. The issued, subscribed and paid up capital of the Transferor Company as on 31.03.2010 is Rs.1,54,10,000/- (Rupees one crore fifty four lakhs and ten thousand only) divided into 15,41,000 equity shares of Rs.10/- each. 4 M/s.India Securities Limited, Transferee Company is a company registered under the Companies Act with its registered office at New No.77/56, C.P.Ramasamy road, Abhiramapuram, Chennai 18. 5 The Transferee Company was incorporated under the name and style of "Dear Leasing and Finance Limited" on 28.06.1984 in the Union Territory of Delhi. The name of the Transferee Company changed to "India Securities Limited" on 01.05.1987. The registered office of the Transferee Company was shifted to the State of Tamil Nadu with effect from 28.11.1988.The name of the Transferee company was thereafter changed to "India Securities Limited on 23.05.1980 and its registered office was shifted to the State of Maharashtra with due approval with effect from 22.07.1988 and thereafter again finally shifted back to Tamil Nadu with effect from 14.05.2010. 6 The capital structure of the Transferee Company as on 31.03.2010 is as follows: AUTHORISED 100,00,00,000 Equity shares of Rs.1/- each 5,00,000 Preference shares of Rs.2,000/- each (in Rs.) 100,00,00,000 100,00,00,000 ISSUED, SUBSCRIBED AND PAID UP 19,95,66,310 Equity shares of Rs.1/- each, fully paid up Add: 2,00,000 1% Non-Cumulative Compulsorily Convertible Preference shares of Rs.2,000/- each fully paid up TOTAL 19,95,66,310 40,00,00,000 59,95,66,310 7 The Board of Directors of Transferor and Transferee Company in their meeting held on 04.06.2010 approved and adopted the Scheme of Amalgamation, proposing to amalgamate the Transferor Company with the Transferee Company subject to confirmation by this Court. It was proposed that the entire undertaking of the Transferor Company would stand transferred to, and vested with the Transferee Company on and from the appointed date i.e. 1.4.2010. The Scheme of Amalgamation has been annexed with the petition as Annexure IV. 8 The object of Amalgamation as stated by the Transferee Company to ensure better management of the company as a single unit. The benefit of Amalgamation are stated as under: (a) According to the plan of business restructuring undertaken by Transferee Company, it has been contemplated to diversify into infrastructure sector as stakeholder in leading telecom company in India. (b) The amalgamation aims at unlocking value and market assessment of the telecom assets of Essar group. (c) The amalgamation also results in value creation for shareholders of Transferee Company and liquidity for shareholders of transferor company. (d) The amalgamation will result in creation of an entity with larger asset base, substantial networth and thus increased ability for promotion of business activities as well as fund raising for enhancement of future business. (e) It will make available to the amalgamated company, the benefit of financial resources, managerial, technical and marketing expertise of both the company. (f) A larger and growing company will mean enhanced financial and growth prospects for the people and organizations connected with the company, and will be in public interest. (g) The shareholders, employees and other stakeholders of both the companies would benefit as a result of proposed amalgamation. 9 As per the Scheme, the equity shareholders of the transferor company as on date are to be alloted 330 equity shares of face value of Rs.1/- as fully paid up in the Transferee Company for everyone equity shares of face value of Rs.10/-. 10 It is also proposed the Transferee Company on sanction shall without any further application or deed, issue and allot to every member of the Transferor company, holding fully paid up equity shares 1 (one) 0.10% Non Cumulative preference share of Rs.2000/- each fully paid up by the Transferee company for every equity share held in the Transferee company redeemable at the end of 72 months at a price of Rs.4000/- per share from the date of allotment of each of such preferential share of Rs.2000/- each. 11 The Transferee Company is also to issued and allot to every debenture holder of Transferor company holding optionally convertible debenture of Rs.100/- each. One compulsorily convertible debentures of Rs.100/- each in lieu of optionally convertible debenture held in the transferor company. The valuation report has been attached as Annexure V with the Company petition. 12 According to the Scheme existing, 2,00,000 1% non cumulative compulsorily convertible preference shares of Rs.2000/- (Rupees two thousand only) each of Transferee company shall get converted into 16,77,00,000 equity shares of Rs.1/- each. 13 The equity shares of the Transferee Company issued in terms of Clauses 13 and 16 shall, subject to applicable regulations and payment of the appropriate fee and approval of the respective stock exchange(s), be listed and / or admitted to trading on the relevant stock exchanges in india, where the equity shares of the Transferee Company were listed and / or admitted to trading. The Non Cumulative Preference share of Rs.2000/- each (NPS) and compulsorily convertible debenture of Rs.100/- each (CCD) issued in terms of clauses 14 and 15 respectively shall not be listed in any of the Stock Exchanges. Equity shares of the Transferee Company to be issued and allotted under the Scheme or on conversion of CCDs shall be credited as fully paid up and shall in all respects, rank pari passu with the existing equity shares of the transferee company including listing on the stock exchanges and shall be entitled to any dividend declared by the Tranferee Company in respect of any financial year but after the respective allotment dates. 14 It is the stand of the petitioner companies that the Scheme of Amalgamation will be beneficial to both the companies and will result in better and more efficient operation of the company. It is also declared that the assets of both companies are more than sufficient to meet liabilities of the transferor and transferee companies and the Scheme will not adversely affect the rights of the creditors of the Transferee Companies in any manner whatsoever. 15 The Transferee Company as on date 30.11.2010 has no secured creditors. A certificate of Chartered Accountant in support thereto has been filed as Annexure VI to the petition. The equity shareholders of the Transferee Company are listed in the Bombay Stock Exchange. The said Stock Exchange accorded its consent to the Scheme vide letter dated 22.10.2010 (copy enclosed with petition as Annexure VII). 16 In C.A.No.1725 of 2010, this Court directed the Transferee Company to convene a meeting of equity shareholders of the Transferee Company for the purpose of considering and if thought fit, approving with or without modification of the Scheme of Amalgamation of the Transferor and Transferee Companies. Whereas in C.A.No.1724 of 2010 this Court was pleased to dispense with the convening, holding and conducting of meeting of equity shareholders of the Transferor company for approving the Scheme of Amalgamation. 17 Transferor Company also has no secured creditors. The certificate of Chartered Accountant in support of this petition has been placed on record. As per the Scheme of Amalgamation, the entire assets and liabilities of the Transferor Company is to be taken over by the Transferee company from the appointed date as a going concern. 18 There are no proceedings pending against either of the companies under Sec.235 to 251 of the Companies Act nor any proceedings under the Income Tax Act are pending against either of the companies. 19 Mr.P.J. Rishikesh, Chairman appointed by this Court in C.A.No.1726 of 2010 has filed his report dated 13.12.2010 as under: "3 Based on the report of the Scrutineers, the said meeting was of the opinion that the Scheme of Amalgamation should be approved and agreed to. The result of the voting upon the said question was as follows: The under mentioned Preference Shareholders of the Company voted in favour of the proposed Scheme of Amalgamation being adopted and carried into effect. SHAREHOLDERS WHO ATTENDED IN PERSON S.No. Folio No./ Client ID Name and Address of preference shareholder No. of Prefernce shares held Ballot form S.No. 1 2 NIL Total (A) NIL SHAREHOLDERS WHO ATTENDED THROUGH PROXIES: S.No. Folio No./ Client ID Name and Address of preference shareholder No. of Prefernce shares held Ballot form S.No. 1 IN300167 - 10038238 Prime India Investment Fund Ltd. C/o blue Arrow (Mauritius) Fund Management Ltd., Suite 2005, Level 2, Alexander House, 35 Cybercity, Ebene, Mauritius. 1,00,000 2 2 IN300167 - 10037760 Passage to India Master Fund Ltd. C/o Arcstone Capital LLC, Ebene House, 33 Cybercity, Ebene, Mauritius. 1,00,000 1 Total (B) 2,00,000 Total (C )= (A) + (B) 2,00,000 The under mentioned preference shareholders of the company voted against the proposed Scheme of Amalgamation being adopted and carried into effect. SHAREHOLDERS WHO ATTENDED IN PERSON/PROXY S.No. Folio No./ Client ID Name and Address of preference shareholder No. of Prefernce shares held Ballot form S.No. NIL Total (A) NIL Votes cast by the following preference shareholders were invalid. SHAREHOLDERS WHO ATTENDED IN PERSON/PROXY S.No. Folio No./ Client ID Name and Address of preference shareholder No. of Prefernce shares held Ballot form S.No. 1 2 NIL 3 Total NIL 4 The report of the Scrutineers is annexed herewith and marked as Annexure 1. 5 I declared the Resolution passed and the Scheme of Amalgamation of Essar Telecommunication Holdings Private Limited with India Securities Limited as placed before the meeting, was approved by the requisite majority without any modification. The said Resolution is given hereunder: "RESOLVED that the Scheme of Amalgmation of Essar Telecommunication Holding Private Limited with India Securities Limited, placed before the meeting and initiated by the Chairman for the purpose of identification, be and is hereby approved. FURTHER RESOLVED that the Board of Directors of the Company be and is hereby authorised to make and/ or consent to any modifications, alterations or amendments in the scheme, which may be deemed to be necessary by them or which are desired, directed or imposed by this Court or any other authority and to take all such steps as may be necessary and desirable to implement the Scheme and to give effect to this reslolution." 20 In pursuance to the notice of this petitions issued, the Regional Director, Ministry of Corporate affairs, Chennai has filed an affidavit on behalf of the Central Government in terms of the provisions of Sec.394A of the Companies Act which read as under: "I, K. Pandian, S/o Shri S.Krishnan, Indian, Hindu, aged about 58 years having my office at Shastri Bhavan, Vth floor, 26, Haddows road, Chennai 600 006, do hereby solemnly affirm and sincerely state as follows: 1 I am the Regional Director, Southern Region, Ministry of Corporate Affairs, Chennai and I am authorized to file this affidavit on behalf of the central Government for due consideration of this Court. 2 I respectfully submit that the Regional Director, Southern Region, Ministry of Corporate Affairs, Chennai had been served with copy of the petitions pursuant to Section 394A of the Companies Act, 1956 in C.P.No.340 & 341 of 2010 and the same have been examined in detail. 3 I submit that the transferor company and the transferee company hve their registered offices at Chennai within the jurisdiction of this Court. 4 I further submit that a complaint has been received from an investor Shri S.Narayanasamy making allegations against M/s.India Securities Limited, Transferee Company as reported by the Registrar of Companies, Chennai. The gist of the complaint is as under: "I have been trying to contact this compnay, for almost one decade, in their old address as well at the Haddlows Road, Chennai address, not received any annual reports, dividends, details about the working of the company, notice of AGM etc, for over a 10 plus years and never get any communication from this company, no idea, whether this company has my folio, still with them, though, many original certificates are with me, I am a shareholder from 26 November 1994 on wards. Shares are in my name." The Registrar of Companies has informed that the matter has been taken up with the company for comments/explanation. However, this office has received a letter from India Securities Limited vide their letter dated 1.2.2011 stating that the above complainant was holding one share of the company vide Folio No.S 100725 as mentioned by him. The company has been regularly sending Annual reports as well as other communications to his registered address. The company had not declared any dividend till April 2009. Pursuant to Scheme of arrangement in the nature of demerger approved by High Court, for every 5 shares held in the company as on April 13, 2009, company had issued 3 new equity shares of Rs.10/- each of the company and 2 equity shares of Rs.10/- each of Essar Securities Limited. Since the shareholder was holding only one share, he was sent DD No.525902 dated 10.2.2010 towards his share of fractional entitlement which was duly encashed by him on 5.4.2010. 5 I further submit that a news item appeared in Business Line dated 21.1.2011 focussed on the objections raised by Vodafone regarding amalgamation of Essar Telecommunication Holdings Private limited with India Securities Limited. On 24.1.2011, the Times of India reported that Essar did not give information on merger claimed by Vodafone. Copies of newspaper extracts are enclosed with Affidavit (Annexure A and B) to enable this court to decide the Scheme. 6 I further submit that this office has received an e-mail from Securities and Exchange Board of India forwarding a letter received from Vodafone International Holdings BV (Vodafone) complaining on the proposed amalgamation. A copy of the said complaint is enclosed as Annexure 'C'. In this connection, comments have been called for from the Registrar of Companies, Chennai and he has furnished the following comments. (a) With regard to inadequate disclosures alleged in the notice to the shareholders, the notice to the shareholders of Tranferor company is not available as this Court has dispensed with the meeting of the shareholders of the Transferor company and with regard to the Transferee Company, the notice does not contain any information aout the shareholding of M/s.ETHL Communication Holdings Limited and Vodanfone. (b) With regard to inadequances alleged in the valuation report, the valuation report does not contain any information about encumbrance of shares in Vodafone Essar Limited. (c ) With regard to sudden increase in Share price of ISL, ROC has commented that it may be perhaps due to market conditions and that it comes under the purview of Secuirties and Exchange board of India. (d) Finally, on examination of Annual returns of both Transferor and Transferee Companies, it is found that "Vodafone" is not a shareholder. In view of the above, "Vodafone" has no locus standi as it was neither a shareholder nor a creditor in these companies. 7 I further submit that the transferor company vide letter dated 8.2.11 has furnished copy of the petition filed by M/s.Vodafone international Holdings B.V. (complainant) impleading themselves as a party to the petition. As the complainant has filed a petition before the Court raising the same allegations mentioned in the complaint, this Court may taken cognizance of the complaint and pass such order. 8 I further submit that the Registrar of Companies, Chennai has received a letter from Assistant Commissioner of Income Tax, Circle 5(1), Mumbai (Annexure D) stating that the assessment in the case of Essar Teleholdings Limited for the Assessment year 2008-09 was completed and the demand of Rs.487.46 crores has been raised against the company and stated that entire transaction appears to have been structured in such a fashion that payment of taxes due to the Income tax department are avoided thus adversely affecting the interest of the revenue. Further, it has been stated that before any approval is given to the merger of these two companies, an opportunity may plese be given to the Assistant Commissioner of Income Tax, Circle 5(1) Mumbai to submit the objections of the Income tax department to these transactions so as to protect the interest of the revenue. 9 I further submit that clause 10 of the scheme protects the interest of the employees of the transferor company and clause 6.1 of the scheme provides for dissolution of the transferor company without winding up, upon amalgamation. 10 In view of the observtions made above, it is prayed that this Court may take the above submissions into consideration and pass such order or orders as this Court may deem fit and proper in the circumstances." 21 The Official Liquidator has also filed his report which reads as under: "The Official Liquidator begs to submit that M/s.Essar Telecommunications Holdings Pvt. Ltd. (hereinafter referred to as "Transferor company") preferred a petition before the Hight Court, Madras in C.P.No.340/2010 for (a) sanctioning the Scheme of Amalgamation with M/s.India Securities Ltd. (hereinafter referred to as "Transferee Company") and (b) for dissolution of the Transferor company without the process of winding up. By its order dated 22.12.2010 in C.P.No.340 of 2010 this Court directed the official liquidator, High Court, Madras to file his report on the affairs of the Transferor Company in terms of the second proviso to sec.394(1) of the Companies act, 1956. Hence this report is submitted. 2 That as per the said order, the Official Liquidator was permitted to engage services of M/s.K.S.Jaganathan and Co., Chartered Accountants to assist him the investigation of the affairs of the Transferor Company on a consolidated remuneration of Rs.10,000/-. The Transferor Company has duly deposited a amount on 27.01.2011. 3 That as per the aforesaid orders of this Court M/s.K.S.Jaganathan & Co., Chartered Accountants have completed their work and given their report to this office on 31.01.2011. 4 That the scrutiny by the Chartered Accountants was confined to the Profit and Loss account, Balance sheet, and other relevant books and statutory records maintained by the Transferor Company for the last 3 years from 31.3.2008, 31.3.2009 and 31.3.2010 and the minutes of the meetings of the members and the Directors of the Transferor Company since the date of incorproration and the statutory books and registers viz., a) Register of Members b) Register of Directors c) Register of Directors Shareholdings d) Register of Contracts. e) Register of Share Transfer. f) Register of Investments g) Minutes of the Board and General Body meetings. 5 That the Chartered Accountants have observed that the Transferor Company is maintaining proper books of accounts as per requirements of the Companies Act, 1956 and in accordance with normally accepted accounting principles. All entries have been made in the statutory registers in accordance with the requirements of the Companies Act, 1956 well within the statutory time prescribed under the Act and no discrepancies were noted. 6 That it is reported by the auditors that on a perusal of the records maintained at the office of the Registrar of Companies, Chennai the Company has filed all the returns and no case was pending against the company or any of its Directors/officers and found nothing prejudicial to the interest of the shareholders, creditors and others. That the company has not accepted any deposits from the public. Hence the question of commenting on compliance of the requirements of the Act relating to deposits does not arise. That the Company has no unpaid/unclaimed dividend and hence the question of commenting on compliance of Sec.205(A) of the Companies Act, 1956 does not arise. 7 That the Chartered Accountants have observed and reported as under on the share valuation report dated 14.7.2010 given by M/s.Bansi S.Mehta & Co., Chartered Accountants, Mumbai. i) The said share valuation report is dated 14.7.2010, whereas the Board has adopted the Scheme of amalgamation on 4.6.2010, how could the scheme have been adopted by the board without the share valuation report in place. ii ) The share valuation report is dated 14.7.2010 & is based on unaccounted accounts as at 31.3.2010. The accounts of the Transferor Company were audited immediately thereafter on 15.7.2010 & its subsidiary ETHL Communications Holdings Limited which holds shares in Vodafone Essar Limited was audited on 28.7.2010. Thus, the share valuation report was based on unaudited financial statements of both the companies. The effect of audit on the share valuation remains unknown. iii) Workings forming part of the valuation report (financial numbers to arive at the swap ratio) have not been provided to us, hence we are not able to comment on the share value of the transferor and transferee companies. iv) We hope the folliwng values attributable to the equity shares of the transferor and transferee company culled out from various records are considered in the valuation report in order to determine the exchange ratio: a) As per the Scheme, on the appointed date preference shares of total nominal value of Rs.360 crores in the books of the transferee company are proposed to be converted into 16.77 crores equity shares of Rs.1/- each, thus imputing a value of Rs.21.47 to a equity share. b) The share of Vodafone Essar Limited held by a subsidary company of the transferor company have been valued at Rs.5229.32 crores as on 31.3.2010 (vide the audited balance sheet of ETHL Communications Holdings Ltd. as at 31.3.2010). However the cost of the same is Rs.1260.59 crores. Note B (i) (b) of schedule 8 to the said accounts specifically mentions that these shares are held under "Investments" in the category of "Available for sale financial assets" have been valued at their fair value. Further, it also adds that the put option held by this subsidiary company has been valued at its fair value of NIL based on its valuation from an independent valuer. c) Vodafone had acquired 67% stake from hutchisonin the joint venture between Hutchison and Essor during 2007. At the time of its acquisition in february 2007, the enterprise (presently known as Vodafone Essar Limited) was valued at 19 billion USD (about Rs.85,500 crores). One of the subsidiary companies of the Transferor company (ETHL Communications Holdings ltd.) holds 10.97% stake in this company which translates to Rs.9,379 crores based on the valuationo prevailing at the time of its acquisition. d) The transferor company has made 2 allotments of shares on 9.4.2008 and on 20.3.2009. Both these allotments have been made at a premium of Rs.90/= to a share. These investments have been made after the acquisition of shares in Vodafone Essar Ltd. By the transferor company's subsidiary, thus the valuation of the Vodafone Essar ltd. Should have translated into these two allotments. v) On 11.10.2010 the shareholders of the transferee company have given permission for sale of the "finance division" of the