G.L. Sultania And Another vs The Securities And Exchange Board Of ...

4. Though the issue involved in the appeals lies within a narrow compass, in view of the submissions vehemently urged on either side it becomes necessary to recapitulate the essential facts which provide the background in which the dispute has arisen. These facts are more or less admitted by the parties.

5. The acquirers are Respondent Nos. 2 and 3 herein namely, ACE Glass Containers Ltd., and Shri C.K. Somany respectively. Respondent No.4 is the target company Hindustan National Glass and Industries Ltd.

6. It is not in dispute that the Somany family comprising of four brothers managed several companies including the target company. All the brothers held equal shares in the target company and the public share-holding in the target company was negligible, that is less than 0.30%. The shares of the target company are infrequently traded. In the year 1994 about 40% of the equity capital of the target company was transferred to Shri C.K. Somany pursuant to a family settlement arrived at between the brothers. According to the appellants on August 5, 1994 there was an agreement between Shri C.K. Somany, Respondent No.3 and his brothers for the sale of the entire balance shareholding in the target company held by his brothers to Respondent No.3, Shri C.K. Somany at the price of Rs.267/- per share. This, however, is disputed by Respondent No.3, Shri C.K. Somany. In this background disputes arose between the parties and the brothers of Respondent No.3, Shri C.K. Somany filed Civil Suit No.35 of 1997 before the Calcuatta High Court against Respondent Nos.2 and 3 and others for specific performance of the agreement dated August 5, 1994. In that suit an ex-parte order of injunction was passed restraining Respondent No.3 Shri C.K. Somany from selling the shares obtained from the other brothers in the target company. In his written statement Respondent No.3 Shri C.K. Somany made a counter claim and prayed for a mandatory injunction directing Shri R.K. Somany to sell 3,40,000 shares of the target company to him @ Rs.15 per share, and the remaining two brothers to sell their shareholding in the target company @ Rs.40 per share which was the prevailing price on the date of the filing of the suit.

8. The public announcement was made by respondent Nos.2 and 3 herein to acquire the balance 19.19% share of the target company held by the minority shareholders on November 30, 2003. The offer price proposed to be mentioned in the public announcement was Rs.40 per share as determined by the Merchant Banker namely, M/s. UTI Bank on the basis of the MOU dated October 7, 2002 between Respondent No.3 Shri C.K. Somany and his brother Shri S.K. Somany for sale of the shares of the target company @ Rs.40 per share.

10. Before approving the draft letter of offer, and having regard to the objections raised by the appellants, the Board appointed M/s. Patni & Company to value the shares. The aforesaid valuers namely, M/s. Patni & Company valued the shares of the target company at the rate of Rs.63.50 per share by one method and Rs.64.17 by another method which had the approval of this Court in Hindustan Lever Employees' Union vs. Hindustan Lever Ltd. and Others : 1995 Supp. (1) SCC 499.

11. Respondent Nos. 2 and 3 were not satisfied with the higher valuation of M/s. Patni and Company and, therefore, the Merchant Banker wrote to the Board objecting to the same on March 9, 2005. The Board permitted the Merchant Banker to get the shares valued by any other Chartered Accountant. In these circumstances, the Merchant Bankers in consultation with the Board appointed M/s. T.R. Chadha and Company to value the shares of the target company. According to the report of M/s. T.R. Chadha & Company submitted on April 13, 2005 the fair market value of each share of the target company was Rs.60.04.

12. From the facts stated above it will appear that the shares of the target company have been valued by three firms of Chartered Accountants, namely, M/s. Deloitte Haskin and Sells who valued the shares of the target company at Rs.43.02 per share, M/s. Patni and Company who valued each share of the target company at Rs.64.17 and M/s. Chadha and Company who valued each share of the target company at Rs.60.04.

14. In the circumstances set forth above the Board accepted the valuation report of M/s. Patni and Company and by its order of August 19, 2005 approved the draft letter of offer incorporating the revised offer including interest. Certain other matters were also incorporated in the original public announcement as directed and a corrigendum was issued accordingly. The offer was opened on August 31, 2005 and closed on September 19, 2005. The appellants tendered the shares without prejudice to their rights and contentions but challenged the order of the Board before the Appellate Tribunal.

15. The Appellate Tribunal by its order of December 8, 2005 dismissed the appeals preferred before it. Having noticed the background facts in which the controversy arose, the appellate Tribunal observed that the valuation of shares could be impeached on the ground of fraud, mistake or miscarriage of justice. It could also be interfered with if there was an apparent or arithmetical error or the valuers took into account something, which ought not to have been taken into account or interpreted the regulations wrongly, or proceeded on some erroneous principles. The interest of the shareholders had to be protected. The appellate Tribunal could also be asked to interfere if it was found that the offer price arrived at was so extravagantly high or so inadequately low that one could infer that the valuer must have committed an error in working out the offer price for the public offer. The appellate Tribunal, however, noticed that there was no allegation of mala fide either against the Board in approving the public offer or against the three valuers whose reports were considered by the Board. Since the shares were not traded frequently the valuers had to keep in mind the principles incorporated in Regulation 20 (5) of the Takeover Code. It noticed that if only clauses (a) and (b) of Regulation 20(5) were to be considered, the only negotiated price under (a) being Rs.40/- per share the minimum offer price to be incorporated in the public offer could be Rs.40/- per share. However, the merchant bankers as well as the valuers also considered the matters which were relevant under Regulation 20(5)(c) of the Takeover Code. After taking into account all relevant considerations M/s. Deloitte had valued each share at Rs.43/- while M/s. Patni and Company valued at Rs.64.17 ps. per share and M/s. Chadha and Co. at Rs.60.04 per share. There is no dispute that the offer price incorporated in the public offer is more than what it could be under Regulation 20(5)(a) and (b) of the Takeover Code. The only question, therefore, which fell for consideration was whether the shares had been valued by the valuers keeping in view the other parameters enumerated in clause (c) of Regulation 20(5).

21. The appellate Tribunal did not accept the valuation reports of M/s. Agarwal and M/s. Bajoria produced by the appellants which valued the shares at abnormally high rates of Rs. 408/- and Rs.590/- per share. Apart from other reasons, the very fact that there was such a wide disparity in valuation in the aforesaid two reports, was itself a sufficient ground to reject them.

regulation (5), shares shall be deemed to be infrequently traded if on the stock exchange, the annualized trading turnover in that share during the preceding six calendar months prior to the month in which the public announcement is made is less than five per cent (by number of shares) of the listed shares. For this purpose, the weighted average number of shares listed during the said six months period may be taken.

46. We shall deal with the valuation reports of M/s. Anand K. Associates and M/s. Sanjay Bajoria and Associates later.

48. We shall now consider the specific points raised by the appellants to support the contention that the relevant factors were not considered by M/s. Patni and Company and both the Board as well as the appellate authority failed to notice non-compliance of the provisions of Regulation 20(5) which vitiated the report of M/s. Patni and Company and also the approval of the offer price by the Board.

49. Before we advert to the rival submissions urged on behalf of the parties pertaining to specific points in the report of M/s. Patni and Company, it is necessary first to notice the salient features of the report.

52. By adopting the Net Asset Value Method the value of Rs.77 per share has been worked out by dividing the Share Capital of the Company plus Reserves and Surplus (excluding Revaluation Reserve and Contingent Liabilities) by the number of equity shares of the Company.

57. Profit Earning Capacity Value has been worked out to Rs.34.39 paise per share.

65. We shall briefly notice some of the objections raised before us by the appellants and the reply of the respondents to those objections only to demonstrate that they are really matters within the realm of the experts to determine and the Court may not be justified in delving into those matters, which must be left to the wisdom, expertise and experience of a qualified valuer.

72. The appellants made a grievance that the capitalization ratio of 15 % was taken by Patni & Company whereas the capitalization ratio should have been 8 %. It was submitted that the guidelines issued by the CCI had been repealed and, therefore, reliance could not be placed on the aforesaid guidelines.

75. Another objection of the appellants is that if revaluation reserve was considered the Net Asset Value would have come to Rs.124.82 but this was not done by the valuer.

81. Having considered all aspects of the matter, we are satisfied that the valuer, Patni & Company have not committed any such error which may justify our interference. They have considered all the factors relevant under Regulation 20(5)) of the Takeover Code and have adopted a reasonable approach which does not call for interference by us. It may be that views may differ and it is no gain saying that even experts may differ in their conclusions or even reasoning. The court must take notice of this fact and must not interfere unless there are compelling reasons to upset the finding of the expert valuer on grounds such as those enumerated in the earlier part of the judgment or other similar grounds.

83. We are, therefore, satisfied that the Board committed no error in accepting the report of Patni & Co. The Board has acted in a reasonable manner and made its best efforts to secure a reasonable price for the shares of the shareholders. It has exercised its discretion wisely and we find no reason to interfere.

84. We, therefore, find no merit in these appeals and they are accordingly dismissed but without any order as to costs.