(1) Companies carry out
restructuring by various methods and the popular method is by carrying out a
scheme of restructuring u/s.390-u/s.394 of the Companies Act, 1956 with the
approval of the Court. While this route is quite a complicated procedure
involving numerous and time-consuming steps, there are several advantages not
only under the Companies Act, 1956, but also under various other laws including
securities laws, the Income-tax Act, 1961, stamp duty, etc. The important thing
is that the Court considering the scheme is said to be a ‘single-window’, under
which several approvals can be received without going to various other forums
and authorities. Further, this single-window channel gives approval under
different laws.
(2) Other bodies including
SEBI, etc., do not interfere with the directions of the Court and the
transaction is exempt under certain laws. For example, if allotment of shares is
made under a scheme of amalgamation or demerger, the acquisition of the shares
is exempt from the requirements of the provisions relating to open offer under
the SEBI Takeover Regulations.
(3) This single-window
service, however, in recent times, has apparently been misused. Forced buyback
of shares has been carried out by a company at predetermined price without any
choice being given to the shareholders. Such schemes have also been used for
accounting of certain transactions in a manner which, according to, Accounting
Standards and prudent accounting policies would not have been allowed.
(4) However, recently, a
decision of the Calcutta High Court has partly reversed this trend and rejected
a scheme of demerger on, inter alia, grounds that certain transactions
were proposed to be carried out as part of the scheme without compliance of the
other provisions of law. Thus, the Court did not sanction a scheme that went
beyond the original intention and was apparently formulated to avoid several
provisions of not just the Companies Act, 1956, but also of other laws — J.
K. Agri Genetics Limited v. Florence Alumina Ltd., [(2010) 102 SCL 495
(Cal.)].
(5) This is a case where the
petitioners had proposed a scheme of demerger. There were several points of
dispute including whether votes of certain persons who objected to the scheme
were validly considered or not. However, the areas of disputes which are the
focus of this article related to certain transactions being carried out as a
part of the scheme of demerger and which would have resulted in certain acts
being carried out that were beyond the inherent nature of a scheme of demerger.
Further, the scheme of demerger would have resulted in allotment of shares to
the promoters out of turn and without compliance with the relevant provisions of
the Companies Act, 1956, and of the Securities Laws.
(6) It may be clarified that
in the normal course, such an allotment of shares does happen as part of a
scheme of restructuring, including merger/demerger. Such an allotment of shares
is taken as part of the single-window facility and additional approval or
compliance as envisaged under other provisions of the Companies Act, 1956, or
Securities Laws is not required. However, in the present case, the facts were
peculiar and it appeared that the allotment was strictly not a part of the
scheme of demerger. It appears that the allotment of shares was not an inherent
part of the demerger and it was introduced in the scheme just to take advantage
of the benefits available to transactions covered in a scheme.
(7) The following are some
observations of the Court while rejecting the scheme :
“The scheme, sanction of
which is sought, seeks demerger of the seed division from the investment
division. This does not, however, seem to be the sole purpose of the scheme.
It also seeks conversion of the Zero Coupon Redeemable Preference Shares (ZCRPS)
and Zero Coupon Non-Convertible Bonds (ZCNCB) given under the 2003 scheme.”
“By such conversion, J. K.
Industries Ltd. (JKIL), the promoter-company, acquires shares in Florence
Alumina Ltd. (FAL), the applicant No. 2, whereby its shareholding increases.
This increase will not benefit any shareholder except the promoters. Therefore
the conversion contemplated will benefit the promoters and none else. This
cannot be the intention of the propounders of the scheme.”
(8) The Court also found
that the conversion of certain bonds and preference shares were at such terms
that were unacceptable and not in the overall interests of persons other than
the promoters. The Court reviewed these proposals and did not find them
something that a prudent person acting at arm’s length would do. The Court
noted :
“6.10 The Bonds and
Preference Shares were to be redeemed over a period of time. In fact the Bonds
were to be redeemed in 5 instalments. The 1st instalment was to be redeemed on
the expiry of the 4th year, i.e. 1-4-2006 till the 8th year, i.e.
1-4-2010. The appointed date of the instant Scheme is 1-4-2005, i.e.
prior to 1-4-2006 and will take effect from 1-4-2005 if sanctioned.
6.11 The 1st instalment in
respect of the Preference Shares was to be paid on the expiry of the 8th
instalment (i.e. 2010).
6.12 By virtue of the
conversion, the said Bonds and Preference Shares are being redeemed much
before the time specified and the present day discounted value ought to have
been considered. This has also not been done.
6.13 This is relevant as
no prudent businessman while considering the commercial aspect of the Scheme
in his wisdom would have proposed a Scheme without considering the discounting
aspect. Furthermore, such a Scheme could also not have been approved by a
prudent businessman cloaked with commercial wisdom unless such men approving
were nothing but ‘yes-men’ of the Transferor Company, Transferee Company and
Promoter Company.
It may be recollected that schemes of restructur-ing by listed companies are required to be submitted to the stock exchanges concerned for approval before filing the same for approval of the Court. The Court also reviewed the nature and purpose of such grant of approval by the stock exchange. It highlighted the limited scope of review that the stock exchange carries out. In the words of the Court?:
“6.14 In the Supplementary Affidavit filed, the reason given for conversion is the decision of the Bombay Stock Exchange. The application filed before the Bombay Stock Exchange was only in respect of the Listing agreement. Therefore, the Scheme has been examined by the Bombay Stock Exchange only for the purpose of approving listing on the Stock Exchange and for no other purpose. The said approval is also subject to certain relax-ation granted by SEBI under the 1957 Rules.”
The Court then found that the scheme was intended to benefit the promoters and the
Court gave the following detailed reasoning and precedents to reject the scheme and thus deny sanction to it?:
“6.17 A Scheme is aimed at not adversely affect-ing the share-holders or creditors and, therefore, is placed before the class of share-holder (equity or preference). If the opinion of the share-holder was not needed, the Scheme could have been accepted without their approval. In the instant case the Scheme is not intended to benefit the share-holder but it’s promoters.
6.18 Single window clearance though accepted in P.M.P. Auto Industries Ltd.’s case (supra) and followed in subsequent decisions, will not be applicable in the instant case as by virtue of the conversion further shares are being allotted to JKIL and for this purpose, the special procedure laid down in S. 81(1A) ought to have been followed.
6.19 The single window clearance contemplated will only apply if the alteration is restricted to the structural changes of the Company for implementation of the Scheme. The issuance of shares for purposes of increasing the share capital is not such alteration and the procedure laid u/s.81(1A) of the Companies Act ought to have been followed and, thereafter, the Scheme sanctioned. No copy of the resolution taken u/s.81(1A) of the 1956 Act has been produced.
6.20 As the single window clearance theory has no application in the instant case the decisions cited in respect thereof can also have no application.
6.21 As held in Miheer H. Mafatlal’s case (supra) and Bedrock Ltd.’s case (supra) that the sanctioning Court while ascertaining the real purpose underlying the Scheme can judiciously x-ray the same and not function as a rubber-stamp or post office, but must satisfy itself that the Scheme is genuine and bona fide and in the interest of the creditor or shareholder and in doing so the Scheme, to the extent it promotes conversion, is not just, fair or bona fide.
6.22 In 1960(1) AER 772, the objection was rejected as no unfairness could be established. Such is not the case here as the conversion will only benefit the promoter share-holder and none-else.
6.23 The conversion is intended to promote the interest of JKIL which is a separate class and a meeting of such class ought to have been called as held in 1975(3) AER 382 to ascertain the intention of its shareholders with regard to acceptance of the arrangement. This, according to 1975(3) AER 382, is fatal to the arrangement and there is no reason to differ therefrom.” (emphasis supplied)
To conclude, the Court has laid down several useful principles as precedent for the future. Schemes have to be focussed on the main intention of the provisions relating to restructuring and they cannot be used to achieve other objectives, particularly if they are against the interests of others having a say in the matter. The Court confirmed that it will examine whether the scheme will be one which a commercial and prudent man would approve and for this purpose, it would even go into the financial calculations involved. The scheme cannot be used to circumvent (at least on these particular facts) the provisions of S. 81(1A) and other provisions of law. This decision along with certain other initiatives by SEBI should help in reducing misuse of schemes of restructuring.
