Case: G.L. Sultania and Anr Vs. The Securities and Exchange Board of India and Ors

The grievance of the appellants before the Securities Appellate Tribunal was that the Securities and Exchange Board (hereinafter referred to as the Board) as well as the Merchant Banker had not properly valued the shares of the target company in accordance with the parameters laid down in Regulation 20(5) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as the Takeover Code). Respondent No.3, who is the real contesting respondent, on the other hand contended before the Appellate Tribunal that the valuation of shares was done having regard to the parameters laid down under Regulation 20(5) of the Takeover Code and the Board had taken all necessary precautions to safeguard the interest of the shareholders so as to ensure payment of best price for the shares to be sold by them. It was further contended that the shares were valued by three reputed firms of valuers and the Board ultimately approved the highest price per share determined by the firm of valuers appointed by the Board namely, M/s. Patni and Company.

Court's reasoning:
ge thated inand without ofed Accountantsng aad ofns ofn theirthey aresought to beed asy thises theapply toon ofn our opinions thes of theof thet to theit hasbetween thens ofts and theds ofed ased Financialuld not haveif thee did notn thatle int in suchs is in itselft to the. At this stage we may make a few observations about Regulation 20(5). This Regulation applies to infrequently traded shares of a company. It lays down the parameters that must be taken note of andat thevaluation. But it must be understoodthe parameters laid downare by no means exhaustive. There are many other considerations which may beo any valuation process.id Regulation, however, mandates isrs expressly laid down therein must in all cases be considered by the valuer sinceic and essential to theof infrequently traded sharesof a company. If the valuation report discloses nonof theenumerated parameters, the report shall stand vitiated for that reason. This however does not prevent the valuer from considering other relevant factors according to accepted principles of7. It may also be observed that not any oneis in itselfdecisive. All the factors have to be considered and the valuation arrived at. The Regulation itself does not prescribe the weightage to be assigned to different enumerated parameters. As noticed earlier, many imponderables enter the exercise of share valuation. It must therefore followthe weightage to begiven to the different factors that go into the process of valuation, must beom, experience and knowledgets in the field of share valuation. Such being the method of share valuation which involves subjective and objective considerations, there is considerable scope for difference of opinion even amongst experts. Eventhe correct principlesare applied, different valuers may arrive at different valuations. Each onem may be right, yet the valuations may differ. Mathematical precision and exactitude are not the attributes of share valuation, for at best the valuation arrived at by an expert is only his opinion as tothe value ofshare should be. No doubt the variation may not be very wide between two valuations prepared honestly by two valuers applying the correct approach ands, butsome variation is unavoidable.38. There is one other factor which cannot be ignored. The Regulation seeks to protect the interest of an investor by ensuring that he gets a fair price for his shares in the target company.39. For the acquirer the decision to acquire shares is a commercial decision. The same block of shares may have different value for different acquirers. An acquirer who intends to control the managementthe target companythe shares in question, without acquiring majority shares, may value the shares differently from an acquirer who is already in managementny but wishes to acquire the majority of shares to strengthen his voting rights. A majority shareholder may also wish to acquire shares so as to hold 75%ty capital which will ensure passage of special resolutions. Such an acquirer may value the shares differently from his point of view. Similarly a shareholder already holding 75% shares may acquire more shares only to consolidate his holding intarget company. Itmay not suit his objectives to pay a higher price than the other three categories noticed above.40. For the purpose of Regulation 20(5) we are not concerned with the price that a particular acquirer may be willing to offer on subjective consideration or for his special reasons. The Regulation is meant to provide guidance to arrive at a fair value of shares objectively which the acquirer is expected to offer to thely Regulation 20(5) mandatesthe offer price shall be determined by the acquirer and the merchant banker taking into account thefactors mentioned therein. The Boardor is not bound to accept the offer price which is required to bein the public offer,if it suspectsthe offer pricedoes not truly represent the fair valuein accordance withRegulation 20(5). It hasbeen provided that if considered necessary the Board may requirech shares by an independent merchant banker. The purpose is only to ensurethe valuation arrived atis a fair valuation after taking into consideration all the enumerated factors in Regulation 20(5). In doing so the Board has to act prudentlyn the limits of its jurisdiction. It cannothe price offered by the acquirerns to suspectthe price offeredhas not been determined fairly taking into account the enumerated factors. In case of doubt, it may requirethe shares by an independent merchant banker or chartered accountant. If the valuation determined by the acquirer or his merchant banker agrees with thethe Boards valuer, more or less, then the Board has no option but to acceptthe offer pricer. It may suggest changes in the draft letter of offer, but it is doubtful if it can compel the acquirer to improve his offer eventhe offer priceis found to be fairly arrived at after dued in theRegulation. We do not wish to express any considered opinion in this regard, because that question does not arise in the facts of this case. The acquirer in the instantge, rather accepted thethe Board to incorporate in his offer documentthe offer price