Judicial Pronouncements in Valuation
Judicial Pronouncements in Valuation
Judicial Pronouncements in Valuation
Judicial Pronouncements
in Valuation
E-mail : [email protected]
Price : ` 200/-
ISBN No : 978-93-90668-44-1
the fee ratified by the CoC, along with the expenses payable. However,
the first Respondent informed the Appellant that the fee as ratified could
not be paid and paid a certain sum.
• The Appellant then filed an application under Section 60(5) of the
Insolvency and Bankruptcy Code, 2016 before the NCLT challenging the
non-payment of the fees. However, the NCLT dismissed the application
concluding that it had been rendered functus officio. In appeal, the
NCLAT rejected the contention of the Appellant, noted that a certain
amount had already been paid over (Rs. 50,000/-).
2. Key Grounds of Appeal
The real issue which has been sought to be canvassed in the appeal is that in
a situation such as present, where the CIRP was set aside by the Appellate
Authority, there has to be within the framework of the Insolvency and
Bankruptcy Code, 2016 (IBC, 2016) a modality for determining the claim of a
professional valuer such as the Appellant.
3. Decision
The Hon’ble Supreme Court set aside the impugned judgment and order of the
NCLAT and remitted the proceedings back to the NCLT for determining the
claim of the Appellant for the payment of the professional charges as a
Registered Valuer appointed by the Resolution Professional in pursuance of
the initiation of the CIRP. The Hon’ble Apex Court held as under: -
(i) The view of NCLT that it was rendered functus officio in relation to the
Appellant’s claim is an incorrect reading of the jurisdiction of the NCLT
as an Adjudicating Authority under the IBC. The Hon’ble Apex Court
relied upon its decision in the case of Gujrat Urja Vikas Nigam Ltd. Vs.
Amit Gupta and Ors. and held that though the CIRP was set aside later,
the claim of the Appellant as Registered Valuer related to the period when
he was discharging his functions as a Registered Valuer appointed as an
incident of the CIRP and hence, the NCLT would have been justified in
exercising its jurisdiction under Section 60(5)(c) of the IBC, 2016 and, in
exercise of jurisdiction under Article 142 of the Constitution to make a
determination of the amount which is payable to an expert Valuer as an
intrinsic part of the CIRP costs.
4
Alok Kaushik Vs Bhuvaneshwari Ramanathan and Ors (2021)
(ii) The Appellant was justified in contending that there must be a forum
within the ambit and purview of the IBC, 2016 which had the jurisdiction
to make a determination on a claim of the present nature, which had been
instituted by a Valuer who was appointed in pursuance of the initiation of
the CIRP by the Resolution Professional.
(iii) Regulation 34 of the Insolvency and Bankruptcy Board of India (Insolvency
Resolution Process for Corporate Persons) Regulations, 20161 defines
'insolvency resolution process cost' to include the fees of other
professionals appointed by the Resolution Professional.
(iv) The availability of a grievance redressal mechanism under the IBC, 2016
against an Insolvency Professional does not divest the NCLT of its
jurisdiction under Section 60(5)(c) of the IBC, 2016 to consider the
amount payable to the Appellant. In any event, the purpose of such a
grievance redressal mechanism was to penalize errant conduct of the RP
and not to determine the claims of other professionals which form part of
the CIRP costs.
4. Key Learnings for Valuers from the above Case
(i) Section 217 of the IBC 2016 empowers a person aggrieved by the
functioning of a Resolution Professional to file a complaint to the IBBI. If
the IBBI believes on the receipt of the complaint that any Resolution
Professional has contravened the provisions of IBC 2016 or the Rules,
Regulations or Directions issued by the IBBI, it can, under Section 218
of the IBC 2016 direct an inspection or investigation. Under Section 220
of the IBC 2016, IBBI can constitute a Disciplinary Committee to consider
the report submitted by the Investigating Authority. If the Disciplinary
Committee is satisfied that sufficient cause exists, it can impose a
penalty.
(ii) The availability of above grievance redressal mechanism under the IBC
2016 against an Insolvency Professional does not divest the NCLT of its
jurisdiction Under Section 60(5)(c) of the IBC 2016 to consider the
amount payable to a Registered Valuer appointed under the IBBI
Regulations. The purpose of such a grievance redressal mechanism is
to penalize errant conduct of the RP and not to determine the claims of
other professionals which form part of the CIRP costs.
5
Judicial Pronouncements in Valuation
6
Case No. 2
Maharashtra Seamless Limited Vs
Padmanabhan Venkatesh and Ors. (2020)
8
Maharashtra Seamless Limited Vs Padmanabhan Venkatesh and Ors. (2020)
9
Judicial Pronouncements in Valuation
10
Maharashtra Seamless Limited Vs Padmanabhan Venkatesh and Ors. (2020)
grounds and accordingly, appeals were filed against the same before NCLAT.
One of the key grounds was that the approval of the Resolution Plan
amounting to Rs. 477 crores were giving the Resolution Applicant windfall gain
as they would get assets valued at Rs. 597.54 crores at a much lower amount.
The parties contended that the ‘Resolution Plan’ is below the liquidation value
and the fair value should be adopted before approval of the ‘Resolution Plan’.
The other ground taken by the objectors was that one of the other Resolution
Applicants had made a revised offer of Rs. 490 crores, which was more than
the amount offered by the MSL.
In this regard, the Resolution Applicant submitted as under: -
─ As per ‘M/s. Maharashtra Seamless Ltd.’ their total exposure was around
Rs. 657.50 crores wherein Rs. 477 crores was upfront amount and in
addition to that Rs. 180.50 crores were to be infused directly by them.
Further, Rs. 57 crores was to be infused towards 25% margin money of
working capital expenditure. Moreover, in fact, the total working capital
requirement was Rs. 224 crores, and the balance was to be taken as a
loan from Bank(s), which would also require corporate guarantees.
─ It was further contended that the Corporate Debtor’s plant has been lying
closed for the last three years therefore; the aforesaid infusion of funds
by MSL aggregating to Rs. 657.50 crores was for the maximization of the
assets of the ‘Corporate Debtor’.
The NCLAT held that since the amount provided in the Resolution Plan was
lower than the average of the liquidation value arrived at by the Valuers,
therefore, the Resolution Plan approved by the Adjudication Authority is
against Section 30(2) of the IBC, 2016 and is against the statement and object
of the ‘I&B Code, 2016’.
It held that “’M/s. Maharashtra Seamless Ltd.’ should increase upfront payment
of Rs. 477 Crores as proposed to the ‘Financial Creditors’, ‘Operational
Creditors’ and other Creditors to Rs. 597.54 Crores by paying additional Rs.
120.54 Crores approximately to make it at par with the average liquidation
value of Rs. 597.54 Crores.”
It held that if the ‘Resolution Applicant’ modifies the ‘Resolution Plan’, as
ordered above and deposits another sum of Rs. 120.54 Crores within 30 days,
by improving the plan, the Adjudication Authority will allow ‘M/s. Maharashtra
Seamless Limited’ to take over the possession of the ‘Corporate Debtor’
including its moveable and immoveable assets and the plant. On failure, the
plan approved in favour of ‘M/s. Maharashtra Seamless Ltd.’ deemed to be set
11
Judicial Pronouncements in Valuation
aside and the Adjudication Authority will pass appropriate order in accordance
with law.
4. 22nd January 2020 – Order of the Hon’ble Supreme
Court of India
Grounds of Admission
Aggrieved by the decision of NCLAT, the M/s. Maharashtra Seamless Ltd.
preferred an appeal before the Hon’ble Supreme Court of India. The two
primary issues for consideration before the Apex Court was whether the
scheme of the Insolvency & Bankruptcy Code, 2016 contemplates that the sum
forming part of the resolution plan should match the liquidation value or not
and whether Section 12-A of the IBC, 2016 is the applicable route through
which a successful Resolution Applicant can retreat.
Judgement
The Hon’ble Supreme Court held as under: -
(i) No provision in the IBC, 2016 or IBBI Regulations has been brought to
our notice under which the bid of any Resolution Applicant has to match
liquidation value arrived at in the manner provided in Clause 35 of the
Insolvency and Bankruptcy Board of India (Insolvency Resolution
Process for Corporate Persons) Regulations, 2016.
(ii) The objective behind prescribing such valuation process is to assist the
CoC to take decision on a Resolution Plan properly. Once, a resolution
plan is approved by the CoC, the statutory mandate on the Adjudicating
Authority under Section 31(1) of the IBC, 2016 is to ascertain that a
resolution plan meets the requirement of sub-sections (2) and (4) of
Section 30 thereof.
(iii) MSL cannot withdraw from the proceeding in the manner they have
approached the Court. The exit route prescribed in Section 12-A of the
IBC, 2016 is not applicable to a Resolution Applicant. The procedure
envisaged in the said provision only applies to applicants invoking
Sections 7, 9 and 10 of the IBC, 2016.
(iv) Court ought to cede ground to the commercial wisdom of the creditors
rather than assess the Resolution Plan on the basis of quantitative
analysis. Such is the scheme of the IBC, 2016. Section 31(1) of the IBC,
2016 lays down in clear terms that for final approval of a Resolution Plan,
the Adjudication Authority has to be satisfied that the requirement of sub-
section (2) of Section 30 of the IBC, 2016 has been complied with.
12
Maharashtra Seamless Limited Vs Padmanabhan Venkatesh and Ors. (2020)
The Supreme Court, after taking into consideration the facts of the case held
that there is no breach of the provisions of the IBC, 2016 or the Regulations
thereunder; upheld the order of the Adjudicating Authority approving the
Resolution Plan and set aside the order of NCLAT dated 8 April, 2019.
5. Key Learnings for Valuers from the above Case
The Preamble of the Insolvency & Bankruptcy Code, 2016 states: -
“An Act to consolidate and amend the laws relating to reorganisation and
insolvency resolution of corporate persons, partnership firms and indivi duals
in a time bound manner for maximisation of value of assets of such persons,
to promote entrepreneurship, availability of credit and balance the interests of
all the stakeholders including alteration in the order of priority of payment of
Government dues and to establish an Insolvency and Bankruptcy Board of
India, and for matters connected therewith or incidental thereto. “
Hence, the IBC, 2016 effectively lays emphasis on reorganisation and
insolvency resolution, albeit in a time bound manner to promote going concern,
with liquidation as the last resort. The IBC, 2016 is first and foremost, a Code
for reorganisation and insolvency debtors. Unless such reorganisation is
effected in a time-bound manner, the value of the assets of such persons will
deplete. Therefore, maximisation of value of the assets of such persons so
that they are efficiently run as going concerns is another very important
objective of the IBC, 2016.
The Adjudicating Authorities have to act on substantive matters of law and
concede to the wisdom of the COC on commercial aspects provided other legal
requirements have been met.
The Valuation process prescribed under the IBC, 2016 is to assist the
Committee of Creditors to take decision on the resolution plan and no provision
in the IBC, 2016 or Regulation thereunder lays down that the bid of any
Resolution Applicant has to match liquidation value arrived at in the manner
provided in clause 35 of the Insolvency and Bankruptcy Board of India
(Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
13
Case No. 3
G.L. Sultania and Ors. Vs The Securities and
Exchange Board of India and Ors. (2007)
During the pendency of the suit, Shri S.K. Somany, one of the brothers offered
to sell 7.30% share held by him in the target company to Shri C.K. Somany on
the basis of price mutually acceptable to the parties. In view of the agreement
arrived at between the two brothers, Shri C.K. Somany moved to Calcutta High
Court for modification of the interim order thereby permitting him to acquire
7.30% shares of Shri S.K. Somany in the target company. This triggered the
provisions of the Takeover Code which obliged Shri C.K. Somany to make a
public announcement to acquire shares in accordance with the Takeover
Code.
2. Scheme of Events and Valuations Done
(i) The Takeover Code having been triggered, acquirers were directed to
make an open offer under the provisions of the Takeover Code by order
dated 2.9.2003. The merchant banker, appointed by the acquirer,
determined the price of shares to be offered to the shareholders in
accordance with the Securities and Exchange Board of India (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997 viz Takeover Code
at Rs. 40 per share.
(ii) Some of the appellants not being satisfied with the price of the share
which was offered to the shareholder under aforesaid SEBI Regulations
objected to the price being low and complained that the same had not
been determined in accordance with the parameters laid down in
Regulation 20(5) of the Takeover Code.
(iii) Respondents in consultation with the Merchant Banker appointed a
renowned firm of Valuers (First Valuer) to value the shares of the target
company. The aforesaid firm of Valuers determined the price of each
share of the target company as Rs. 43.02 per share.
(iv) The appellants still persisted in their objection that the value of each
share determined by the aforesaid firm of Valuers was also not correct.
(v) SEBI took serious note of the objections and appointed an Independent
Valuer (Second Valuer), to once again value the shares of the target
company under Regulation 20(5) of the Takeover Code. The said
Independent Valuer, carried out valuation of the target company and
submitted a report on 20.5.2004 to SEBI. The valuation was done on the
basis of the market price of the shares of the target company and other
methods as required under valuation principles and revised the valuation
to Rs.64.17 per share.
15
Judicial Pronouncements in Valuation
(vi) The acquirers felt aggrieved by the hike in the valuation and felt that the
valuation by the first Valuer at Rs. 43.02 was reasonable. The merchant
bankers pursuant to this objection by the acquirers wrote a letter dated
9.3.2005 to SEBI on this aspect of the matter. SEBI permitted the
merchant bankers to obtain valuation from a third Chartered Accountant.
(vii) Accordingly, the merchant bankers in consultation with SEBI appointed
third Valuer to carry out the valuation of the shares of the target company.
The said Valuer submitted a report on 13.4.2005 stating that the fair
market value of the share was Rs. 60.04 per share of the target company.
(viii) SEBI after considering all the three reports felt that in public interest
justice must be done to the shareholders and held that the highest price
per share amongst the three valuations be the fair price.
(ix) The merchant bankers and acquirers accepted the suggestion of SEBI.
(x) Appeal was filed before the Appellate Tribunal and it may be further noted
that the appellant G.L. Sultania had complained against the valuation of
shares by the Merchant Banker and while doing so he had enclosed
copies of two Valuation Reports valuing the shares of the target company
at much higher rates namely, Rs.408/- and Rs.590/- per share.
(xi) The Appellate Tribunal did not accept the Valuation Reports of 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.
(xii) The Appellate Tribunal held that the Board (SEBI) had acted strictly in
terms of the Takeover Code and approved the public offer. The valuation
of shares as accepted by the SEBI was arrived at after following the
norms laid down in Regulation 20(5) of the Takeover Code and, therefore,
it could not be characterized as either erroneous, arbitrary or
unreasonable.
(xiii) Aggrieved by the order of the Appellate Tribunal the appellants had filed
the instant appeal under Section 15(Z) of the Securities and Exchange
Board of India Act, 1992.
3. Issues Raised
(i) First objection was that the SEBI, as well as the Merchant Banker had
16
G.L. Sultania and Ors. Vs The Securities and Exchange Board of India and …
17
Judicial Pronouncements in Valuation
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.
(ii) In case of disinvestments of a Public Sector Undertaking, the shares of
such an undertaking shall be deemed to be infrequently traded, if on the
stock exchange, the annualized trading turnover in the shares during the
preceding six calendar months prior to the month, in which the Central
Government of the State Government as the case may be opens the
financial bid, is less than five per cent (by the number of shares) of the
listed shares. For this purpose, the weighted average number of shares
listed during the six months period may be taken.
(iii) In case of shares which have listed within six months preceding the public
announcement, the trading turnover may be annualized with reference to
the actual number of days for which the shares have been listed.”
So far as Clauses (a) and (b) are concerned, there can be no dispute that the
highest price offered by the acquirers for the shares of the target company
under the Memorandum of Undertaking dated 7th October, 2002 was Rs. 40/-
per share and the price to be paid by C.K. Somany group for purchase of
shares permitted by the High Court of Calcutta was also Rs. 40/- per share.
Thus, the offer price based on factors under Clauses (a) and (b) of Regulation
20(5) works out to be not less than Rs. 40/- per share. The thrust of the
challenge to the valuation is with respect to Clause (c) of Regulation 20(5)
of the Takeover Code.
5. Salient features of Valuation Report accepted by the
SEBI (i.e. Report of the Second Valuer)
• The Report takes note of the three commonly adopted methods of
valuation of shares, namely, the Net Asset Method, the Profit Earning
Capacity Method, and the Market Price Method.
• While the Net Value Method represents the value of the shares with
reference to the value of the assets owned and the liability as on the
valuation date, the Profit Earning Capacity Method (for short the "PECV")
involves determination of the future maintainable earnings of the
Company from its normal operations. Under the Market Approach, the
common method employed to derive the value of the business is to
18
G.L. Sultania and Ors. Vs The Securities and Exchange Board of India and …
19
Judicial Pronouncements in Valuation
20
G.L. Sultania and Ors. Vs The Securities and Exchange Board of India and …
making; hence having a negative P/E ratio and the other 3 companies
having minimal profit, the Industry Composite P/E ratio of 20.9 is
calculated based on P/E ratio of 3 profit making companies only, thereby
ignoring the performance of other 9 companies.
• Allegation No. 2
The Net Asset Value comes to Rs. 133.27, if reserves and surplus as per
consolidated accounts of the target company and subsidiaries at book
value were taken. According to the appellants, the Net Asset Value would
have come to Rs. 233.04 if 50% of the net worth of the controlled
associate company, ACE Glass Containers Ltd. was considered. The
value of the shareholding of the target company in the subsidiaries and
ACE Glass as reflected in the Balance Sheet of the target company
merely reflected the historical cost of such investments and not the true
value thereof.
Observation:- ACE Glass was a potentially sick company registered with
the BIFR having carry forward losses of Rs. 266 crores as on March 31,
2003 and there is no reasonable prospect of earning any dividend from
ACE Glass in the immediately foreseeable future. There was no question
of consolidating the net worth of ACE glass into the net worth of the target
company or the profit earning capacity of ACE Glass with the profit
earning capacity of the target company.
Further, it is not mandatory to derive the valuation of shares on the basis
of consolidated financial statement. As per normal accounting practices,
for determining the value of shares as a going concern only individual
financial statements are considered because parent company is entitled
to dividend only and has no right whatsoever in the assets of subsidiary
and associate companies.
• Allegation No. 3
The capitalization ratio of 15% was taken; whereas the capitalization ratio
should have been 8% and the guidelines issued by the CCI had been
repealed.
Observation:- CCI guidelines had been followed which laid down the
principles which are applicable in working out the profit earning capacity
which involve two important factors, namely - average profit before tax
and capitalization ratio.
21
Judicial Pronouncements in Valuation
• Allegation No. 4
If revaluation reserve was considered, the Net Asset Value would have
come to Rs. 124.82.
Observation:- Revaluation reserves are never considered as part of the
net-worth computation. Section 2(29A) of the Companies Act, 1956 (now
substituted by the Companies Act, 2013) which defines "net worth",
expressly excludes revaluation reserves. Moreover the CCI guidelines
for “Valuation of equity shares for companies and the business and net
assets of branches” clearly provided that the revaluation reserves arising
out of revaluation of fixed assets should ordinarily be ignored. Only after
an efflux of 15 years would it be reasonable to consider non-exclusion of
revaluation reserves. Even SEBI guidelines for initial public offerings of
shares expressly exclude capitalization arising out of revaluation
reserves for purposes of determining "promoter's contribution" to be
eligible to make an initial public offering.
• Allegation No. 5
Profit Earning Capacity Value should not be calculated on the basis of
past earnings alone as done by the Valuer but on future maintainable
profit basis.
Observation:- The Valuer has correctly applied the HLL/TOMCO
principles for computation of the "Yield Value". Adopting those principles
audited financial statements of 9 years between 1993-1994 and 2001-
2002 were considered. The financial statement for the year 2002-2003
was excluded since the profits for that year had fallen by nearly 50%.
Adopting these principles and taking into account the discounting rate of
15% applicable in terms of the CCI guidelines a value of Rs. 55.06 per
share was computed by the valuer. The Valuer also independently
applied the yield value and without applying HLL principles computed the
value of the shares as Rs. 34.39. After having arrived at two distinct
values as aforesaid, the Valuer adopted the higher of the two values.
(iii) The Court held that unless it is shown to the Court that some well-
accepted principles of valuation have been departed, without any reason ;
or that the approach adopted is patently erroneous; or that relevant
factors have not been considered by the Valuer; or that the valuation was
made on a fundamentally erroneous basis; or that the Valuer adopted a
demonstrably wrong approach or a fundamental error in going to the root
of the matter; the Court cannot interfere with the valuation of an expert.
22
G.L. Sultania and Ors. Vs The Securities and Exchange Board of India and …
(iv) The Court held that the Valuer, had not committed any such error which
may justify their 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 the Court.
The Court held that “Board committed no error in accepting the Report, as
Valuer has acted in a reasonable manner. Unless it is shown to the Court that
some well-accepted principle of valuation has been departed from without any
reason or that the approach adopted is erroneous, the Court cannot interfere
with the valuation of an expert.”
Hence, Board had exercised its discretion wisely.
7. Key Learnings for Valuers from the above Case
(i) Important Valuation Principles upheld
o It is an established principle that for working out the average profit under
the Profit Earning Capacity Method, profit of only those years which were
normal and not affected by abnormal situations should be considered.
o It is not mandatory to derive the valuation of shares on the basis of
consolidated financial statement. As per normal accounting practices, for
determining the value of shares as a going concern only individual
financial statements are considered because parent company is entitled
to dividend only and has no right whatsoever in the assets of subsidiary
and associate companies.
o Revaluation reserves are never considered as part of the net-worth
computation. Section 2(29A) of the Companies Act, 1956 (now
substituted by the Companies Act, 2013) which defines "net worth",
expressly excludes revaluation reserves. Moreover, the CCI guidelines
on “Valuation of equity shares for companies and the business and net
assets of branches” clearly provided that the revaluation reserves arising
out of revaluation of fixed assets should ordinarily be ignored. Only after
an efflux of 15 years would it be reasonable to consider non-exclusion of
revaluation reserves. Even SEBI guidelines for initial public offerings of
shares expressly exclude capitalization arising out of revaluation
reserves for purposes of determining "promoter's contribution" to be
eligible to make an initial public offering.
o CCI guidelines on “Valuation of equity shares for companies and the
business and net assets of branches” have always been and continued
23
Judicial Pronouncements in Valuation
24
Case No. 4
Renuka Datla Vs Solvay Pharmaceutical
B.V. and Ors. (2003)
Special Leave Petition (C) No. 18035 of 2000 with Interlocutory Application
No. 2 of 2002 with S.L.P. (C) Nos. 18041-18042/2000 with I.A. Nos. 3 and
4/2002
Decided On: 30.10.2003
1. Brief Facts of the Case
The case arose from the dispute between the petitioners, Mrs. Renuka Datla
and her husband Dr. Vijay Kumar Datla, and the company Solvay
Pharmaceutical and Shri D. Vasant Kumar. The petitioners were shareholders
of two Pharmaceutical Companies namely Duphar Pharma India Ltd. (DPIL
renamed as Solvay Pharma India Ltd.) and Duphar Interfran Ltd. (DIL). The
dispute was with respect to the transfer of shares of these two Pharmaceutical
Companies to the respondents.
The petitioners filed three appeals in the High Court under Order 43 Rule 1
C.P.C. The appeal filed by the petitioner in the first S.L.P. against the refusal
of injunction was dismissed by the High Court and the other two appeals filed
by the aggrieved defendants were allowed and the ad interim injunction in both
the cases was vacated.
Against this common order of the High Court, the present S.L.Ps. were filed
by the petitioners namely, Mrs. Renuka Datla and Dr. Vijay Kumar Datla.
During the course of the hearing itself, the parties settled the disputes and the
terms of mutual settlement were signed by all the parties. The Court passed
the following order on 15th July, 2002 to give effect to the settlement.
Counsel for the parties stated that the dispute between them has been settled.
A copy of the terms of mutual settlement signed by the parties has been filed
Judicial Pronouncements in Valuation
in Court and initiated by the Court Master. Terms of settlement are recorded.
The terms contemplate valuation to be done of the intrinsic worth of the two
companies and the value of 4.91% shares in the said two companies held by
the petitioners. Valuation has to be completed within a period of four weeks.
The terms of mutual settlement shall form part of this order. Copy of the order
be sent to the Valuers.
According to the terms of settlement, M/s. Solvay Pharmaceuticals and Mr.
Vasant Kumar agreed to purchase 4.91% shares held by the petitioners (Dr.
Renuka Datla/Dr. Vijay Kumar) in the two companies namely Duphar Pharma
India Ltd. (DPIL renamed as Solvay Pharma India Ltd.) and Duphar Interfran
Ltd. (DIL). A Chartered Accountant, had to evaluate the intrinsic worth of both
the Companies— DPIL and DIL as going concerns and the value of the said
4.91% shares held by the petitioners in those two Companies "by applying the
standard and generally accepted method of valuation". The Valuer was also
asked to give an opportunity to the respective parties to make their
submissions.
2. Basic Principle and Valuation Methodology adopted
by the Valuer
The Valuer considered three methods of valuation.
(i) Asset based
(ii) Earning based
(iii) Market based.
DCF was not applied in absence of any independent projections and also
because the projections provided by both the parties differed substantially.
a) Intrinsic Value
As per the Valuer, intrinsic value of the share should be based on the asset
and earnings-based value with appropriate weightage given to the two
methods.
Since the value of a company/business is more influenced by its earnings
value, a higher weightage was given to the earnings value as compared to its
asset value. The asset value is considered as an integral part of the intrinsic
value as it has a persuasive impact. The Valuer hence allocated following
weightage for determining the intrinsic value: -
26
Renuka Datla Vs Solvay Pharmaceutical B.V. and Ors. (2003)
27
Judicial Pronouncements in Valuation
28
Renuka Datla Vs Solvay Pharmaceutical B.V. and Ors. (2003)
In this respect, the respondents submitted that the brands VERTIN and
COLOSPA have been purchased by Solvay Pharmaceuticals BV from
Dupen Laboratories Private Limited. As such, these were not the assets
of DIL. DIL also has no investment in Dupen Laboratories Private Limited.
This is not a matter which should affect the valuation of the shares of DIL.
The Court held that the petitioners cannot be permitted to thwart the
terms of the settlement by inviting the Valuer or this Court to go into the
extraneous issue as regards the validity of the transfer or incidental
matters. The assets as per the relevant records had to be taken into
account by the Valuer and that had been done. The Hon’ble Court,
therefore, found no apparent error in excluding those brands.
c) Discounted Cash Flow Method had not been adopted though it is a
generally accepted method, even according to the Valuer.
The Court held that the DCF method is adopted while resorting to
valuation based on future earnings but the future earning based valuation
is not the only reliable method of 'earnings-based valuation'.
Moreover, the petitioners have not placed any facts and figures to show
that such method of valuation would result in a definite increase in the
share value going by independent projections.
There were vast discrepancies between the projection given by the
parties and independent projections had not been provided; the Valuer
had chosen the best possible method of evaluation by capitalizing the
past earnings. In doing so, the future maintainable profits based on past
performance were also an element that had gone into the calculation. No
prejudice whatsoever was shown to have been caused to the petitioners
by the earnings-based valuation.
The court decided that the Valuer approached the question of valuation
having due regard to the terms of settlement and applying the standard
methods of valuation. The valuation has been considered from all
appropriate angles. No case has been made out that any irrelevant
material has been taken into account or relevant material has been
eschewed from consideration by the Valuer. The plea that the valuation
is vitiated by fundamental errors cannot but be rejected.
29
Judicial Pronouncements in Valuation
30
Renuka Datla Vs Solvay Pharmaceutical B.V. and Ors. (2003)
even to the purchaser since the respondents collectively held in the two
companies 60.5% of the share capital of each company. On that
consideration, the value of the shares can only be 4.91% of the intrinsic
worth of the two companies.
(viii) It was further held that “If a valuer has not added control premium in
intrinsic value and the same has not been specifically mentioned in the
terms of settlement, the treatment done by Valuer will be considered as
correct.”
(ix) The Court also ruled that the Valuer had arrived at market-based
valuation in addition to the other modes of valuation and observed that
the recommended value is the higher of the intrinsic value or the market-
based value. Thus, the petitioners had the benefit of higher valuation.
The first principle laid down in the above decision has been kept in view.
Moreover, the profit earning method which has been referred to in the
above decisions in the context of valuation of shares of a private limited
company has also been applied, though future earnings-based valuation
has not been done in the absence of reliable figures. As observed by us
earlier, the profit earning capacity of the company has not been excluded
from consideration, Thus, the Valuer's mode of valuation does not in any
way infringe the principles laid down in the case of Commissioner of
Gift Tax, Bombay v. Smt. Kusumben D. Mahadevia to the extent they
are applicable.
31
Case No. 5
Miheer H. Mafatlal Vs Mafatlal Industries Ltd.
Ors. (1996)
33
Judicial Pronouncements in Valuation
34
Miheer H. Mafatlal Vs Mafatlal Industries Ltd. Ors. (1996)
35
Judicial Pronouncements in Valuation
(b) may, at the time of making such order or at any time thereafter, give such
directions in regard to any matter or make such modifications in the
compromise or arrangement as it may consider necessary for the proper
working of the compromise or arrangement.
(2) If the Court aforesaid is satisfied that a compromise or arrangement
sanctioned under Section 391 cannot be worked satisfactorily with or without
modifications, it may, either on its own motion or on the application of any
person interested in the affairs of the company, make an order winding up the
company, and such an order shall be deemed to be an order made under
Section 433 of this Act.
(3) The provisions of this section shall, so far as may be, also apply to a
company in respect of which an order has been made before the
commencement of this Act under Section 153 of the Indian Companies Act,
1913 (7 of 1913), sanctioning a compromise or an arrangement.
Section 393
393. (1) Where a meeting of creditors or any class of creditors, or of members
or any class of members, is called under Section 391,-
(i) with every notice calling the meeting which is sent to a creditor or
member, there shall be sent also a statement setting forth the terms of
the compromise or arrangement and explaining its effect : and in
particular, stating any material interests of the directors, managing
director, managing agent, secretaries and treasurers or manager of the
company, whether in their capacity as such or as members or creditors
of the company or otherwise, and the effect on those interests, of the
compromise or arrangement, if, and in so far as, it is different from the
effect on the like interests of other persons; and
(ii) in every notice calling the meeting which is given by advertisement, there
shall be included either such a statement as aforesaid on a notification of
the place at which and the manner in which creditors or members entitled
to attend the meeting may obtain copies of such a statement as aforesaid.
36
Miheer H. Mafatlal Vs Mafatlal Industries Ltd. Ors. (1996)
37
Judicial Pronouncements in Valuation
38
Miheer H. Mafatlal Vs Mafatlal Industries Ltd. Ors. (1996)
Decision
When the Scheme as a whole is examined and found to be advantageous to
the economic and commercial interest of shareholders as a class, only one or
two items implicatory for deciding the exchange ratio cannot tilt the balance as
so many factors and aspects would enter that exercise. The Supreme Court
finally concluded that ’Once the exchange ratio of the shares of the transferee
company to be allotted to the shareholders of the transferor company has been
worked out by a recognized firm of chartered accountants who are experts in
the field of valuation and if no mistake can be pointed out in the said valuation,
it is not for the Court to substitute its exchange ratio, especially when the same
has been accepted without demur by the overwhelming majority of the
shareholders of the two companies.
5. Court’s Observations and Key Learnings for Valuers
from the above Case
• As per the statutory provisions of Sections 391 and 393 of the Companies
Act, 1956 the question of void ability of the scheme will have to be judged
subject to the rider that a scheme sanctioned by majority will remain
binding to a dissenting minority of creditors or members, as the case may
be, even though they have not consented to such a scheme and to that
extent absence of their consent will have no effect on the scheme.
• In case of such a Scheme of Compromise and Arrangement put up for
sanction of a Company Court (now NCLT) it will have to be seen whether
the proposed scheme is lawful and just and fair to the whole class of
creditors or members including the dissenting minority to whom it is
offered for approval and which has been approved by such class of
persons with required majority vote.
• It is the commercial wisdom of the parties to the scheme who have taken
an informed decision about the usefulness and propriety of the scheme
by supporting it by the requisite majority vote that has to be kept in view
by the Court. The Court certainly would not act as a Court of appeal and
sit in judgment over the informed view of the concerned parties to the
compromise as the same would be in the realm of corporate and
commercial wisdom of the concerned parties.
• The Court has neither the expertise nor the jurisdiction to delve deep into
the commercial wisdom exercised by the creditors and members of the
39
Judicial Pronouncements in Valuation
40
Miheer H. Mafatlal Vs Mafatlal Industries Ltd. Ors. (1996)
(vii) That the Company Court (now NCLT) has also to satisfy itself that
members or class of members or creditors or class of creditors, as the
case may be, were acting bona fide and in good faith and were not
coercing the minority in order to promote any interest adverse to that of
the latter comprising of the same class whom they purported to represent.
(viii) That the scheme as a whole is also found to be just, fair and reasonable
from the point of view of prudent men of business taking a commercial
decision beneficial to the class represented by them for whom the
scheme is meant.
(ix) Once the aforesaid broad parameters about the requirements of a
scheme for getting sanction of the Court are found to have been met, the
Court will have no further jurisdiction to sit in appeal over the commercial
wisdom of the majority of the class of persons who with their open eyes
have given their approval to the scheme even if in the view of the Court
there would be a better scheme for the company and its members or
creditors for whom the scheme is framed. The Court cannot refuse to
sanction such a scheme on that ground as it would otherwise amount to
the Court exercising appellate jurisdiction over the scheme rather than its
supervisory jurisdiction.
41
Case No. 6
Hindustan Lever Employees' Union Vs
Hindustan Lever Limited and Ors. (1994)
Particulars % of holding
Tata Group 22%
Financial Institutions 41%
General Public 37%
Business of Tata Oil Mills Co. Ltd. ("TOMCO") started declining in the year 90-
91, they incurred a loss of Rs 13 Crore in the year 91-92 and another Rs 16
Hindustan Lever Employees' Union Vs Hindustan Lever Limited & Ors. (1994)
Crores in the first half of the year 92-93. Hence, the Board of TOMCO Ltd.
decided to collaborate with Hindustan Lever Ltd. ("HLL"), a 100% subsidiary
of Unilever ("UL"). The Scheme, inter alia, provided for transfer and vesting in
HLL of the Undertaking and business of TOMCO together with assets and
liabilities excluding certain assets and/or licence rights to use certain
premises.
Both TOMCO & HLL availed service of Senior Partner of a reputed Chartered
Accountant firm, for the purpose of evaluation of the share-price of the two
Companies in order to arrive at a fair share exchange ratio. The said person
was also a director of TOMCO.
He gave the Valuation Report and recommended an exchange ratio of two
equity shares of HLL for every fifteen ordinary shares of TOMCO. The Board
of Directors of both the Companies at their separate and independent meetings
accepted the recommendation and approved the Scheme of Amalgamation.
The valuation of the shares for exchange ratio was determined by combining
three well-known methods –
a) the yield method;
b) the asset value method; and
c) the market value method
The Valuation was further checked and approved by two other independent
bodies at the instance of shareholders of TOMCO by the High Court and it has
been found that the determination did not suffer from any infirmity.
2. Scheme of Events
(i) Company Application No. 250 of 1993 filed by TOMCO.
(ii) The Court passed an order of 29th April, 1993 directing TOMCO to call
the meetings of the debenture holders, creditors, ordinary shareholders
arid preference shareholders on 29th and 30th June, 1993.
(iii) Individual notices of the said meetings together with a copy of the
Scheme of Amalgamation, the statement as settled by the Company
Registrar and as required under Section 393(1)(a) of the Companies Act,
1956 (the Act) and a proxy form was sent to concerned members as
required by law.
43
Judicial Pronouncements in Valuation
(iv) The meeting of the ordinary shareholders was held on 29th June, 1993
and was attended by 1,294 members holding 85,85,009 ordinary shares
and by 1,652 members holding 55,18,251 ordinary shares through
proxies. In the shareholder’s meeting amendment was proposed to the
effect that the exchange ratio should be 5:15 shares in place of 2:15
shares as envisaged in the Scheme. 99.64% of ordinary shareholders
voted against amendment and 99.72% voted in favour of the Scheme as
proposed.
(v) Debenture holders voted 99%, secured creditors voted 100%, unsecured
creditors voted 84.30% and preference shareholders voted 100% in
favour of the Scheme.
(vi) Similar directions were also issued to HLL by the Court on 29th April for
convening the meeting on 30th June, 1993 of the equity shareholders and
creditors,
(vii) On 30th June, 1993, shareholders of HLL at their Extraordinary General
Meeting approved the proposed scheme by the requisite majority.
(viii) The meeting of the creditors was held on 2nd July, 1993 under the
chairmanship of Mr. S.M. Datta, Chairman of HLL, as directed by the
Court. The creditors also voted for the Scheme.
(ix) The merger scheme was challenged by few shareholders of TOMCO,
Federation of Employees Union of both the TOMCO and HLL, Consumer
Action Group and Consumer Education and Research Centre.
3. Issues Raised by the objectors
According to the appellants, the Scheme should not be sanctioned for the
following reasons:
(i) Violation of Section 393(1)(a) of the Act in not making required
disclosures in the explanatory statement.
(ii) Valuation of share exchange ratio is grossly loaded in favour of HLL.
(iii) Ignoring the effect of provisions of the Monopolies and Restrictive Trade
Practices Act (the Monopolies & Restrictive Trade Practices Act).
(iv) Interest of employees of both the Companies was not adequately taken
care of.
44
Hindustan Lever Employees' Union Vs Hindustan Lever Limited & Ors. (1994)
45
Judicial Pronouncements in Valuation
The Market price of TOMCO share truly reflected the bleak outlook of the
Company, hence it cannot be said that the market price as on 17.6.93 did
not reflect the true picture of the value of the Company's shares.
On the market price basis as on 17.6.93 (the last price available before
the circular letter dated 21.6.93 issued to the shareholders of the two
Companies), the exchange ratio of 2:15 was very apt. If the yield method
was adopted, the ratio would be astronomically high in favour of HLL. But,
if the book value was taken per share, then TOMCO shares would be of
higher value than HLL shares.
In this respect, the court has held that the usual rule is that shares of the
going concern must be taken at quoted market value but in case of
amalgamation, a combination of all or some of the methods of valuation
may be adopted for the purpose of fixation of the exchange ratio of the
shares of the two companies. It was noted that even in such a situation,
the book value method has been described as more of talking-point than
a matter of substance.
(ii) With respect to the next contention that Valuer's report is not acceptable
to the TOMCO shareholders as he was a Director of TOMCO, the courts
observations were as under:-
The Valuer was a Director of TOMCO and HLL had no difficulty in
accepting the share exchange ratio fixed by him, even though he was a
Director of TOMCO. Hence if there was any bias, it should have been in
favour of TOMCO and not against TOMCO.
(iii) With respect to the next contention that Valuation of Shares exchange
ratio is grossly loaded in favour of HLL the Court’s observations were as
under:-
• Jurisdiction of the Court in sanctioning a scheme of merger is not to
ascertain with mathematical accuracy if the determination satisfied
the arithmetic test.
• A Company Court does not exercise appellate jurisdiction. It
exercises a jurisdiction founded on fairness.
• What requires a thoughtful consideration is whether the Company
Court has applied its mind to the public interest involved in the
merger.
46
Hindustan Lever Employees' Union Vs Hindustan Lever Limited & Ors. (1994)
47
Judicial Pronouncements in Valuation
48
Hindustan Lever Employees' Union Vs Hindustan Lever Limited & Ors. (1994)
relevant growth prospects of two company, the cover (ratio of after -tax
earnings to dividends paid during the year) for the present dividend of
two company, the relative gearing of the shares of two company, the
value of net assets of two company, voting strength in the merged
enterprise of the shareholders, past history of prices of two companies.
(iv) It is not required to interfere only because the figure arrived at by the
Valuer was not as better as it would have been if another method would
have been adopted.
(v) It was further held that the exchange ratio determined cannot be
considered as malafide merely on the fact that the share exchange ratio
is calculated through combination of three well-known methods i.e., net
worth, market value and earning method.
(vi) It was further held that “A financial institution holding 41% of shares of
the transferor company did not find any fault in the valuation of share, the
Court should not interfere with such valuation.”
49
Orders passed by the
Hon’ble High Courts
Case No. 7
Pr. Commissioner of Income Tax-2
Vs Cinestaan Entertainment Pvt. Ltd.
(DEL HC) (2021)
(iii) Assessee company booked a loss of Rs. 71,99,40,002/- in P&L A/c for
the year ended 31st Mar 2017 on account of loss on sale of investment
in unsecured compulsorily convertible debenture of Rs. 1000 each in M/s.
Script Stories Media P. Ltd. Since, the investment was in zero percent
debentures there was no scope of any income rather the transactions
resulted in the loss of Rs. 71,99,40,002/-.
(iv) Even in 2017-18, the assessee company kept raising share capital on
premium and at the same time booked losses on account of sale of zero
percent debentures which are in contradiction of each other. Hence, the
premium taken by the assessee is not justified even on merits.
Aggrieved by the assessment order, the Respondent preferred an appeal
before the Commissioner of Appeals [CIT (A)], who upheld the additions made
by the AO.
The second appeal before the ITAT was allowed in favour of assessee and the
order of the CIT (A) was set aside.
Revenue appealed against the aforementioned order on the grounds that the
Ld. ITAT has erred in law and on facts in deleting the addition made u/s
56(2)(vii)(b) of the Income Tax Act, 1961, by ignoring the sound reasoning and
detailed analysis of the AO that the Cash Flow projections considered in the
Discounted Cash Flow Method by the assessee are nothing but paper plans
that have no relation with the reality.
2. Key Observations and Decision of ITAT
• It is the prerogative of assessee as to how much capital is to be raised
based on its long-term and short-term funding requirements for the
purpose of running its business.
• Any businessman or entrepreneur visualise the business based on
certain future projections and undertakes all kinds of risks. It is the risk
factor alone that gives a higher return to a businessman and the Income
Tax Department or Revenue Official cannot guide a businessman in
which manner risk has to be undertaken. Such an approach of the
revenue has been judicially frowned by the Hon'ble Apex Court on several
occasions.
• At the time when valuation is made, it is based on reflections of the
potential value of business at that particular time and also keeping in
53
Judicial Pronouncements in Valuation
mind underline factors that may change over the period of time and thus,
the value which is relevant today may not be relevant after a certain
period of time.
• In DCF method, the value is based on estimated future projection and
these projections are based on various factors and projections made by
the management and the Valuer, like growth of the company,
economic/market conditions, business conditions, expected demand and
supply, cost of capital and host of other factors. These factors are
considered based on some reasonable approach, and they cannot be
evaluated purely based on arithmetical precision as value is always
worked out based on approximation and catena of underline facts and
assumptions.
• Section 56(2)(vii)(b) of the Income Tax Act,1961 is not applicable to
genuine business transactions and the genuineness and creditworthiness
of the strategic investors were not doubted by either the AO or the CIT(A).
In accordance with sub clause (i) of explanation, the Respondent-
Assessee had an option to carry out a valuation and determine the fair
market value (FMV) only on the Discounted Cash Flow method (DCF),
which was appropriately followed by the Respondent-Assessee.
• The shares were issued based on the valuation received from the
prescribed expert i.e., a Chartered Accountant who used the DCF method
which is one of the methods stipulated under Section 56(2)(vii)(b) of the
Income Tax Act, 1961 read with Rule 11UA(2)(b) of the Income Tax
Rules, 1962.
• Section 56(2)(vii)(b) of the aforesaid Act is a deeming provision and one
cannot expand the meaning of scope of any word while interpreting such
deeming provision. There has to be some enabling provision under the
Rule or the Act where Assessing Officer has been given a power to tinker
with the Valuation Report obtained by an Independent Valuer as per the
qualification given in the Rule 11U of the IT Rules, 1962. Rule 11UA(2)
of the said Rules does not give any power to the Assessing Officer to
examine or substitute his own value in place of the value determined or
requires any satisfaction on the part of the Assessing Officer to tinker with
such valuation.
• The shares have not been subscribed by any sister concern or closely
related person, but by outside investors who are one of the top investors
54
Pr. Commissioner of Income Tax-2 Vs Cinestaan Entertainment Pvt. …
and businessmen of the country and if they have seen certain potential
and accepted this valuation, then how AO or Ld. CIT(A) can question their
wisdom.
3. Cases relied upon
• In the case of SA Builders and also in case of CIT vs. Panipat Woollen
and General Mills Company Ltd, the Hon’ble Apex Court has held that
Income Tax Department cannot sit in the armchair of businessman to
decide what is profitable and how the business should be carried out.
Commercial expediency has to be seen from the point of view of
businessman.
• In the case of Securities & Exchange Board of India & Ors. [2015]
[ABR 291] the Hon’ble Bombay High Court has held that:-
❖ It is a well settled position of law with regard to the valuation that
valuation is not an exact science and can never be done with
arithmetic precision.
❖ The attempt on the part of SEBI to challenge the valuation which is
by its very nature based on projections by applying what is
essentially a hindsight view that the performance did not match the
projection is unknown to the law on valuations.
❖ Valuation being an exercise required to be conducted at a particular
point of time has of necessity to be carried out on the basis of
whatever information is available on the date of the valuation and a
projection of future revenue that Valuer may fairly make on the basis
of such information.
• In the case of Rameshwaram Strong Glass Pvt. Ltd. Vs. ITO the learned
ITAT has held that :-
❖ DCF Method is essentially based on the projections (estimates) only
and hence, these projections cannot be compared with the actuals
to expect the same figures as were projected.
❖ The Valuer has to make a forecast on the basis of some material but
to estimate the exact figure is beyond its control.
55
Judicial Pronouncements in Valuation
56
Pr. Commissioner of Income Tax-2 Vs Cinestaan Entertainment Pvt. …
(ii) The value which is relevant today may not be relevant after certain period
of time. At the time when valuation is made, it is based on reflections of
the potential value of business at that particular time and also depends
upon various underlying factors that may change over the period of time.
(iii) Courts have repeatedly held that valuation is not an exact science, and
therefore cannot be done with arithmetic precision. It is a technical and
complex problem which can be appropriately left to the consideration and
wisdom of experts in the field of accountancy, having regard to the
imponderables which enter the process of valuation of shares.
(iv) In DCF method, the value is based on estimated future projection and
these projections are based on various factors and projections made by
the management and the Valuer, like growth of the company,
economic/market conditions, business conditions, expected demand and
supply, cost of capital and host of other factors. These factors considered
shall be based on some reasonable approach as they cannot be
evaluated purely based on arithmetical precision.
(v) Valuation, other than rule-based, is an estimation and hence, the
forecasts and projection cannot match the actual performance. Valuation
at two different dates cannot be same due to change in the various
internal and external socio-economic factors that impact the concerned
asset. However, a Valuer and Assessee both shall analyse the variance
between the actual and projections and prepare a just and proper reason
to justify their valuation assumptions to AO.
(vi) Any Valuer when working on any projections and estimations works with
some inherent limitations. A valuer can use various tools and analysis
like regression analysis or trend analysis to limit risks of these
assumptions and to determine the fairness of projections.
(vii) A valuer shall maintain documentation which provides:
a. sufficient and appropriate record of the basis of the Valuation
Report; and
b. evidence that the valuation assignment was planned and performed
in accordance with the ICAI Valuation Standards, 2018 or other
applicable Valuation Standards along with other applicable legal and
regulatory requirements.
57
Case No. 8
Cushman and Wakefield India Private
Limited and Ors. Vs Union of India and Ors.
(DEL HC) (2019)
Petition was filed to declare Rule 3(2) of the Companies (Registered Valuers
and Valuation) Rules, 2017 as unconstitutional for violating Article 14, Article
19(1)(g) and Article 301 of the Constitution of India. The aforementioned rule
3(2) is reproduced as under:
“(2) No partnership entity or company shall be eligible to be a Registered
Valuer if-
(a) it has been set up for objects other than for rendering professional or
financial services, including valuation services and that in the case of a
company, it is a subsidiary, joint venture or associate or another company
or body corporate."
2. Issues raised by the Petitioner
(i) The petitioner held that it has over the years been instrumental in setting
benchmark for high standards, transparency and fairness with respect to
valuation services in India. Further, the petitioner had invested time,
money and experience in creating a pool of resources to carry out quality
valuation services in India.
(ii) The subsidiaries or joint ventures or associates of foreign and Indian
companies will continue to impart more professionalism, quality, high
standards and transparency in valuation industry.
(iii) The advent of Section 247 of the Companies Act, 2013, has impaired the
right of the petitioners to carry on trade and business, which is
guaranteed by the Constitution of India and it imposes unreasonable
restriction on the petitioner's right to carry on trade and business .
(iv) The petitioner is not only discriminated against individuals and
partnership entities but also such companies which are not subsidiaries,
joint ventures or associates of other companies/body corporates.
3. Submission of the Respondent
(i) Explanation to Rule 1(3) of the Companies (Registered Valuers and
Valuation) Rules, 2017 clearly stipulates that the conduct of valuation
under any other law other than the Companies Act, 2013 shall not be
affected by the coming into the effect of the Rules in question.
(ii) Valuers had been adopting divergent methodologies resulting in vast
differences in their conclusions. Due to divergent valuation outcomes and
criteria, asset valuation in India was not considered credibly. Credible
valuation of assets is critical to the efficient working of the financial
59
Judicial Pronouncements in Valuation
market. Till the commencement of the Act and the Rules, there had not
been any generally accepted and uniform standards in asset valuation
system in India.
(iii) It is in order to regulate valuation profession under a regulatory regime
and to guide and develop the same, the Parliament decided to bring in
uniformly acceptable norms and generally accepted global valuation
practices in India by incorporating a separate Chapter in the Companies
Act, 2013 to set regulatory norms for various classes of asset valuation
for the purposes of Companies Act, 2013.
(iv) Given the importance of valuation in fairness of business transactions,
every effort has been made by the respondents to avoid situation of
conflict of interest with an entity conducting the valuation. The endeavour
of the Rules is to introduce a class of professionals where the focus is on
the professional skills of the individuals rather than a business venture.
(v) There is a rational nexus to the object of disqualifying all entities with
interest in other professions or business/enterprises so that the integrity
of the profession be maintained and there is no conflict of interest. Hence,
the Rules do not suffer from the vires of excessive delegation.
(vi) If a Registered Valuer Company is a subsidiary, joint venture or associate
of another company, the said entity may not be able to stand out as an
independent professional body. Hence, if valuation is allowed to be
undertaken as a business by such entities, independence and credibility
cannot be ensured.
4. Decision
The objective and intention behind laying down the impugned Rule is clearly
to introduce higher standards of professionalism in valuation industry,
specifically in relation to valuations undertaken for the purpose of Companies
Act, 2013 and IBC, 2016. The impugned Rule obviates the possibility of conflict
of interest on account of divergent interests of constituent/associate entities
which resultantly shall undermine the very process of valuation, being one of
the most essential elements of the proceedings before NCLT.
The court also relied upon the judgment of the Supreme Court in the case of
Dr. Haniraj L. Chulani and held that the exclusion of a subsidiary company,
joint venture or associate of other company, for purpose of eligibility for
registration as a Valuer is reasonable.
60
Case No. 9
Cadbury India Limited (BOM HC) (2014) -
Petition for reduction of Share Capital
2. Contentions/Allegation Raised
In 2009, only 2.4% of shares were held by public, CIL made an offer to these
remaining minority shareholders at Rs. 1,340 per share, based on Valuation
Reports of two reputed and independent Valuers. Against same petition was
filed by the minority shareholders before the Bombay High Court on the
contention that Cadbury India Ltd has been under-valued and they are being
suppressed due to minority shareholding.
Observation/Decision of Court
Thereafter, an order was passed by the Hon’ble High Court appointing a third
valuer as Independent Valuer. This valuation was to be as on the appointed
date and based on the unaudited balance sheet as on 31st July 2009.
On the date of the petition, the issued share capital of Cadbury India Ltd. stood
at Rs. 31,06,95,530 divided into 3,10,69,553 equity shares of Rs. 10/- each
and the subscribed share capital was Rs. 31,06,70,400 divided into
3,10,67,040 equity shares of Rs. 10 each. The audited accounts of the
Company for the year ending 31st December 2008, showing the financial
position of the company was as follows:
Particulars Rs in Mn
Net worth (share Capital & Reserves) 4,644.0
Secured Loans 320.2
Unsecured Loans 96.8
Fixed Assets (incl CWIP & Adv) 7,552.5
Investments 29.2
Current Assets Loan & Advances 5,818.8
62
Cadbury India Limited (BOM HC) (2014) - Petition for reduction of…
Particulars Rs in Mn
Current Liabilities & Provision 4,495.7
Net Current Assets 1,323.1
PBT 2008 2,018.9
PAT 2008 1,657.8
The Third Valuer submitted its Valuation Report on 20th May 2010 ("the first
report") wherein it adopted the Comparable Companies Multiples ("CCM")
method of valuation using Nestle, GSK & Britannia as the comparable
companies, and returned a value of Rs. 1,743/- per fully paid-up equity share.
In the above reports, following were worth noting:
a) Valuer did not take into account any premium,
b) The PE multiple was arrived at considering factors like stock market
trends, size and growth trends of comparable companies vis-à-vis CIL,
market share of CIL in the chocolate segment.
c) The selected PE multiple was higher than the then prevailing PE multiples
of BSE Sensex and BSE FMCG Index.
d) Nestle and Britannia both had factories located in tax benefit zone in
Uttarakhand.
However, the minority shareholders opposed this report as well and produced
their own valuation of Rs 2,500 per share and demanded that the valuation
shall be done on DCF Method. This valuation of 2,500 was not based on any
data or material pertaining to Cadbury India, but on the supposed market value
of Nestle India Limited. The minority shareholders held that since on 19th
January 2010, Nestle's shares were being traded at Rs. 2,542/- per share,
Cadbury India's shares should be at least Rs. 2,500/-, for the two must be held
to be "competitors". The court found the valuation approach completely
untenable and further directed the Third Valuer to update its Valuation Report
dated 20th May 2010 taking into account the valuation of the Company based
on the Discounted Cash Flow ("DCF") method along with the CCM method.
63
Judicial Pronouncements in Valuation
The third Valuer performed valuation basis both the methods giving equal
weightage to both and came up with a valuation of Rs. 2,014.5 per share. The
basic assumptions considered in same were as under: -
64
Cadbury India Limited (BOM HC) (2014) - Petition for reduction of…
(a) CAGR of sales for next 10 years considered at 18.3% as against 14.5%
of last 10 years.
(b) Cost of Equity considered at 11%, wherein Rf = 7% and Rm = 15%; Beta
Considered based on betas of comparable companies @ 0.50
(c) Debt/Equity Ratio = 0, hence WACC = Cost of Equity
(d) Terminal Growth Rate considered @ 6% based on comparison between
future projections with past performance, and with the projections of
comparable companies.
(e) Income Tax considered flat at 33.33% assuming that Tax regimes are
liable to change at short notice. Hence in long run a flat tax rate in a
projection might, in fact, provide a very realistic and fairer value than
something that is presently at a lower marginal rate.
(f) Equal Weightage given to both CCM and DCF method to arrive at final
valuation
The revised Valuation of Rs 2,014/- as well was challenged by the
minority shareholders but the High Court, in a detailed judgment, agreed
with third Valuers’ approach and dismissed all objections raised against
the Report.
3. Key Learnings for Valuers from the above Case
(a) The Court held that “In order to decline sanction it must be shown that
the valuation is ex-facie unreasonable and cannot be accepted on the
face of it. The mere existence of other possible methods of valuation
would not be sufficient to deny sanction to such a scheme. It was held
that the assent of the court would be given if:
(i) the scheme is not against the public interest;
(ii) the scheme is fair and just; and
(iii) the scheme does not unfairly discriminate against or prejudice a
class of shareholders”
(b) The sanctioning Court has no power or jurisdiction to exercise any
appellate functions over the scheme as it is not a Valuer and it does not
have the necessary skills or expertise. The sanctioning Court cannot
substitute its own opinion for that of the shareholders. Its jurisdiction is
65
Judicial Pronouncements in Valuation
peripheral and supervisory, not appellate. The Court is not "a carping
critic, a hair-splitting expert, a meticulous accountant or a fastidious
counsel; the effort is not to emphasize the loopholes, technical mistakes
and accounting errors".
(c) Valuation is not an exact science, it is always and only an estimation, a
best-judgment assessment. All valuations proceed on assumptions and
the fact that a particular estimation might not catch an objector's fancy is
no ground to discredit it. To dislodge a valuation, it must be shown that
those assumptions are such as could never have been made, and that
they are so patently erroneous that the end result itself could not but be
wrong, unfair and unreasonable.
(d) The Court must not venture into the realm of convoluted analysis,
extrapolation, and taking on itself an accounting burden that is no part of
its remit or expertise, and no part of a statutory obligation.
4. Decision of the Hon’ble High Court
The Hon’ble Bombay High Court held that the valuation of Rs. 2,014.50/- per
fully paid-up equity share arrived at by the Court-appointed Valuer in its second
(supplementary) report dated 29th July 2011 was accepted.
66
Case No. 10
Sanction to the Scheme of Amalgamation -
Reliance Petroleum Ltd. with Reliance
Industries Limited (BOM HC) (2009)
• The Court noted from the record that the Petitioner company has
complied with all the statutory formalities and the Scheme was approved
with overwhelming majority of the Equity Shareholders and unanimously
by the Secured Creditors, the Regional Director and the Registrar of
Companies have also consented for approving the proposed Scheme.
Ordinarily, in this backdrop, the Court would readily accord approval to
the proposed scheme keeping in mind, the well-established position
restated in the case of Mafatlal Industries Ltd., In re [1996] 87 Comp.
Cas. 792 (Guj): [1995] 3 SCL 69 (Guj.)
o It is well established that the Court cannot undertake the exercise of
scrutinising the scheme placed for its sanction with a view to find out
whether a better scheme could have been adopted by the parties.
In the same decision, the Apex Court has observed that such
exercise remains only for the parties and is in the realm of
commercial democracy permeating the activities of the concerned
creditors and members of the company who in their best commercial
and economic interest of majority agree to give green signal to such
a compromise or arrangement.
• The objectors vehemently argued that the Court should decline to
exercise its discretion according to approval to the proposed scheme.
2. Contentions & Allegations raised by the Objectors and
Observations of the Ld. High Court for same.
(i) Contention no. 1
Firstly, it was contended that the act of the Petitioner Company smacks of
undue haste, as can be seen from the admitted dates. In that, the Board
Meeting of the Transferee Company was held on 27-2-2009, in which decision
to amalgamate two companies was taken. It was a Friday. It is intriguing that
in a short interval of only two days during the weekend, Valuation Report was
prepared on Monday 2-3-2009. Not only that, the fairness report of other two
experts were obtained on the same day on 2-3-2009 and the Board of Directors
proceeded to pass resolution at 10.15 a.m. on the same day on 2-3-2009.
These circumstances clearly indicate that the matter was hastened by the
Petitioner Company for reasons best known to them and it is a clear case of
non-application of mind - not only of the Board of Directors, but also by the
Valuers appointed by the Petitioner Company.
68
Sanction to the Scheme of Amalgamation - Reliance Petroleum Ltd. …
69
Judicial Pronouncements in Valuation
to discard the said Valuation/Fairness Reports. If so, this Court cannot sit over
the decision of the Board of Directors and of the class of stakeholders as Court
of Appeal and scrutinise the criticism pressed into service by the Objectors
disregarding the commercial wisdom of the overwhelming majority of the
Equity Shareholders as a class.
It is not the case of the objector that necessary material indicated under
Section 393 of the Companies Act, 1956 was not placed before the voters at
the concerned meeting, as was required to be held in terms of Section 391 of
the said Act and directions given by this Court.
(ii) Contention no. 2
The next criticism was in relation to the contents of the Valuation Report. It
was pointed out that the Valuers' Report if read clause by clause or as a whole
clearly indicated that no details are forthcoming. Forecast was not given, nor
the valuation of the shares of the Transferee Company and the basis on which
the same is done could be discerned and the experts have given their opinion
without analysing the relevant matter. Further, it was submitted that the report
clearly admits the fact that due diligence had not been carried out and gives
conflicting opinions, without disclosing any logic.
Observation of the Court
On reading the reports clause by clause and as a whole, no fault c ould be
found with the ultimate opinion reached by the experts regarding share swap
ratio, which is founded on tangible material and basis. The fact that the
language of the report would give an impression that the Expert does not take
the responsibility of the accuracy of the figures furnished to them by the
Company or that they have not made any independent valuation of the assets
and liabilities of the companies on their own, does not mean that the relevant
factors for determination of swap ratio have not been considered by the
experts. Obviously, the opinion of the Experts is based on the information
provided by the Company. There is nothing to show that the figures available
in the Books of Account provided to the Experts were incorrect or otherwise.
Thus, there is nothing in the said Reports to indicate that the consideration
weighed with the Experts in arriving at the opinion is impermissible or
unacceptable.
70
Sanction to the Scheme of Amalgamation - Reliance Petroleum Ltd. …
71
Judicial Pronouncements in Valuation
72
Sanction to the Scheme of Amalgamation - Reliance Petroleum Ltd. …
73
Judicial Pronouncements in Valuation
74
Sanction to the Scheme of Amalgamation - Reliance Petroleum Ltd. …
75
Case No. 11
Sanction to the Scheme of Amalgamation -
Shrey Promoters Private Limited with
EMAAR MGF Land Private Limited (DEL HC)
(2006)
CP No. 134/2006
Date of Decision: October 9, 2006
• The transferee company had transferred huge funds to the tune of Rs.
1,617 Crores to the 31 subsidiaries of the transferor companies before 6 th
Dec 2005 i.e., within about two months, when the transferor company was
incorporated.
• The transferor company itself did not own any land and the land was
owned by 31 subsidiaries of the transferor company who were flushed with
money and funds provided by the transferee company.
• The investment/advances given by the transferee company of Rs.
1,617.82 crores as on 15th December, 2005 was much more than the
paid-up share capital of Rs. 7 crores of the transferor company. This paid-
up share capital was utilized by the transferor company for purchase of
shares in the 31 subsidiary companies at cost price of Rs. 6.60 crores.
Thus, the 31 subsidiary companies of the transferor company used
advance/investment made by the transferee company to purchase land.
• Total net value of investments made by the 31 subsidiary companies on
or before 15 th December, 2005 was Rs. 6.93 crores (the specific dates on
which these investments have been made have not been stated). Within
about two months from incorporation of the transferor company on 6th
October, 2005 till 15th December, 2005, the market value of the said
investments of Rs. 6.93 crores made by the 31 subsidiary companies is
stated to have increased to Rs. 1,662.80 crores.
• On the basis of the market value of the investments made by the 31
subsidiary companies as per the valuation report, within about two
months, value of each issued share of the transferor company went up
from Rs.10/- to Rs. 2376/- per share.
• After 15th December 2005, the transferee company had issued
2,96,00,000 shares of Rs.10 each @ Re.1 paid up value to two foreign
companies and 30,00,000 shares of Rs.10 each to Mr. Shravan Gupta at
paid up value of Re.1. It was not stated that the said shares have been
issued at premium, though earlier the joint venture partner had agreed to
purchase shares of the transferee at premium of Rs. 540/- per share and
another investor had agreed to purchase shares at a premium of
Rs.1547.84 per share.
• The post-merger shareholding pattern shows that the two foreign
companies held about 45% shares and the Indian group about 60% shares
in the transferee company.
77
Judicial Pronouncements in Valuation
78
Sanction to the Scheme of Amalgamation - Shrey Promoters Private…
• It was further submitted that both the transferor and transferee companies
were owned and controlled substantially by the same group of
shareholders and, therefore, valuation of share and determination of
share exchange ratio has to be considered in light of same. Reference
was also made to the unequivocal and unanimous consent letters given
by the shareholders to the scheme of amalgamation and the exchange
ratio mentioned therein.
• In respect of the third objection, it was submitted that the valuer had acted
on the basis of land valuation report of a government-approved valuer. It
was also submitted that the valuer determined the value of each share of
the transferor company at Rs.2,376/- by following an accepted method of
valuation and has furnished cogent reasons for adopting the said
valuation. With regard to the share exchange ratio, it was also submitted
that the shareholders of transferor company and transferee company are
substantially the same persons and, therefore, the share exchange ratio
cannot be a valid ground to object to the scheme of amalgamation.
4. Key Observations in the Case
(i) The transferor is a shell company doing no activity of its own. The entire
paid-up capital of Rs. 7 Crores stands transferred as subscribed and paid
capital of the 31-subsidiary company.
(ii) It is also quite apparent that there is a tacit understanding between the
two joint venture partners, the exact details and particulars have not been
brought out and have been hidden under the veil of secrecy. Why and for
what reason funds from the transferee company were transferred to the
31 subsidiaries remains unknown. Nothing prevented and it defies logic
why the transferee company did not float and incorporate these 3 1
subsidiary companies or purchase land on its own?
(iii) It is also not explained why one promoter/joint venture partner of the
transferee company did not invest and purchase shares in the transferor
company itself? This has not been done but a cumbersome and difficult
procedure to obtain the sanction of this Court with the proposed scheme
has been resorted to. It is obvious that the transferor company and the
transferee company seek, seal of approval from this court on the scheme.
They have in mind the proposed initial public offering.
79
Judicial Pronouncements in Valuation
(iv) The dates on which subsidiary companies were incorporated have not
been stated and how and when the said 31 companies became
subsidiaries of the transferor company is also not mentioned. The dates
on which subsidiary company purchased land have also not been
mentioned.
(v) The valuer had justified valuation of shares of the transferee company on
book value basis as the said company was passing through a transitional
phase. Value of each issued share of the transferor company on 15th
December 2005 has been done on market value of investments made by
the 31 subsidiary companies. The valuer probably overlooked that the
transferor company was incorporated two months back only on 6.10.2005
and the transferee company was incorporated earlier on 18.2.2005 and
was the joint venture vehicle as per the terms of the joint venture
agreement.
(vi) The Valuation report is a well-guarded and evasive document, which
neither affirms nor negates the valuation made. The Report and the
“limitations” mentioned by the Valuer have been quoted below.
In the course of valuation, Valuer was provided with both written and verbal
information, including market, technical, financial and operating data. “We
have evaluated the information provided to us by the management of Emaar
through broad inquiry, analysis and review. We have not independently
investigated or otherwise verified the land valuation reports. Through the
above valuation, nothing has come to our attention to indicate that the factual
information provided was materially misstated/incorrect or would not afford
reasonable grounds upon which to base our report. We do not imply, and it
should be construed that we have verified any of the information provided to
us, or that our inquiries could have verified any matter, which a more extensive
examination might disclose. The terms of our engagement were such that we
were entitled to rely upon the information provided by the managements of
Emaar/Shrey/MGF without detailed inquiry. Also, we have been given to
understand by the management that it has not omitted any relevant and
material factors and it has checked out relevance or materiality of any specific
information to the present exercise with us in case of any doubt. Accordingly,
we do not express any opinion or offer any form of assurance regarding its
accuracy and completeness. Except where specifically stated otherwise, our
conclusions are based on the assumptions, forecasts and other information
given by/on behalf of the company. Emaar MGF has indicated to us that it has
80
Sanction to the Scheme of Amalgamation - Shrey Promoters Private…
81
Judicial Pronouncements in Valuation
would approve. The Hon’ble high court also cited the words of the Hon’ble
Apex Court in the case of Employees' Union V/s Hindustan Lever Ltd.
(1995) that the scheme shall pass the “prudent business management
test”.
• The Court relied upon the decision of Hon’ble Apex Court in the case of
Miheer H. Mafatlal v. Mafatlal Industries Ltd., (1997) and held that it is in
the public interest to over-ride the scheme. Public policy can have many
connotations but in the present case, it is contrary to justice, detrimental
to commercial morality and interest of public at large.
• The Hon’ble High Court lastly held that the scheme is also rejected for
failure to disclose all material facts. Pursuant to the Daphtry Sastry
Committee report, proviso to section 391(2) of the Act was inserted. The
petitioners must candidly place all relevant facts before the court to judge
the scheme on its own merits.
6. Key Learnings for Valuers from the above Case
(i) In the given case the Hon’ble High Court held that “a Valuer is required
to give fair, objective and an independent report as he is fully aware
that the Report shall form basis of the order for sanction of the scheme.”
Further in Para 17-18 of Framework of ICAI Valuation Standards, 2018
it has been stated that:-
“17. To be reliable, the information presented in a valuation report must
represent faithfully what it purports to represent. Faithful representation
has three characteristics, namely, error-free, neutrality and
completeness.
18. Sometimes the information in the valuation report is subject to some
risk of being less than a faithful representation of that which it purports to
portray. This is not due to bias but may arise due to inherent difficulties
either in identifying the appropriate method, approaches or techniques to
be applied in valuation.”
A Valuer shall always remember that the right to practice a profession
carries a duty to protect the society and is not a privilege for the benefit
of the professional. A professional should not only be competent to
practice, but he must also enjoy the trust and respect of his stakeholders.
82
Sanction to the Scheme of Amalgamation - Shrey Promoters Private…
(ii) In the above case the respondents contended that the valuer had acted
on the basis of land valuation report of a government approved valuer.
But nowhere in his report the Valuer provided the reason as in how within
two months from October, 2005 to December, 2005 the value of each
share of the transferor company increased from Rs. 10/- to Rs.2376/-.
While relying upon the work of an expert a valuer shall evaluate the
skills, qualification, and experience of the other expert in relation to the
subject matter of his valuation.
Further Para 40-43 of ICAI Valuation Standard 201- Scope of Work,
Analyses and Evaluation clearly lays down the guidelines for valuers
while placing reliance upon the work of other experts.
“40. A valuer shall evaluate the skills, qualification, and experience of the
other expert in relation to the subject matter of his valuation.
41. A valuer must determine that the expert has sufficient resources to
perform the work in a specified time frame and also explore the
relationship which shall not give rise to the conflict of interest.
42. If the work of any third-party expert is to be relied upon in the valuation
assignment, the description of such services to be provided by the third-
party expert and the extent of reliance placed by the valuer on the
expert’s work shall be documented in the engagement letter. The
engagement letter should document that the third-party expert is solely
responsible for their scope of work, assumptions and conclusions.
43. A valuer shall specifically disclose the nature of work done and give
sufficient disclosure about reliance placed by him on the work of the third-
party expert in the valuation report.”
(iii) In the above case the Hon’ble high Court held that “normally courts
accept valuation reports given by experts, but this cannot be done in an
impetuous manner unconcerned and oblivious of the reservations
expressed and the guarded language used in the report.”
“The Valuation report is a well-guarded and evasive document, which
neither affirms nor negates the valuation made.”
Hence, a valuer shall always remember that a Valuation Report should
not carry a disclaimer or limitation which has the potential to dilute the
83
Judicial Pronouncements in Valuation
84
Case No. 12
Dinesh Vrajlal Lakhani Vs. Parke Davis
(India) Ltd. (BOM HC) (2003)
Appeal No. 261 of 2003 and Company Application No. 894 of 2002
Decided On: 23.07.2003
86
Dinesh Vrajlal Lakhani Vs. Parke Davis (India) Ltd. (BOM HC) (2003)
87
Judicial Pronouncements in Valuation
88
Dinesh Vrajlal Lakhani Vs. Parke Davis (India) Ltd. (BOM HC) (2003)
• It was ruled that the Court will not for instance interfere only because the
valuation adopted by the valuer may have been improved upon had
another method been adopted. The Court is neither a valuer nor an
appellate forum to re-appreciate the merits of the valuation. What the
Court has to ensure is that the determination should not be contrary to
the law or unfair to the shareholders of the company which has been
merged.
• The Court held that the Learned Company Judge was correct in
sanctioning the Scheme of Amalgamation. There is no merit in the
objections raised by the Appellant.
4. Key Learnings for Valuers from the above Case
i) The Scheme of Amalgamation has received an overwhelming support of
99.94% of the shareholders. The shareholders in their commercial
wisdom have thought it fit that the Scheme should be approved.
ii) The jurisdiction of the Court in such matters is not appellate in nature but
is founded on fairness. The Court will not interfere only because the
valuation adopted by the Valuer may have been improved upon had
another method been adopted. The Court is neither a valuer nor an
appellate forum to reappreciate the merits of the valuation.
iii) What the Court has to ensure is that the determination should not be
contrary to law or unfair to the shareholders of the Company which has
been merged. In Hindustan Lever Employees Union s case (supra), the
Supreme Court held that it is not a part of the judicial process in such a
matter "to examine entrepreneurial activities to ferret out flaws".
iv) Where more than 95 per cent of the shareholders had agreed to the
valuation determined by the Chartered Accountant, the procedural
irregularities which were present in it could not vitiate the determination.
v) In the case of Miheer H. Mafatlal vs. Mafatlal Industries, the Supreme
Court has laid down that the sanctioning Court has to consider whether:-
a. the requisite statutory procedure has been complied with;
b. the scheme is backed up by the requisite majority;
c. the creditors or members had the relevant material to enable the
voters to arrive at an informed decision;
89
Judicial Pronouncements in Valuation
90
Case No. 13
Sanction to the Scheme of Amalgamation -
Brooke Bond Lipton India Ltd. and
Hindustan Lever Ltd. (CAL HC) (1996)
amalgamation. None of them inspected the Valuation Report when the same
was offered for public inspection prior to the Court convened meeting. None of
them attended the Court convened meeting to present their point of view and
in the event of their having a difference of opinion, moving an appropriate
amendment resolution for consideration by other members so that a decision
on their objections was taken by the totality of shareholders in the meeting in
keeping with the spirit of shareholders' democracy.
None of the objectors attended the meeting or for the inspection of the
Valuation Report which showed a total lack of interest in the scheme. In fact,
no shareholder asked for an inspection of the Report.
2. Issues Raised by the Objectors
The main objections urged/raised by the objectors were as follows:
a) In view of the overwhelming shareholding majority held by Unilever, they
should be placed in a different class and accordingly the shareholders as
a class, have not been properly represented.
b) Since without the consent of the landlord tenancies cannot be
transferred, the scheme is prejudicial.
c) The exchange ratio has not been properly or fairly determined.
d) The Valuation Report does not value the assets of the Company properly
in that the value of the brands has not been taken into account.
The objectors also filed an application for appointment of an Independent
Valuer and took the following points to challenge the Valuation Report:-
(i) The said Report does not disclose the value per share of either the
company or Hindustan Lever Ltd. and as such the basis of arriving at the
exchange ratio referred to in the said Valuation Report and in the scheme
has not been disclosed. From the purported Report it does not appear
whether any such valuation was at all made.
(ii) Neither the said Report nor the Scheme of which the sanction has been
sought from the Court disclosed the value of per share of either the
company or Hindustan Lever Ltd. either on “book value basis” or “yield
value basis” or “stock exchange quoted value basis” and as such the
basis for arriving at the exchange ratio has not been disclosed.
92
Sanction to the Scheme of Amalgamation - Brooke Bond Lipton India…
(iii) The Valuation Report also records that for the purposes of valuation of
shares, the said Valuers have not carried out any audit or other tests to
verify the accuracy of the audited financial statements of both the said
companies and information and explanations given by the said valuer
which clearly shows that no independent exercise was undertaken by the
said valuers.
(iv) The said valuation report clearly shows that no valuation has been
conducted "on assets basis". The company is the owner of a large
number of well-known and popular trademarks and brand names which
are valuable assets. The market value of the said trademarks and brand
names will be running into several hundred crores of rupees. In fact,
some brands like Kwality, Anikspray etc. have been acquired by the
company from third parties upon payment of massive sums of money.
The value of such trademarks and brand names are not reflected in the
audited accounts of the company.
(v) No provision has been made in the scheme with regard to the
shareholding of the company in Hindustan Lever Ltd.
(vi) The disputed premium of Rs. 595 per share amounting to Rs. 17,758
lakhs cannot be said to belong to Hindustan Lever Ltd. As the same is
lying in an "escrow" account yet the same has been taken into
consideration in arriving at the exchange ratio which has caused
prejudice to the shareholders of the company.
(vii) The scheme of which sanction has been sought provides that the
shareholding of Hindustan Lever Ltd. and its subsidiaries in the company
are to be cancelled. Yet the value of such shares had been taken into
consideration in arriving at the exchange ratio.
3. The Hon’ble High Court’s View & Decision
Point No. 1: In view of the overwhelming shareholding majority held by
Unilever, they should be placed in a different class and accordingly the
shareholders as a class, have not been properly represented.
The objection raised for the respondent/ objectors that the class of
shareholders has not been properly represented does not appea r to be of
much significance in view of the fact that, it does not appear from the Scheme
also that the position of Unilever in any way changed as a result of the scheme
93
Judicial Pronouncements in Valuation
of amalgamation. It appears from the facts on record that the proposal would
have been passed by overwhelming majority, even without voting by Unilever.
Point No. 2: Since without the consent of the landlord tenancies cannot
be transferred, the scheme is prejudicial.
That the proposed scheme of compromise and arrangement was not found to
be violative of any provision of law and was not contrary to public policy.
Point No. 3: The exchange ratio has not been properly or fairly
determined.
• In a Scheme of amalgamation, if the ratio of exchange has been fixed by
an experienced and reputed firm of chartered accountants, then in
absence of any charge of fraud against them, Court will accept such
valuation and ratio of exchange.
• A mere allegation of fraud is not enough; it must be a proper charge of
fraud with full particulars.
• Once the exchange ratio of the shares of the transferee-company to be
allotted to the shareholders of the transferor-company has been worked
out by a recognised firm of Chartered Accountants who are experts in the
field of valuation and if no mistake can be pointed out in the said
valuation, it is not for the Court to substitute its exchange ratio, especially
when the same has been accepted without demur by the overwhelming
majority of the shareholders of the two companies or to say that the
shareholders in their collective wisdom should not have accepted the said
exchange ratio on the ground that it will be detrimental to their interest.
Point No. 4: The valuation report does not value the assets of the
Company properly in that the value of the brands has not been taken into
account.
With respect to non-consideration of the brand value, the Court noted that the
transferee-company owns many more valuable brands than the transferor-
company. Moreover, it is well-recognised that the brands are part of the
goodwill of the business and cannot be valued separately. It is also well settled
that if a business is closed or transferred the brand goes with it. Separate
mention of the mark in Schedule VI only takes place when a brand is acquired
in which case the cost is mentioned. It may also be noted that even then once
acquired it becomes part of the goodwill of the business and is valued
accordingly.
94
Sanction to the Scheme of Amalgamation - Brooke Bond Lipton India…
95
Orders passed by the Ld.
Appellate Tribunals and
Tribunals
Case No. 14
Simpson and Company Limited (NCLT)
(2021) - Consolidation and Reduction of
Share Capital
as per Section 247 of the Companies Act, 2013. However, the Applicant
Company in all fairness and also in the interest of the shareholders has
obtained the valuation from such Valuer to ascertain the value.
• The petitioner submitted that 12 shareholders constituting 99.86% being
the overwhelming majority have approved the said resolutions while the
47 shareholders holding 10,492 shares constituting 0.14% have voted
against the said resolutions.
• In compliance with the procedural requirements, the Regional Director
filed a common Report dated 16.09.2020 submitted that the scheme of
consolidation of shares and consequently reduction of share capital has
been examined and it has been decided not to make any objections
except for the observations made by them with respect to the three
complains received.
2. Objections raised by the Minority Shareholders
Around 30 shareholders holding 7000 shares filed their common written
objections through their Counsel at the hearings before the Tribunal alleging
that the management of the Company wielding brute majority has forcefully
expropriated the shares of the minority at a value fixed by them, which is unfair,
oppressive and unreasonable.
• It was alleged that the majority of the Public Shareholders present and
voted in the meeting have actually voted against the resolution and
Promoter shareholders and their relatives have voted "for" the resolution.
Since the number of shares held by the Public Shareholders is negligible,
the resolution could not be defeated. It clearly depicts the intention of the
Minority Shareholders that they were against this proposed consolidation.
• Their main objection was that the valuation given by the Company at INR
14860/- is grossly undervalued and is arbitrary and abysmally low as the
fair value cannot be less than Rs. 50,000/-.
• One of the Subsidiary Companies of Simpson & Co where the company
held 76% stake was TAFE, with an EPS of Rs. 505/- for the year ended
31st March 2019. A comparable peer for TAFE in the listed market
segment was Escorts which was trading at a PE multiple of 36 times. A
peer valuation analysis translates to a value of INR 13,816/- per share of
Simpson & Co for just one company i.e., TAFE.
100
Simpson and Company Limited (NCLT) (2021) - Consolidation and …
• The Objectors submitted that the Valuation is not in accordance with the
Provisions of Section 247 of the Companies Act, 2013 and the relevant
Registered Valuer Rules i.e. the Companies (Registered Valuers and
Valuation) Rules, 2017, as the Valuer in his Report has stated the
valuation analysis has been carried out without a detailed "Due diligence"
based on full, fair and complete disclosure by Simpson on all matters that
affect the Valuation exercise.
• The valuation exercise undertaken by the Registered Valuer suggests
that several illiquidity discounts have been applied. Any aggressive
assumptions would result in a substantial reduction in the final value
arrived at for the purpose of consolidation.
• Discounted Cash Flow method which is one of the more robust valuation
approaches has been discarded completely.
• The other objection raised was that the Valuation Report has not been
provided by the Petitioner Company.
• Assets of the Company which are used for business have been taken at
book value and not fair value. An example is the fact that the Company
has its manufacturing facility in Mount Road, Chennai spread across at
least 10 Acres on a conservative estimate. This asset alone will give a
fair value of Rs. 700 Crore for the company. The subsidiary companies
also have enormous assets which have not been properly valued. Apart
from this, the company has a huge manufacturing facility at Sembiam and
many such business assets across subsidiaries which have been valued
at book value or historical purchase costs which are irrelevant now.
3. Observations of the Ld. Tribunal
• Price Earnings Ratio signifies the relationship between Price and
Earnings (Market Price divided by Earnings Per Share), evidently in the
case of listed shares. It is not so in the case of equity shares of unlisted
Public Limited Companies for which there is no regular or assured market
in which case the determinants of value per share cannot be attributed to
P/E Ratio.
• In the instant case, the equity shares of this Applicant Company are
unlisted and accordingly, it does not carry a demand from the public
investors to invest in the Rs. 10/- equity shares of this company by
offering a higher value or esteem value which could be the one projected
by the objectors, falling in the range of Rs. 50,000/- to Rs. 5,00,000/- per
equity share of Rs. 10/- each in the Applicant Company.
101
Judicial Pronouncements in Valuation
• The equity shares of the Applicant Company being unlisted, do not carry
liquidity as there can be no takers to acquire these shares for a price of
Rs. 14,860/- or even below since the higher the price demanded the
greater will be the illiquidity discounting factor.
• Valuation of the shares has been done by a renowned Registered Valuer
and the appropriateness of the value has been confirmed by a SEBI
approved Category-I Merchant Banker.
• It is a well-accepted principle that DCF is a direct valuation technique that
values a Company by projecting its future cash flows and then using the
Net Present Value Method to value those cash flows. The task of
projecting future cash flows of any Corporate Entity is based on a series
of assumptions about how the business will perform in the future and then
forecasting how this business performance translates into the cash flow
generated by the business. Even this is also challengeable and according
to the view of this Tribunal, by anyone who wants to challenge this.
Further, by applying Discounted Cash Flow Method, the discounting
factor is based upon the weighted average cost of the capital which in the
case of the Applicant Company may be a theoretical weighted average
cost owing to minimal borrowed fund having regard to the size of owned
fund; there can be only a notional weighted average cost of capital the
ascertainment of which is also disputable by the objector. Therefore, this
Tribunal is unable to discern the contention of the objectors pertaining to
disregarding of the Discounted Cash Flow Method.
4. Decision of the Ld. Tribunal
The Tribunal relied upon the judgement rendered by the Hon'ble High Court of
Karnataka in the matter of Vijay Kumar D. Shah vs Hewlett Packard Global
Soft Ltd. and held that:
• The consolidation of shares as prayed for by the Petition is free from any
legal infirmities and falls within the contours of Section 61(1)(b) of
Companies, 2013 and in such circumstances, the relief as prayed for
stands allowed.
• In order to safeguard the interest of those who are in the dissenting
minority category, who would otherwise not be willing to accept the price
of Rs. 14,680/- per share offered by the petitioner company in
consideration of cancellation of their shares and reduction, the petitioner
company shall facilitate constituting a trust in which the fractional shares
shall be vested for benefit of the dissenting shareholders.
102
Simpson and Company Limited (NCLT) (2021) - Consolidation and …
103
Judicial Pronouncements in Valuation
(v) The availability of a liquid market for the minority shareholder to sell his
or her stake is a distinct advantage. Conversely, the holder of a small
shareholding in a private company with no internal market mechanism
may have more difficulty realising value for those shares and this is likely
to lead to the value of the shares being discounted.
104
Case No. 15
Dr. Vijay Radhakrishnan vs. Bijoy P Pulipra,
Resolution Professional (NCLAT) (2021)
However, the NCLT dismissed the said Appeal and approved the application
filed by the Resolution Professional.
The Applicant being still dissatisfied had filed the present Appeal before
NCLAT.
2. Order Passed by the Ld. NCLT
The NCLT had dismissed the Application filed by the Appellant on the following
grounds:-
(i) The Resolution Professional has filed the Resolution Plan before the
NCLT, on a Caveat Petition. However, the applicant approached with this
IA only on 12.2.2021 (after curing the defects), i.e., the last moment when
the Plan is to be approved.
(ii) Accordingly, it seems that this is only a delaying tactics putting hurdle in
the process of approval of Resolution Plan by the Adjudicating Authority,
which cannot be accepted.
(iii) The NCLT in view of the pronouncements of the Hon’ble Supreme Court
of India and the Hon’ble NCLAT, cannot entertain the claim put forward
by the applicant for rejection of the Resolution Plan at this stage and
consequently dismissed the ‘Application’ without costs.
3. Key Grounds of appeal and argument presented by
the Appellant
The Appellant has challenged the impugned order on following grounds and
arguments:-
(i) The NCLT had not appreciated the fact in a proper perspective to the
effect that the ‘Resolution Plan’ prepared was based on ‘faulty Valuation
Report’ with variance of 15.62% amounting to a difference of Rupees
Seven Crores and is in violation of Section 30(2) of the Insolvency and
Bankruptcy Code, 2016 and 35(1)(a), 35(1)(b) and 35(1)(c) of the
(Insolvency Resolution Process for Corporate Persons) Regulations,
2016.
(ii) Inequitable provisions were made in the Plan by way of discriminating the
Employee Doctors and Consultant Doctors.
• It had failed to take into account the important fact that by holding
the 99.2% to the ‘Employee Doctors’ under the category of
‘Operational Creditor’ – Employees – 2.35% to ‘Consultant Doctors’
106
Dr. Vijay Radhakrishnan vs. Bijoy P Pulipra, Resolution Professional …
107
Judicial Pronouncements in Valuation
108
Dr. Vijay Radhakrishnan vs. Bijoy P Pulipra, Resolution Professional …
109
Judicial Pronouncements in Valuation
110
Case No. 16
TSI Yatra Pvt. Ltd. Vs ACIT, Range-25 (ITAT)
(2020)
Date of Issue No. of Face Premiu Issue Total Premium Total Amount
shares Value m per Price Received Received
Issued Per Share Per
Share Share
4th Nov 2013 5,20,830 10 182 192 9,47,91,060 9,99,99,360
31st Mar 2014 5,38,323 10 264 274 14,21,17,272 14,75,00,502
Total 10,59,153 20 446 466 23,69,08,332 24,74,99,862
112
TSI Yatra Pvt. Ltd. Vs ACIT, Range-25 (ITAT) (2020)
113
Judicial Pronouncements in Valuation
56. (1) Income of every kind which is not to be excluded from the total income
under this Act shall be chargeable to income-tax under the head "Income from
other sources", if it is not chargeable to income-tax under any of the heads
specified in section 14, items A to E.
(2) In particular, and without prejudice to the generality of the provisions of
sub-section (1), the following incomes, shall be chargeable to income-tax
under the head "Income from other sources", namely:--
(viib) "where a company, not being a company in which the public are
substantially interested, receives, in any previous year, from any person being
a resident, any consideration for issue of shares that exceeds the face value
of such shares, the aggregate consideration received for such shares as
exceeds the fair market value of the shares:
Provided that this clause shall not apply where the consideration for issue of
shares is received--
(i) by a venture capital undertaking from a venture capital company or a
venture capital fund or a specified fund; or
(ii) by a company from a class or classes of persons as may be notified by
the Central Government in this behalf:
Provided further that where the provisions of this clause have not been applied
to a company on account of fulfilment of conditions specified in the notification
issued under clause (ii) of the first proviso and such company fails to comply
with any of those conditions, then, any consideration received for issue of
share that exceeds the fair market value of such share shall be deemed to be
the income of that company chargeable to income-tax for the previous year in
which such failure has taken place and, it shall also be deemed that the
company has under reported the said income in consequence of the
misreporting referred to in sub-section (8) and sub-section (9) of section 270A
for the said previous year.
Explanation.--For the purposes of this clause,--
(a) the fair market value of the shares shall be the value--
(i) as may be determined in accordance with such method as may be
prescribed; or
(ii) as may be substantiated by the company to the satisfaction of the
Assessing Officer, based on the value, on the date of issue of shares, of
114
TSI Yatra Pvt. Ltd. Vs ACIT, Range-25 (ITAT) (2020)
115
Judicial Pronouncements in Valuation
(iii) The Ld. CIT(A) as well as Ld. AO have failed to appreciate provisions of
Rule 11UA(2)(b) of the IT Rules, 1962 which provide for an option to the
Appellant to choose a method of his choice for valuation of its shares for
the purposes of Section 56(2)(vii)(b) of the Act. The act of rejection of
Valuation Reports and carrying out valuation of shares of Appellant as
per NAV method is therefore ultra-vires the Act and the Rules as well as
the principle laid down by Hon'ble Supreme Court in the case of Bharat
Hari Singhania & Others vs. Commissioner of Wealth Tax & Others.
(1994) 207 ITR 1 (SC) wherein it was held that it is not an option of an
Assessing Officer to either follow or not to follow the prescribed method
of valuation but that he is bound to follow the Rules of valuation made
under the Act.
(iv) The Ld. CIT(A) erred in confirming the action of Ld. AO of carrying out
comparative analysis of projected revenue from operations and actual
revenue from operations and is against the rule of Hon'ble Delhi Tribunal
in case of M/s. Stryton Exim India Pvt. Ltd. (ITA No. 5982/2018)
wherein the Hon'ble Tribunal had held that it was incorrect to assume that
the projected cash flows should have equalled the actual cash flows for
the purpose of valuation of shares using a DCF method.
(v) Without prejudice, that the Ld. CIT (A) and Ld. AO gravely erred in holding
that year-on-year growth rate estimated by Appellant is arbitrary and self-
serving without appreciating close proximity between projected cash
flows considered as per Valuation Reports and actual cash flows from
operations and the fact that variation between the two cash flows we re
sometimes as low as 4%-6%.
(vi) The legislative intent behind the insertion of Section 56(2)(vii)(b) in the
Income Tax Act, 1961 was to tackle a menace of the black money and
literal interpretation should not be applied and one has to see the purpose
of introduction of this section that is, purposive construction should be
given while interpreting the said section. It was submitted that the
aforesaid deeming provision was brought in the statute as an anti-abuse
provision where a company receives any consideration for issue of
shares that exceeds the face value of shares, then the excess value is
deemed to be the income of that company.
116
TSI Yatra Pvt. Ltd. Vs ACIT, Range-25 (ITAT) (2020)
117
Judicial Pronouncements in Valuation
118
TSI Yatra Pvt. Ltd. Vs ACIT, Range-25 (ITAT) (2020)
(iii) For scrutinizing the Valuation Report, the facts and data available on the
date of valuation only has to be considered and actual result of future
cannot be a basis to decide about reliability of the projections
(iv) A Court of Law has nothing to do with reasonable or unreasonableness
of a provision of a Statute except as it may hold in interpreting what the
legislature has clearly stated. If the language of the Statute envisages
only one meaning then it must be continued to mean and intended what
it has been clearly expressed.
(v) A critical aspect under the Valuation process is selection of the source of
information. A Valuer should exercise professional judgement while
selecting the Source as it can immensely impact the Valuation. If the
Valuer relies on the information available in public domain, the Valuer
should assess the credibility/reliability of such information taking into
account, inter-alia, the purpose of valuation, and materiality vis-à-vis the
valuation conclusion.
(vi) In a DCF method, the value is based on estimated future projection.
These projections are based on various factors and projections made by
the management and the Valuer, like growth of the company,
economic/market conditions, business conditions, expected demand and
supply, cost of capital and host of other factors. These factors are
considered based on some reasonable approach and they cannot be
evaluated purely based on arithmetical precision as value is always
worked out based on approximation and catena of underline facts and
assumptions.
119
Case No. 17
In Re: Syngenta India Limited (NCLT)
(2020) - Application for reduction of
Share Capital
IN THE NCLT, MUMBAI BRANCH
Appellant: In Re: Syngenta India Limited
issued, subscribed and paid-up share capital of the Petitioner Company held
by the Public Shareholders i.e. the Reduction u/s 66 of the Companies Act,
2013.
The Company after complying with the requirements of section 66 of the
Companies Act, 2013 has applied to NCLT for approval of the Reduction. The
Company has determined the fair value of the shares on the basis of Valuation
Report of Independent Valuer.
However, the ROC Pune filed its two reports on the proposed Scheme of
Reduction of Capital dated 25.06.2018 and 29.06.2018, on which the Regional
Director, MCA has filed its observation, brief of which are as under -
(i) As per ROC Pune report dated 25.06.2018: One Complainant has stated
that Syngenta is paying only 43.4 % of Fair Market Price and cheating
the small shareholders.
(ii) As per ROC Pune report dated 29.06.2018: 23 complaints are received
against reduction. On perusal of shareholding pattern of the petitioner
company, Prima facie it appears that the reduction is to bump of entire
12,373 Public Shareholders/11,81,036 Equity Shares consisting of 3.59%
at an offer price Rs. 2,445/- per share. Such selective reduction of capital
is not within the letter and spirit of Section 66 of the Companies Act, 2013.
This is against the public interest as the present value/status of the
company is also due to public participation. The selective reduction is
detrimental to the public participation in equity market. Further, the fair
value of the assets/shares is not made available. Hence, the Scheme
deserves to be rejected.
2. Submissions made by the Petitioner Company
(Syngenta India Limited)
The Syngenta India Limited inter alia has made the following submissions
while filing its application for Reduction of Capital before NCLT:
• The Articles of Association of the Company authorize it to reduce its
capital in any way authorized by applicable law.
• The Company has engaged two Independent Valuers to undertake
separate independent valuations of the equity shares of the Company to
determine the fair value of the shares for the purpose of the Reduction.
121
Judicial Pronouncements in Valuation
122
In Re: Syngenta India Limited (NCLT) (2020) - Application for reduction …
123
Judicial Pronouncements in Valuation
124
In Re: Syngenta India Limited (NCLT) (2020) - Application for reduction …
125
Judicial Pronouncements in Valuation
126
In Re: Syngenta India Limited (NCLT) (2020) - Application for reduction …
iii. Third Issue: Whether the proposed scheme has the effect of wiping out
entirely a class of shareholders, namely, the non-promoter shareholders,
though on payment of certain compensation in view of the objection
raised by them and whether such selective reduction can be allowed?
Decision: Section 66 of the Companies Act, 2013 expressly permits
companies to undertake reduction of their share capital in any manner,
i.e. including by way of selective reduction of share capital, as laid down
by numerous High Courts.
Cases relied upon:
➢ Re: R.S. Live Media Pvt. Ltd
The mode, manner and incidence of reduction have been regarded
as a matter of domestic concern and there is no restriction under
the Act which curtails the discretion of a company in adopting the
manner in which the company chooses to reduce its capital.
➢ Re: Elpro International Ltd.
The Court must first and foremost have regard to the well-
established position that a selective reduction of share capital is
legally permissible.
➢ Re: Indrama Investment Pvt. Ltd. & Ors.
The Court held that merely because the arrangement results in
extinguishing some shares and resulting into 100% shareholdings
in the hands of a particular group cannot be treated improper per
se
➢ Wartsila India Limited v. Janak Mathuradas
The Hon'ble Bombay High Court upheld the reduction of share
capital as undertaken by the company therein which resulted in the
extinguishment of non-promoter shareholding of the company. The
Hon'ble Court further held answering in the question "whether the
special resolution which proposes to wipe out a class of
shareholders after paying them just compensation can be termed
as unfair and inequitable" in the affirmative, observed that "...In
our opinion, once it is established that non-promoter shareholders
are being paid a fair value of their shares...the court will not be
justified in withholding its sanction to the resolution."
127
Judicial Pronouncements in Valuation
iv. Fourth Issue: Objection has been raised by RD while submitting its
observation on the report of ROC, Pune which states that Mr. Punit
Kumar has complained that the company is paying only 43.4 % of Fair
Market Price and cheating the small shareholders, therefore the company
is seeking to bump of entire 12,373 Public Shareholders/11,81,036
Equity Shares consisting of 3.59% at an offer price Rs. 2,445/- Per Share.
Such selective reduction of capital is not within the letter and spirit of
Section 66 of the Act. This is against the public interest as the present
value/status of the company is also due to public participation. The
selective reduction is detrimental to the public participation in equity
market.
Decision: The objections are untenable in view of the ratio laid down by
the Hon'ble Supreme Court and the Hon'ble High Courts quoted in the
aforesaid paragraphs.
Other cases on which the NCLT has relied
➢ Re: HCL Infosystems Limited and Ors
It is also settled position of law that once the exchange ratio of the
shares of the transferee company to be allotted to the
shareholders of the transferor company has been worked out by a
recognised firm of chartered accountants who are experts in the
field of valuation and if no mistake can be pointed out in the said
valuation, it is not for the court to substitute its exchange ratio,
especially when the same has been accepted without demur by
the overwhelming majority of the shareholders of the two
companies....
➢ Ratan Housing Development Ltd
The Regional Director in his objection has not contended that the
valuer has played a fraud. The Regional Director only contended
that one method of valuation should have been adopted. As stated
earlier, the Supreme Court has held in Hindustan Lever's case
[1995], that different methods of valuation could be adopted for the
purpose of fixation of the exchange ratio of the shares of the two
companies. Thus, in the absence of fraud or mala fides, the mere
fact that the determination of the exchange ratio of the shares of
the two companies could be done by a slightly different method
128
In Re: Syngenta India Limited (NCLT) (2020) - Application for reduction …
which might have given a different exchange ratio could not justify
interference unless it was found to be unfair."
➢ Reckitt Benckiser (India) Limited (2005)
The principles, which can be distilled from the aforesaid judicial
dicta, are summarized as under:
• The question of reduction of share capital is treated as matter
of domestic concern, i.e. it is the decision of the majority
which prevails.
• If majority by special resolution decides to reduce share
capital of the company, it has also the right to decide as to
how this reduction should be carried into effect.
• While reducing the share capital company can decide to
extinguish some of its shares without dealing in the same
manner as with all other shares of the same class.
Consequently, it is purely a domestic matter and is to be
decided as to whether each member shall have his share
proportionately reduced, or whether some members shall
retain their shares unreduced, the shares of others being
extinguished totally, receiving a just equivalent.
• The company limited by shares is permitted to reduce its
share capital in any manner, meaning thereby a selective
reduction is permissible within the framework of law (see Re.
Denver Hotel Co., 1893 (1) Chancery Division 495).
• When the matter comes to the Court, before confirming the
proposed reduction the Court has to be satisfied that (i) there
is no unfair or inequitable transaction and (ii) all the creditors
entitled to object to the reduction have either consented or
been paid or secured."
Decision
Ld. NCLT allowed the application for reduction of share capital of the Company
subject to adherence to the directions given by it.
129
Judicial Pronouncements in Valuation
130
Case No. 18
Vodafone M-Pesa Ltd. Vs. DCIT, Circle
8(3)(2) (ITAT) (2019)
IN THE ITAT, MUMBAI BENCH, MUMBAI
Appellant: Vodafone M-Pesa Ltd.
Vs.
Respondent: DCIT, Circle 8(3)(2)
I.T.A. No(s). 1073 and 2032/Mum/2019
Decided On: 13.12.2019
1. Brief Facts of the Case:
• The assessee company was engaged in operation of the mobile wallet
business. During the year under consideration, the assessee company
had issued shares of face value Rs. 10/- each at a premium of Rs. 14.70/-
per share, and accordingly received a share premium of Rs. 148.78
Crores. During assessment proceedings, assessee was asked to furnish
the working of premium and Valuation Report in respect of the intrinsic
value of shares issued during the year under consideration.
• The AO observed that the Valuer has recorded the following in the
Valuation Report:-
"In particular, it may be noted that we have relied upon the information
provided by the management. We have been given to understand that the
information provided is correct and accurate......"
• From the above statement, he observed that the Valuer had relied on
company specific information with respect to various projections and this
information was provided to the Valuer by the Management of the
assessee. The AO hence asked the assessee to furnish the information
provided to the Valuer in order to conduct the valuation.
• On scrutiny of these documents, AO came to the conclusion that Valuer
had not independently valued the prospects of the assessee company
and had merely relied on information supplied by the assessee. By using
Judicial Pronouncements in Valuation
the phrase "We have been given to understand" the Valuer has avoided
to comment on the correctness of the information.
• The Assessee submitted his contentions as under:-
(i) the above clause is a standard clause used in all Valuation Reports
and there is nothing unusual or atypical about it.
(ii) a Valuer is required to rely on the information provided by the
Company in terms of its historical data and projections, and is not
required to verify the authenticity of the data unlike an Auditor who
is required to examine and verify the details in an Audit process.
(iii) a Valuer, basis the future projections of earnings provided by a
company, is required to compare it to general industry/economy
trends and associated risks and accordingly, arrive at a discounting
factor that needs to be applied to future net cash flows.
(iv) a Valuer is not required to verify the authenticity of the historical and
future projections of the company submitted but undertake a
scientific exercise of determining the correct 'discounting factor'
which indicates the minimum return from the asset being valued had
the investor invested in the next best alternative.
(v) the services/facilities offered are still at a nascent stage and are
likely to grow exponentially with the growth of the economy and as
and when Indian customers start using such services/facilities on a
large-scale basis. Therefore, while the projections prepared by
Vodafone M-Pesa Ltd (VMPL) at the time of obtaining the Valuation
Report may be different from how the first few years have actually
unfolded as a result of the uncertain business environment, there
are strong future prospects and VMPL is likely to grow rapidly and
exponentially with the various digital initiatives invading the
economy.
• After considering the above submission, AO came to the following
conclusion that
(i) Assessee has tried to underplay the important disclosures by the
Valuer as being standard or routine.
132
Vodafone M-Pesa Ltd. Vs. DCIT, Circle 8(3)(2) (ITAT) (2019)
(ii) the cash flow from operations is not positive and there is no basis to
make reliable forecast. The prediction of sales and operating
expenses have been done by the assessee without any rationale.
(iii) the Valuer has clarified in his report that the forecast regarding
future revenues was made by the management and further they
stated that company specific information was provided by the
Management either verbally or in written form.
(iv) the projections made by the assessee are nowhere near to the
actual state of affairs and he came to the conclusion that the
management has provided the Valuer, figures in projections as are
suitable to their own requirement of charging premium on shares
and further observed that the predictions/forecast made by the
assessee are not based on any scientific calculation based on the
faulty predictions.
(v) Further, the Valuer has stated that the valuation is based on the
unaudited balance sheet of the company as provided by the
Management and the Management has not provided them detailed
assumption and back-up information.
• AO himself calculated the value of shares based on Net Assets Value
method and determined the value at Rs. 4.15 per share. Assessee has
received an amount of Rs. 24.7 per share for the face value of Rs. 10/-.
Hence the excess received by the assessee was Rs. 20.55 per share.
This was treated as excess received under the provision of section
56(2)(vii)(b) of the Income Tax Act, 1961 to make addition to the total
income of the assessee
• On appeal, Ld. CIT(A) accepted the contentions of the assessee with
regard to valuation of the shares based on fair market value on the basis
of provisions of section 56(2)(vii)(b) read with rule 11UA of the Income
Tax Rules, 1962 and rejected the contention of the AO to value the shares
based only on Net Asset method. As per the above valuation rule, the
assessee has an option to select the valuation method i.e., net asset or
DCF method and assessee can adopt higher of the two-value arrived
based on the above said two methods.
• Further Ld. CIT(A) rejected the Valuation Report submitted by the
assessee as erroneous by adopting the DCF method, but accepted the
133
Judicial Pronouncements in Valuation
134
Vodafone M-Pesa Ltd. Vs. DCIT, Circle 8(3)(2) (ITAT) (2019)
135
Judicial Pronouncements in Valuation
(vii) ICAI Valuation Standards 2018 also states that a Valuer is expected to
exercise Professional Skepticism in all his Valuation Assignments.
“An attitude of professional skepticism means the valuer makes a critical
assessment, with a questioning mind, of the validity of information
obtained and is alert to information that contradicts or brings into question
the reliability of documents or representations by the responsible party.”
(viii) Any valuer when working on any projections and estimations, works with
some inherent limitations. A valuer can use various tools and analysis
like regression analysis or trend analysis to limit risks of these
assumptions and to determine the fairness of projections.
(ix) Consequently, Valuer needs to critically evaluate reasonableness of
management developed prospective financial statements.
136
Case No. 19
Ankit Mittal Vs. Ankita Pratisthan Ltd
and Ors (NCLAT) (2019)
IN THE NCLAT, NEW DELHI
Appellant: Ankit Mittal
Vs.
Respondent: Ankita Pratisthan Ltd and Ors
138
Ankit Mittal vs. Ankita Pratisthan Ltd and Ors (NCLAT) (2019)
➢ The main assets of the 1st and 2nd respondent are the Investments
in the Dalmia Bharat Ltd which has been ignored by the Valuer while
arriving at the swap ratio.
i) 1st and 2nd Respondent held 7.20% and 21.82% shares
respectively of Dalmia Bharat Ltd. (DBL in short) in 2016-17
and the net worth of DBL is Rs. 5578 crores and the market
capital of DBL was Rs. 17,488 crores. 7.20% of Rs. 5578 crores
and 21.82% of Rs. 5578 crores is Rs. 401.61 crores and Rs.
1217.1 crores respectively.
ii) As per Merchant Banker's Valuation (based on Net Asset Value
method which 9th respondent admitted to be the most
appropriate valuation method for companies having no
significant business), each share of 1st and 2nd Respondent
are worth Rs. 20,677.11 and Rs. 14,885.22 respectively.
However, the book value of 1st and 2nd Respondent was
merely Rs. 173.38 and Rs. 280.51 respectively. Therefore, the
book value comes out to be 0.83% of its market value in
respect of 1st Respondent and 1.8% of its market value w.r.t
2nd Respondent, which is extremely low.
• The Scheme contemplates reduction of capital in violation of Section 66
of the Companies Act, 2013. The appellant represented one of the
shareholders of 1st and 2nd respondent; however, he was not served with
the Notice convening EGM on 17th August, 2017 by 1st and 2nd
respondent and some other companies.
• The Regional Director Southern Region, Ministry of Corporate Affairs
Chennai has also filed its objections against the scheme. Still, the NCLT
has approved the scheme subject to minor interventions despite the
objections of the appellant and the Regional Director not being
satisfactorily addressed by the Companies.
3. Arguments presented by the Respondent
The Respondent has presented the following counter replies/arguments:
• The present appeal is not maintainable as the appellant does not have
any locus standi to file the present appeal as the appeal has been filed
by the appellant in his personal capacity and neither as a shareholder in
139
Judicial Pronouncements in Valuation
140
Ankit Mittal vs. Ankita Pratisthan Ltd and Ors (NCLAT) (2019)
141
Judicial Pronouncements in Valuation
142
Ankit Mittal vs. Ankita Pratisthan Ltd and Ors (NCLAT) (2019)
(vii) A very cavalier approach has been adopted by the Respondents which is
unprofessional, devoid of due diligence expected of them.
In view of the other reasons as recorded above and on the basis of this
Valuation Report, the amalgamation cannot be termed as fair to all
stakeholders.
Accordingly, the Impugned order dated 12th April, 2018 was quashed and set
aside and the Respondent was charged a sum of Rs 10,00,000/-.
6. Key Learnings for Valuers from the above Case
(i) Section 247 of the Companies Act, 2013 was notified w.e.f. 8.10.2017.
Therefore, the compliance of Section 247 would arise only after this date.
However, the duties of the valuer as all along is necessitated that as a
professional he will do his work i.e. Make an impartial, true and fair
valuation of any assets which may be required to be valued; Exercise due
diligence while performing the functions as Valuer; Make the valuation in
accordance with such rules as may be prescribed.
(ii) Valuation of share of every company is a starting point to determine the
exchange ratio of the shares of the transferor and transferee company.
(iii) Share exchange ratio has to be outcome of the share value determined
for an individual company to ensure that the exchange ratio is fair.
(iv) Valuation Report should justify the figures being arrived at and should not
be merely based on guess work.
(v) Scheme cannot be approved where a Valuation Report is not credible.
(vi) Though the law prescribes that the objectors must have 10% limit,
however when the matter is before the Tribunal it is duty bound to see
that all the procedures are duly followed and the scheme is conscionable
even if the issue has been raised by anyone whether eligible or not, the
Tribunal will have a duty to look into the issue so as to see whether the
scheme as a whole is also found to be just, fair, conscionable and
reasonable inter alia from the point of view of prudent men of business
taking a commercial decision beneficial to the class represented by them
for whom the scheme is meant.
143
CASE STUDY
Case No. 20
Kingfisher Airlines – A case study on Brand
Valuation
148
Kingfisher Airlines – A case study on Brand Valuation
Post-merger the airline decided to phase out Brand “Air Deccan” and started
offering three classes of travel services: -
1) Kingfisher First – Premium Business Class of service
2) Kingfisher Class – Premium Economy Class of service
3) Kingfisher Red – Low fare basic class of service
This strategy couldn’t benefit airlines and only led to confusion in the mind of
its customers. It couldn’t help the Airline to attract the no frill customers for
Kingfisher Red rather it impacted the brand strength as it was no more the
premium brand reckoned by high-class travellers.
The merger only added to the financial woes of the company by adding to
higher debt and financing costs of the company.
In 2008, the domestic aviation industry continued to witness capacity
expansion by all airline operators and the competition grew stiff amongst
operators putting pressure on the pricing, the top line and ultimately the
profitability of the company. In addition, an increase in crude prices during this
period resulted in surge in the price of Air Turbine Fuel Cost which further
impacted the profitability. The rising fuel cost along with rampantly increasing
operating cost combined together in cascading operating losses for Kingfisher
Airlines. Given the global financial meltdown and economic downturn during
this period; there was slow-down in the air travel market too and hence,
profitability remained a concern for airlines given the high cost of operations.
In 2008, the company also started international operation of business by
connecting Bengaluru with London.
Post 2009, major steps were taken by the Airline with respect to distribution
costs, fuel management systems, aircraft utilisation and general contracts in
order to enforce cost competitiveness. However, many finance professionals
believed that it was too late as the way its Chairman was building up the brand
for the airline was never connected with business and commercial
sustainability. A customer might pay extra for beverages but not for transport
because transport is a type of a necessity and not a luxury. It is because of
this the cost per seat for Kingfisher Airlines was still higher than its competitors
and hence the profitability of the company continued to be in red, that was also
an infamous corelation to the aura of glowing red that the Airline used to
project.
149
Judicial Pronouncements in Valuation
The low-cost airlines like Indigo and Spice Jet were also able to erode the
customer base of Kingfisher Airlines with their attractive fares during this
period and hence impacting the revenue and ultimately the bottom line for
Kingfisher Airlines. The fleet size of the airlines was also reduced significantly
over the next few years to keep the airline afloat.
The company started raising loans to overcome its weak financial condition,
but because of the loans the company had a huge burden of interest and debt
that further added to its woes.
To reduce the burden of heavy debt and interest, Board of Directors decide to
undertake debt restructuring later.
Things went out of control for the Airlines also because the company never
had a stable professional management in place, who had experience of
working in Airline Industry. When Kingfisher Airlines was launched in 2005
Nigel Harwood was appointed as the CEO but he left after a year and then the
Airline did not have a CEO till 2010. The frequent change of CEO and incorrect
strategic decisions by the top-level management seemingly also led to the
downfall of the Airlines.
3. Comparative year-on-year Financials of the Company
Source: Annual Reports
Kingfisher Airlines Ltd.
Profit & Loss
Amount ₹ In Crores
150
Kingfisher Airlines – A case study on Brand Valuation
As can be seen from above, the company was never in profits since its
inception inspite of good growth in its revenue. Further since 2008, post-
merger with Air Deccan, the net loss for the company was more than Rs. 1000
Crores till it went defunct. During this period the debt and the loan amounts for
the company also increased significantly as can be seen hereunder. By 2012,
the Airline had negative reserves of more than ₹6000 Crores with Borrowings
of almost ₹9000 crores in its Balance Sheet.
Source: Annual Reports
Balance Sheet
Amount ₹ In Crores
Other Liabilities 383 493 677 3,645 3,659 4,737 6,036 6,903
Net Block 231 307 279 1,576 1,555 1,572 1,443 712
Investments 0 0 - 0 0 0 0 0
Other Assets 533 1,119 1,175 3,874 5,072 6,687 7,676 2,126
151
Judicial Pronouncements in Valuation
PRICE
150
100
50
Jun-10
Jun-06
Jun-07
Jun-08
Jun-09
Jun-11
Jun-12
Feb-07
Feb-08
Feb-09
Feb-10
Feb-11
Feb-12
Feb-13
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Oct-11
Oct-12
4. Issues with Corporate Governance leading to Ultimate
Failure
Owing to its business model and several incorrect strategic decisions the
Airline was incurring losses right from its launch inspite of high revenue growth.
By 2012, the Airline had accumulated loss of more than Rs. 6000 crores due
to its operational inefficiency combined with the impact of economic downturn.
The company started funding its losses by drawing loans from various banks
and by the year 2012, it has an outstanding loan of more than Rs. 7,500 crores
towards a consortium of Banks out of which SBI had the maximum exposure
of Rs. 1600 crores. The company soon started defaulting in paying back its
lenders leading to a series of legal and regulatory actions against the
company.
The company not only defaulted in paying back its lending Banks but also
failed to pay back its creditors and outstanding government dues. The
company used to buy Air Turbine Fuel from BPCL which was one of its key
creditors, but since the airlines repeatedly defaulted in payments, it stopped
supplying fuel to the Airline and the company switched to other vendors. Due
to its repeated failure in payment of bills to the new vendors too, it was soon
put on cash and carry mode by these companies as well.
Employees are the backbone of any company and Kingfisher Airlines had a
strength of more than 5000 employees. When the company started facing
financial difficulties the company delayed payment of salary to its employees
for several months because of which many of them resigned while others went
152
Kingfisher Airlines – A case study on Brand Valuation
on strike to recover their dues. The company not only defaulted in paying their
salary but also Tax Deducted at Source (TDS) and the PF contributions were
not deposited with the Government. These actions of the company affected
lives of its employees badly and nothing was done to amend it. All this not only
impacted the business tremendously but also tarnished the image of the brand.
The company also defaulted on payment of several statutory dues to the
Government and other Regulatory Authorities. This led to freezing of its bank
accounts at the behest of Tax Authorities and the Carrier lost its flying license
as the Directorate General of Civil Aviation (DGCA) refused to renew its Air
Operator Permit (AOP) in December 2012.
The Auditors of the company were also issuing qualifying reports for sev eral
consecutive accounting years but same was being disagreed by the
management and justification for accounting policy adopted was given in their
Director’s Report. Some of the key Accounting Policies for which the reports
were qualified by the Auditors are as under:-
a) Auditors were of the view that the receipt of subsidy from aircraft
manufacturers should have been recognised as income on a systematic
basis over the period necessary to match them with related cost, while
the company accounted the subsidy received from the aircraft
manufacturer as income in the year of accrual and receipt itself and
hence inflating their Income to that extent.
b) The Fair Market Value of the Aircrafts considered by the company was
based on the Valuation Report received from a leasing company and
same was higher than the sale price of these Aircrafts.
c) Cost of repairs and maintenance was amortized by the company while
same should have been expensed off according to the Auditors.
5. Valuation of the Brand of the Company and Issues
around it
The term ‘brand’ refers to names, signs, symbols, colours, logos etc. that help
customers to identify goods, services, or companies. It is something that a
consumer associates itself with and considers as a promise by the brand that
they will conform to the expectations they have created in the minds of their
customers.
153
Judicial Pronouncements in Valuation
Hence, Brands are the interface between a business and its customers. It is
the Brand through which the customers interact with business owners. Brand
Value is the monetary worth of the Brand if it was sold and represents financial
value attributable to the brand equity for a given purpose.
Kingfisher Airlines Brand was valued at ₹4,100 crores in the year 2008 by
valuer XYZ when the Kingfisher Airline was a market leader with more tha n
30% market share. Based on this Valuation, the company was able to raise
loans from banks by making its Brand the single largest collateral for these
loans. Post the downfall of the company the Brand Valuation done by XYZ was
questioned and it came under the scanner of the investigating agencies.
Serious Fraud Investigation Office (SFIO), which comes under the purview of
the Ministry of Corporate Affairs, started investigating the ₹4,100 crore
valuation attached by the Valuers to the Kingfisher Airlines brand.
Questions were raised on the Brand Valuation Methodologies used and how
the brand can be valued at such a whopping amount when the company had
been making losses since its inception. Further, when the company started
defaulting, the lenders appointed a second valuer who estimated the value of
Brand at ₹160 crore which was less than 95% of the original valuation done
by XYZ Valuer.
In April 2014, SBICAP Trustee Co. Ltd, a wholly-owned subsidiary of SBI
Capital Markets Ltd, attempted to sell the Kingfisher Airlines brand and called
for an expression of interest in acquiring trademarks linked to the grounded
Kingfisher Airlines.
The list of trademarks offered included “fly kingfisher” (label), “fly kingfisher”,
“flying models”, “fly the good times”, “fun liner”, “kingfisher” and “flying bird
device”. Unfortunately, there were no takers for these brands as by that time
the controversy surrounding Kingfisher had damaged the brand so badly that
no airline came forward to take it.
The episode has put a question mark on the working of Valuers undertaking
brand valuation, but it is important to understand that valuation is done as on
a particular date and is based on the circumstances existing as on the date of
Valuation. Further, valuation is an opinion that a Valuer express based on his
professional judgement and on a hindsight, everyone can be an expert and
question the projections and valuation, but as on the date of valuation, no one
can project the future accurately as there are multiple assumptions that a
154
Kingfisher Airlines – A case study on Brand Valuation
Valuer undertakes with respect to the company, industry and various micro
and macro-economic factors.
Having said that, it is also important that a valuer carry out sufficient analyses
and evaluation to justify his assumptions and projections. Reference is made
to para 26-28 of ICAI Valuation Standard 201- Scope of Work, Analyses and
Evaluation, which states as under:
“Analyses and Evaluation
26. The extent of analyses to be carried out by the valuer in relation to the
engagement shall be based on the purpose of the valuation assignment and
the terms of engagement.
27. The judgments made by the valuer during the course of assignment,
including the sufficiency of the data made available to meet the purpose of the
valuation, must be adequately supported.
28. The valuer shall carry out relevant analyses and evaluations through
discussions, inspections, survey, calculations and such other means as may
be applicable and available to that effect.”
In the case of Kingfisher Airlines it is perceived that, while the Valuer XYZ
considered the Market Share of the company that was generated in a short
time, preference of the brand over the nearest competitor and its ability to
command premium over competition and the perception and the hype around
the brand and its promoters but what they didn’t consider was the ability of the
brand to consistently command premium and ability to perform in case of
Disruption. The traditional method of valuation holds good only when a stable
environment is expected to continue however, if the business associated with
the brand undergoes a disruption, the brand needs to be valued on a revised
estimated future cash flow basis.
The biggest example of the impact of disruption on a brand valuation is that of
Nokia. While Nokia had the largest market share in mobile handsets and was
always amongst the top names on brand valuation lists but it was not future-
ready and couldn’t perceive the change in industry that was about to come
post the smartphone launch.
According to one of the leading brand valuation firm, brand value is attributable
to three components – financial performance, the role of the brand, and brand
strength.
155
Judicial Pronouncements in Valuation
156
Kingfisher Airlines – A case study on Brand Valuation
157
Judicial Pronouncements in Valuation
158