Sale of shares reducing the extent of shareholding is inappropriate: Supreme Court of India

SLP(C)No.204117 etc M s. Daiichi Sankyo Company Limited vs. Oscar Investments Limited and others 1 IN THE CIVIL APPELLATE INHERENT JURISDICTION SPECIAL LEAVE PETITIONin Fortis Healthcare Limited ‘FHL’ for short) be maintained. By next order dated 31.08.2017 it SLP(C)No.204117 etc M s. Daiichi Sankyo Company Limited vs. Oscar Investments Limited and others 2 was clarified that the earlier order dated 11.08.2017 was intended to be in respect of ‘both the encumbered and unencumbered shares of Fortis Healthcare Limited held by Fortis Healthcare Holding Private Limited’. Soon thereafter various banks financial institutions filed applications seeking modification clarification submitting inter alia that certain shares of FHL held by FHHPL were already pledged with said banks financial institutions and that it be directed that the orders dated 11.08.2017 and 31.08.2017 would not apply to such encumbered shares. For example I.A. No. 897517was filed by Axis Bank Limited stating in para 2 of the application that 1 83 75 000 shares were pledged with it since 2014. Similarly I.A. No 902417was filed by Yes Bank Limited. By order dated 15.02.2018 the earlier orders dated 11.08.2017 and 31.08.2017 were clarified by this Court to mean that the status quo granted would not apply to shares of FHL held by FHHPL which had been encumbered before the interim orders dated 11.08.2017 and 31.08.2017 were passed SLP(C)No.204117 etc M s. Daiichi Sankyo Company Limited vs. Oscar Investments Limited and others 3 Later the order dated 15.11.2019 passed by this Court in Contempt Petition No.2120 of 2018 creditors and availability of the funds would only pare down the debt and increase the value of the shares. Contrary to the aforesaid solemn assurances and undertakings which were repeatedly reiterated to procure orders the shareholding went into a downward spiral as is apparent from the table in paragraph 23. There was a significant decline in the total number of shares held by FHHPL both encumbered and unencumbered which fell down from 27 21 59 955 and 5 29 31 574 in September 2016 to 5 51 484 and 6 01 607 in December 2018. The aforesaid fact with the impact on valuation was never brought to the notice of the Court and was concealed with the knowledge that these facts if brought to the notice would have substantial bearing on the orders that would be passed to protect the interest of the SLP(C)No.204117 etc M s. Daiichi Sankyo Company Limited vs. Oscar Investments Limited and others 4 As a matter of fact the concerned figures showing shareholding patterns including the division between encumbered and unencumbered shares in various quarters were set out in a tabular chart in paragraph 23 of the Order. Said paragraph 23 was as under: “23. FHL is a public company and being a listed company it has to disclose its shareholding patterns to the stock exchange. A chart showing share holding pattern of FHHPL in FHL will show the position of holdings at various stages shareholding of 32 50 91 529 27 21 59 955 5 29 31 574 32 50 91 529 25 22 63 248 7 28 28 281 4. March 7. December 8. March 32 50 91 529 25 19 23 248 7 31 68 281 27 02 41 529 23 18 01 440 3 84 40 089 22 22 11 701 18 38 96 484 3 83 15 217 17 80 26 597 17 53 94 820 26 31 777 17 80 26 597 17 53 94 820 26 31 777 34 20 451 6 89 084 27 31 367 32 82 851 5 51 484 27 31 367 SLP(C)No.204117 etc M s. Daiichi Sankyo Company Limited vs. Oscar Investments Limited and others 5 10. September 11. December 11 53 091 5 51 484 6 01 607 11 53 091 5 51 484 6 01 607 It is true that we have to decide whether there is any disobedience of the orders of this Court but while doing so we will make reference to the proceedings before the Delhi High Court and the above chart to show how both sets of respondents have violated the orders of the courts. As pointed above on 19.06.2017 learned counsel for OIL and RHC had made a statement before the Delhi High Court that the status of unencumbered assets as disclosed to the court would not be changed and the shareholding as disclosed in terms of order dated 06.03.2017 shall not be affected. When the petitioner felt that this order is not being complied with it filed contempt petition in the Delhi High Court. Within two days another order was passed by the Delhi High Court on the basis of the undertaking given to it.” The observations in paragraphs 34 to 38 of the Order indicate that the number of unencumbered shares held by FHHPL steadily declined and that ‘the contemnors knowingly and willingly lost control of Fortis Healthcare Limitednot only the total number of shares started dwindling but the number of unencumbered shares went down from 7 31 68 281 to 6 01 607 as stated in the chart. Mr. Dwivedi then referred to the affidavit dated 08.02.2017 filed on behalf of all the respondents in the High Court of Delhi which held out that the value of unencumbered shares was more than Rs.4 000 crores and that the value of the unencumbered security was sufficient in the event the award was to be enforced. The relevant paragraphs of said affidavit were as under: SLP(C)No.204117 etc M s. Daiichi Sankyo Company Limited vs. Oscar Investments Limited and others 9 “2. That vide order dated 23.1.2017 this Hon’ble Court had directed an affidavit to be filed by anyone of the Respondents on behalf of all the Respondents in respect of the unencumbered assets held by the Respondents in support of the assurance given to the Court as recorded in the letter dated Therefore in furtherance of the Order dated 23.1.2017 I am filing the present affidavit on behalf of Respondent No 19 and all other Respondents All the Respondents had submitted their respective affidavits disclosing their assets on 6.12.2016 to this Hon’ble Court. The aggregate book value of investments held by all the Respondentsas per the said Affidavits is Rs.10 217.10 Crores out of which investments to the tune of Rs.1 409.93 crores are encumbered leaving the residual investments to the tune of Rs.8 807.18 Crore as unencumbered. Further as on 31.12.2016 the book value of investments held only by RHC Holding Private Limited as on 31.12.2016 is Rs.6 510.54 Crores out of which investments to the tune of Rs.1 513.86 Crores are encumbered leaving the residual investments to the tune of Rs.4 996.68 Crores as Respondent No.19 has also undertaken an internal valuation of its unencumbered investments as on 31.12.2016 mentioned in para above and based on such internal valuations the estimatedfair value of its unencumbered investments as on 31.12.2016 is approximately Rs.3 453 Crores. Apart from the aforesaid investments Respondent No.19 has also extended loans and advancesand after netting off the loans raised on current assets the amount of loans and advances recoverable is Rs.252.59 Crores as on 31.12.2016 which is over and above the aforesaid investments SLP(C)No.204117 etc M s. Daiichi Sankyo Company Limited vs. Oscar Investments Limited and others 10 There is no intention of selling any of the unencumbered investments by way of shares held by Respondent No.19. A proposal which is under discussion may involve the sale of 29 00 000 equity shares of SRL Limited held by Respondent No.19 and 7.05 000 equity shares of SRL Limited held by Malav Holding Private Limitedto external investors in the near future. These shares of SRL Limited are encumbered and thus not included in the value of unencumbered assets mentioned at paras&above. Obviously this will have to be after obtaining the consents of the security holders. The proceeds of such sale will have to be utilized to pare down the debt the net assets of the Respondents will thus remain unchanged. The shares being sold which are below 5% of the share capital of SRL will be sold to an external investor. The further proposal under consideration is to merge SRL with another listed group company at a later point of time. Even if this does take place this will have no implications on the next assets of the Respondents There are proposals to issue further capital in the downstream companiesdoes not include value of 5 crore equity shares of Fortis Healthcare Limited held by the underlying subsidiary of the Respondents which have been kept aside from the aforesaid valuation for the sake of flexibility and debt repayments of various group entities.” SLP(C)No.204117 etc M s. Daiichi Sankyo Company Limited vs. Oscar Investments Limited and others 11 It was therefore submitted that it was not just a case of creating encumbrance or pledge but there were instances of sale of shares and the purpose was definitely to reduce the extent of control of FHHPL He further submitted that at the stage when the applications for modification clarification were preferred by the banks and financial institutions on the basis of which the order dated 25.02.2018 was passed by this Court none of the banks had told this Court what the consequences of said order would be and that in a matter of a year and half the shareholding of FHHPL stood reduced to negligible level 13. Mr. Arvind P. Datar learned Senior Advocate added that there would normally be a basic arrangement or loan agreement in terms of which various kinds of securities including charge over properties corporate and personal guarantees would be offered and that a pledge of shares would only be by way of an additional security. None of the banks financial institutions had indicated why the unencumbered shares were sought to be put under encumbrance or the shares were sold when other forms of securities were available. He further submitted that the arrangements under which the shares were pledged SLP(C)No.204117 etc M s. Daiichi Sankyo Company Limited vs. Oscar Investments Limited and others 12 must be disclosed so that the purpose for which the basic accommodation or loan was obtained would also be clear. For example according to him in November 2016 a loan agreement was entered into between India Bulls and RHC Holding Private Limited for an amount of Rs.350 crores purportedly for ‘construction development of residential projects’. He submitted that no such project had come up and the amount of Rs.350 crores through successive transactions was siphoned away. What kind of due diligence was undertaken by the banks financial institutions while extending the loan facility must therefore be brought on record 14. Both the learned Senior Counsel submitted that with various orders passed by the High Court and this Court the concerned individuals and corporate entities could not sell the shares held by FHHPL directly and therefore a device was employed and the arrangement was so structured that the shares were proceeded against by the banks and financial institutions. It was submitted that the banks financial institutions had intervened in the matters pending before this Court that they were definitely aware of the Award granted SLP(C)No.204117 etc M s. Daiichi Sankyo Company Limited vs. Oscar Investments Limited and others 13 in favour of M s. Daiichi Sankyo Company Limited and that the role of banks and financial institutions would therefore require closer and financial institutions : In the premises for the present we direct all the noticee banks to place on record the basic documents pertaining to loans advanced or financial accommodations extended in respect of which the shares of FHL were pledged with them to place on record the nature of securities offered in connection with such loan arrangements to place on record the details of the encumbered and unencumbered shares of FHL standing in the name of FHHPL held by them in September 2016 to place on record the details of encumbered and unencumbered shares of FHL standing in the name of FHHPL held by them on 11.08.2017 SLP(C)No.204117 etc M s. Daiichi Sankyo Company Limited vs. Oscar Investments Limited and others 14 to give details of shares of FHL standing in the name of FHHPL which were put by them under encumbrance to give details of shares of FHL standing in the name of FHHPL sold by banks financial institutions from after 11.08.2017 January 2017 to disclose whether such encumbrance created after 11.08.2017 was in pursuance of any fresh arrangement or agreement and if so the details of such to disclose whether under such agreement arrangement any other security was given by the pledgors and to give the value of the encumbered shares as they stood in September 2016 on 11.08.2017 and on SLP(C)No.204117 etc M s. Daiichi Sankyo Company Limited vs. Oscar Investments Limited and others 15 16. The appropriate responses shall be filed by all the noticee banks and financial institutions on or before 22.02.2021 17. List these matters for further consideration on 24.02.2021 Uday Umesh Lalit New Delhi February 18 2021

Summary: The instance where the sale of shares takes place with the purpose to reduce the extent of control of shareholding is inappropriate. The stage when the applications for modification are preferred by the financial institutions, on the basis of which the order is to be passed and none of the banks present what the consequences of said order would be, it results in the intervening in the matter pending before the court. This assertion was made by the Supreme Court presided by J. Uday Umesh Lalit, J. Indira Banerjee and J. K.M. Joseph in the case of M/S. DAIICHI SANKYO COMPANY LIMITED vs. OSCAR INVESTMENTS LIMITED &amp; ORS. [SPECIAL LEAVE PETITION (CIVIL)NO.20417 OF 2017]. In the present case, while issuing notice in Special Leave Petition, this Court directed that status quo as on the day with regard to the shareholding of Fortis Healthcare Holding Private Limited in Fortis Healthcare Limited is maintained. By next order was clarified that the earlier order was intended to be in respect of ‘both the encumbered and unencumbered shares of Fortis Healthcare Limited held by Fortis Healthcare Holding Private Limited’. Soon thereafter, various banks/financial institutions filed applications seeking modification/clarification submitting inter alia that certain shares of FHL held by FHHPL were already pledged with said banks/financial institutions and that it be directed that the orders would not apply to such encumbered shares. The earlier orders were clarified that the status quo granted would not apply to shares of FHL held by FHHPL which had been encumbered before the interim orders were passed. It was submitted that it was not just a case of creating encumbrance or pledge but, there were instances of sale of shares and the purpose was definitely to reduce the extent of control of FHHPL. He further submitted that at the stage when the applications for modification/ clarification were preferred by the banks and financial institutions, on the basis of which the order was passed by this Court, none of the banks had told this Court what the consequences of said order would be; and that in a matter of a year and-half, the shareholding of FHHPL stood reduced to negligible level.