Mr. Mahendra G. Wadhwami vs M/S Reed Relays & Electronics India ...

Page 1 of 42 Present

For Appellant: Mr. Virender Ganda, Sr. Advocate with Ms. Akanksha Mathur, Ms. Amodini Raina, Advocates.

For Respondent: Mr. Delep Goswami, Mr. Anirud Goswami, Advocates for R-1. Mr. Praneet Das, Advocate for R-2.

JUDGMENT

(Date: 16.11.2022)

[Per.: Dr. Alok Srivastava, Member (Technical)]

1. This appeal has been filed under Section 421 of the

Companies Act, 2013 by Mahendra G. Wadhwani, a public

shareholder of M/s. Reed Relays & Electronics India Limited

(Respondent No. 1, in short 'Reed Relays') against the order dated

18.9.2019 passed by the National Company Law Tribunal,

Chennai in CA/21/66(1)/CB/2017 (hereinafter called 'Impugned

Order).

2. The Appellant is aggrieved by the Impugned Order mainly on

the ground that it has been passed in a mechanical manner by

only reiterating the observations made by the Division Bench of

NCLT, Chennai in its earlier order dated 4.10.2017, without paying

attention to the fact that the Respondent Company Reed Relays Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 2 of 42 did not follow the guidelines/procedure laid down in the Exit

Circulars and Delisting Regulations of Securities and Exchange

Board of India (in short 'SEBI').

3. It is recalled that an order was passed by the NCLT, Chennai

in CP/21/66(1)/CB/2017 on 4.10.2017 regarding the petition of

M/s. Mahendra G. Wadhwani, which was assailed by him in

appeal bearing CA(AT)/337/2017 before the National Company

Law Appellate Tribunal (in short 'NCLAT') which, by order dated

17.4.2018, set aside the order of NCLT, Chennai stating as

follows:-

"46. In view of the above discussions, we are not giving our judgement/decision on the other various issues/counter issues raised by the parties in the appeal. The impugned order dated 4.10.2017 passed by the Tribunal is set aside. The matter is remanded back to the Tribunal to re-hear the matter, NCLT shall take into consideration the affidavit dated

18.9.2017 of Respondent No. 3 and after giving due opportunity to all the parties to argue on the same, decide the Company Petition expeditiously in terms of Section 422 of the Companies Act, 2013. Earlier evidence will also be evidence in the cause. The parties are also given opportunity to argue on the other issues as well before the Tribunal. No order as to cost.

47. Parties are directed to appear before the NCLT, Chennai Bench, Chennai on 28th May, 2018 and no separate notice would be necessary."

Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 3 of 42

4. The judgment dated 17.4.2018 in CA(AT) 337 pronounced by

NCLAT was challenged before Hon'ble Supreme Court in Civil

Appeal No. 6117/2018 which was dismissed vide order dated

24.7.2018.

5. The observations made by NCLAT in order dated 17.4.2018

made it clear that the affidavit dated 18.9,2017 filed by the

Regional Director of Companies, Southern Region, Ministry of

Corporate Affairs (in short 'RD'), should be taken into

consideration and after giving due opportunities to all the parties

to argue on the same, the Company Petition should be decided

expeditiously. The said order also gave opportunities to the parties

to argue on other issues as well before the NCLT.

6. The NCLT, Chennai Bench re-heard the arguments of the

parties and passed the Impugned Order, which effectively maintain

the earlier order of the Division Bench of the NCLT dated

4.10.2017 withing making any modification therein.

7. We heard the arguments presented by the Learned Senior

Counsels for both parties and perused the record.

Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 4 of 42

8. The Learned Senior Counsel for Appellant has submitted the

following arguments in support of his case:-

(i) The order dated 4.10.2017 passed by NCLT, Chennai

(Division Bench) was set aside by order dated

174.2018 of the NCLAT and remanded of the matter.

Upon remand, the matter was heard by Single Member

(Judicial) of NCLT, whereas the earlier order was

passed after hearing by the Division Bench of NCLT on

4.10.2017. Therefore, the Impugned Order suffers

from defective constitution of bench as a Single

Member (Judicial) Bench. Moreover, since the order

dated 4.10.2017 was set aside by NCLT, it was

required that the NCLAT should have taken into

consideration the contents of the affidavit dated

18.9.2017 filed by the RD, and a fresh order should

have been passed since the earlier order dated

4.10.2017 no longer existed in law. The NCLT has not

passed a fresh order, but has simply said that after

careful study of the relevant material, this Tribunal is

of the opinion that the earlier order passed on

4.10.2017 does not warrant any modification, and Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 5 of 42 thus it has effectively maintained the earlier order

dated 4.10.2017.

(ii) The Impugned Order has been passed in an

application made under section 66 of the Companies

Act, 2013, which is regarding reduction of share

capital, whereas the buy-back of shares was done

under section 100 of the Companies Act, 1956. Since,

the Special Resolution was passed under section 52 of

the Companies Act, 2013, which provides for use of

Security Premium Account for Buy-Back of shares, the

intention was always to Buy-Back of shares and

therefore, the application under section 66 was not

maintainable.

(iii) The voting in the EGM dated 12.12.2016 in which

decision for reduction of share capital was taken, show

the votes cast by the promoters clubbed with votes

cast by non-promoter shareholders, whereas the votes

of promoters shareholders and non-promoters

shareholders should have been shown separately to

show clearly the views/opinion of the non-promoter

Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 6 of 42 shareholders, since promoter shareholders are

interested party in the buy-back of shares.

(iv) The process of reduction of share capital was initiated

in Board meeting dated 5.10.2016. The 'Exit Circular'

dated 10.10.2016, which established a clear and

unambiguous procedure for providing exit to

shareholders, should have been taken note and the

Company's Board should have decided to follow the

procedure for exit, as stipulated in 'Annexure A' of the

Exit Circular dated 10.10.2016.

(v) The notice for Board meeting October 13, 2016, which

authorised convening of an Extra-ordinary General

Meeting was issued on 8.10.2016. This period of

notice of 5 days is less than the 7 days compulsory

notice period which is provided in section 173(3) of the

Companies Act, 2013.

(vi) The Special Resolution dated 12.12.2016 adopted in

EGM for reduction of share capital under section 100- 104 of the Companies Act, 1956 permitted use of

Security Premium Account for buy-back of shares,

Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 7 of 42 whereas the Exit Circular dated 10.10.2016 made it

very clear that the promoters will have to buy-back the

shares of the exiting non-promoter shareholders and

company's funds should not be used for the same.

(vii) The shareholders were paid @ Rs. 107 per share,

whereas the valuation of shares on the basis of Net

Asset Value was at Rs. 351 per share.

(viii) The company made an incorrect statement in the

notice dated 27.10.2016 and in the attached

explanatory statement that no director is

concerned/interested in the Resolution, which was not

the case, and therefore, it is non-compliance of the

section 102 of the Companies Act, 2013.

(ix) The non-promoters' shares were to be provided

voluntary exit option, but the action as taken by the

company was for compulsory cancellation and buy-

back of the shares through reduction of share capital

route, which is not consistent with the modality

established by Exit Circular dated 10.10.2016. After

the EGM and buy-back of the shares, intimation was

Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 8 of 42 sent to the National Stock Exchange and SEBI without

mentioning that the action was not taken in

accordance with the Exit Circular dated 10.10.2016.

(x) The 4th Exit circular dated 17.4.2015 gave 18 months'

time to Exclusively Listed Companies (ELCs) within

which they had to obtain listing upon compliance with

the listing requirements of a nation-wide stock

exchange and it was not the time period given for

providing exit to non-promoter shareholders.

(xi) The 5th Exit Circular dated 10.10.2016 provided the

modality/procedure for exit to public, non-promoter

shareholders which should have been followed.

According to Annexure 'A' of this circular, there had to

be a public announcement by the promoter of the

company in one national newspaper and one regional

newspaper with material information relating to exit

opportunities to its shareholders, which should have

included the proposed exit price per share. Thereafter,

the exiting shareholders were required to tender their

shares to the company and the promoter was required

to open an escrow account in favour of the Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 9 of 42 independent valuer/designated stock exchange and

the total estimated amount of consideration based on

the exit price and number of outstanding public

shareholders was to be deposited in the escrow

account. The payment of exit shareholders was to be

made by the promoters and not the company and the

promoters had to certify to the satisfaction of the

designated stock exchange that appropriate procedure

has been followed for providing exit to the

shareholders. This procedure was not followed by the

Respondent No. 1 Company in the present case.

9. The Learned Senior Counsel for Respondent No. 1 has

submitted the following arguments in support of his case:-

(i) On the issue of the defective constitution of bench, it

has submitted that NCLAT in its order dated

17.4.2018 had ordered that "the matter is remanded

back to the Tribunal to re-hear the matter. NCLT shall

take into consideration the affidavit dated 18.09.2017

of Respondent No. 3 and after giving due opportunity to

all the parties to argue on the same, decide the Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 10 of 42 Company Petition expeditiously in terms of Section 422

of the Companies Act, 2013.." There was nothing

specific in this order of NCLAT that the case after

remand should be heard only by a Division Bench of

NCLT and cannot be heard by validly constituted

Single Member (Judicial) Bench of NCLT. Further the

affidavit filed by the RD dated 18.9.2017 has been

considered in paragraphs 2 to 11 of the impugned

judgment and a well-reasoned order has been passed

by NCLT. Even if the bench that passed the order was

a Single Member Bench, it is not an invalid bench and

even a vacancy or defect in bench's constitution does

not make the order illegal, as is stipulated in section

431 of the Companies Act, 2013. Moreover, during the

hearing by NCLT's Single Member Bench, the

Appellant never once raised any objection to the case

being heard by a Single Member Bench.

(ii) When the matter was heard after remand by the NCLT,

the Counsel for SEBI appeared and submitted that the

issue regarding the appointment of Auditor was not

pressed by SEBI, since SEBI's Exit Circular dated

10.10.2016 which prescribed criteria for appointment Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 11 of 42 of Auditor was issued subsequent to the appointment

of Auditor by Respondent No. 1 Company on

5.10.2016, and that the said Exit Circular dated

10.10.2016 had no retrospective effect.

(iii) The Appellant has raised similar contention before

SEBI and thereafter in appeal before the Securities

Appellate Tribunal (SAT), which by order dated

20.3.2017 has dismissed the appeal. This fact has

been suppressed by the Appellant in this appeal. The

principles of Res Judicata would, therefore, apply in

the present appeal as, a similar issue has been heard

and decided through an order dated 23.11.2017 by the

SAT.

(iv) The Special Resolution approving the reduction of

share capital of Respondent No. 1 Company was

passed in the EGM with a majority of 89.56% on

12.12.2016 and at that time section 100-104 of the

erstwhile Companies Act, 1956 were in force. With the

enactment and coming in force of the Companies Act,

2013 on 15.12.2016, the Respondent No. 1 Company

applied for necessary approval by filing petition section

66 of the Companies Act, 2013 because provision of Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 12 of 42 section 66 of the Companies Act, 2013 is pari materia

to section 100 of the Companies Act, 1956.

(v) Madras Stock Exchange ("MSE") was in the process of

getting de-recognised and exclusively listed companies

(ELCs) earlier listed with MSE, were required to either

get listed on a nation-wide stock exchange or provide

exit to its public, non-promoter shareholders. Since

the Respondent No. 1 company did not enter into any

listing agreement with a nation-wide stock exchange,

it ceased to be a listed company, a fact which is taken

note in the Impugned Order in paragraphs 8-9 and

therefore, Respondent No.1 company which was no

longer a listed company, was not required to follow

SEBI Listing Regulations and also its circulars

including the various Exit Circulars.

(vi) The SEBI's Exit Circular dated 17.4.2015 provide a

time period of 18 months to either get listed on a

nation-wide stock exchange or to provide exit to its

shareholders, and this period was getting over on

16.10.2016. Therefore, in order to comply with the

timeline, set by SEBI, Respondent No.1 Company

issued a notice dated 26.9.2016 for board meeting, Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 13 of 42 which was held on 5.10.2016, wherein it was decided

to provide exit to its non-promoter shareholders, by

way of reduction of share capital and appoint an

independent Chartered Accountant firm to do

valuation of shares. The valuer's report was presented

in the Board meeting on 13.10.2016, wherein the

valuation of shares @ Rs. 107/- per share as per

Discounted Cash Flow (DCF) was considered since the

company was a going concern and pay off to non-

promoters' shareholders by utilizing share premium

reserves and general reserves was approved by the

Board. Since the process of giving exit to non-

promoters' shareholders had already started on

20.9.2016 and the valuer was appointed on 5.10.2016,

there was no question of adopting the procedure

provided in the Exit circular dated 10.10.2016 in view

of strict time-line for completing the exit process.

(vii) Section 66 of the Companies Act, 1956 requires

passing of Special Resolution and does not mandate

counting of votes segregated on the basis of "promoter"

and "non-promoter" votes. Such a segregated

counting of votes is not mandatory and does not make Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 14 of 42 the decision taken by the majority in passing the

Special Resolution illegal or erroneous.

(viii) Section 66 of the Companies Act, 2013 states that the

reduction of share capital can be carried out by a

company "in any way" and therefore the Respondent

No. 1 Company committed no illegality in offering exit

opportunity to non-promoters' shareholders by

reduction of share capital. Furthermore, reduction of

share capital is not by buy-back of shares, as these

acts are completely different and operate differently.

(ix) Utilisation of Securities Premium Account in paying off

shareholders is permitted under section 52 (1) of the

Companies Act, 2013 and any argument that this

money in this account can be utilised only for "buy-

back" of shares under section 52 (2)(e) is erroneous

and untenable.

(x) The judgments of Hon'ble Madras High Court in

Parry's Confectionary Ltd. vs. Unknown (2004 122

Comp Case 900 Mad.) and in the matter of In Re:

Nestle India Ltd. [MANU/DE/2751/2008] were cited

in support of the contention.

Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 15 of 42

(xi) Hon'ble Supreme Court has held in the matter of

Hindustan Lever Employees' Union vs. Hindustan

Lever Ltd. (AIR (1995) SC 470) that the valuation of

shares is a technical and complex issue, which can be

appropriately left to the accounting expert and merely

because some other method of valuation could be

resorted to, which could possibly be more favourable

to the objector, this alone cannot militate against

granting approval to the modality adopted by the

company, and the court's obligation is to see that

valuation was done in accordance with law and it was

carried out by an independent body.

(xii) After the order of NCLT dated 18.9.2019, Respondent

No 1 Company transferred requisite funds to a Special

Bank Account in HDFC Bank, which has thereafter,

issued demand drafts/warrants to the company's

shareholders and out of 2506 such non-promoter

shareholders, more than 1430 shareholders have

encashed their warrants as on 31.12.2019. The

Appellant has also acquired further shares of

Respondent No. 1 Company, after passing of the

concerned Special Resolution, even though he has Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 16 of 42 objected to the reduction of the shares capital. Thus

all the former non-promoter shareholders, including

the appellant, were satisfied with the buy-back of their

shares.

10. The Learned Counsel for SEBI has submitted that it finds

that the Respondent company exercise the then available method

of buy-back of shares as it started the exercise with the

appointment of valuer on 5.10.2016, which was before the date of

issue of Exit Circular on 10.10.2016.

11. In rejoinder, the Learned Senior Counsel for Appellant has

said that after the resolution for payoff to the shareholders

regarding their shares, the shareholders' meeting was held after

about two months and there was no reason why, after the Exit

Circular dated 10.10.2016 has been issued, the Respondent No. 1

company could not follow the procedure stipulated in providing

exit to its shareholders, which had to start with the appointment of

an independent valuer from the panel of valuers approved by SEBI.

He has also reiterated that in the application under section 66 of

the Companies act, 1956, a confirmation by High Court is

required, whereas in section 66 of the present Companies Act, Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 17 of 42 2013, a procedure for reduction of share capital is provided. He

has made the point strongly that the intention of SEBI circular

dated 10.10.2016 was that the promoter had to pay to the exiting

shareholders the value of their shares, and not the company, as

has been done in the present case. He has also contended that

irrespective of the fact whether the company was listed or unlisted,

it was bound to follow the guidelines/procedures laid down by

SEBI, which was not done in the present case. He has also

referred to the Valuer's report for valuation of equity shares to

point out that there are many conditionalties and limitations

mentioned in the Report in paragraph 5, which point to a number

of assumptions taken in the preparation of the report, particularly

regarding non-consideration of cash reserves and bank balance,

non-current investments and liabilities which amount to

Rs.22,40,20,314/-, Rs.49,91,472/- and Rs.65,91,693/-

respectively as on 31.3.2016 and whose consideration in the

valuation calculation, shall mean an incremental amount of

Rs.207/- per equity share over and above Rs.107/- per share. In

the 'Opinion Section' of the Valuation Report, the valuer has said

that it is the Company's discretion and decision to adopt the most

appropriate value and the Company shall adopt a suitable fair

Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 18 of 42 value per equity share based on factors and reasons considered

appropriate by the Company.

12. The Learned Senior Counsel for Respondents has cited the

following judgments in support: -

(i) The Hon'ble Delhi High Court in the matter of Reckitt

Benckiser (India) Ltd. vs Unknown (122 (2005) DLT

612) and Sandvik Asia Limited vs Bharat Kumar

Padamsi (MANU/MH/0237/2009).

(ii) The Hon'ble Supreme Court of India in the matter of

Hindustan Lever Employees' Union v/s Hindustan

Lever Ltd. [1994 SUPPL (4) SCR 723] and G.L.

Sultania and Anr. v/s SEBI [2006 67 SCL 71 SAT].

13. The issues that are relevant in deciding this appeal are as

follows:-

(i) Whether the Adjudicating Authority hearing the matter

in a Single Member Bench was legally competent to

consider the matter after remand by NCLAT, , which

matter was earlier heard by a Division Bench of NCLT?

Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 19 of 42

(ii) Whether the Special Resolution passed under sections

100-104 of the erstwhile Companies Act, 1956 read

with section 52 of the Companies Act, 2013 is in the

nature of buy-back shares of non-promoters'

shareholders and is akin to providing them exit as

contemplated under the Exit Circulars of SEBI?

(iii) Whether the Respondent Company was not required to

follow the various circulars issued by SEBI for

providing exit to its non-promoters' shareholders upon

de-recognition of a stock exchange where the

Company was earlier listed?

(iv) Whether the valuation of share value as done by the

company was protecting the interest of its public

shareholders who wanted to voluntarily exit the

company?

(v) Whether the Company's funds could have been used

for buy-back the shares of exiting non-promoters'

shareholders, providing exit to non-promoters'

shareholders instead of using the funds of the

shareholders and also whether the shareholders have

unjustly enriched themselves by becoming 100%

shareholders of the company without using their own Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 20 of 42 funds, which is contrary to the guidelines given by

SEBI in its Exit Circular dated 10.10.2016?

14. In relation to the issue included in para 13 (i), it is noted

that Mr. Ramji Srinivasan, Learned Senior Advocate was appointed

as Amicus Curiae vide order dated 22.02.2021 to advise this

Tribunal on the question of law whether a Single Judicial Bench is

competent to hear and adjudicate the matter after remand by

NCLAT. The Learned Amicus Curiae submitted report dated

11.8.2021, wherein he has concluded that on the basis of legal and

factual background to the technicalities and administrative

exigencies, the provision of section 419(3) of the Companies Act,

2013, the first proviso thereto and section 431 of the Companies

Act, 2013 must be interpreted in a manner which subserve the

cause of justice. He has advised that a decision rendered by a

Single Member (Judicial) Bench is permissible in law and the

jurisdiction cannot be held to be violative of provisions of section

419 of the Companies Act, 2013. Provisions of sub-section 3 of

section 419 and the first proviso therein of the Companies Act,

2013 is reproduced below for appreciation of this view:-

Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 21 of 42 "419. Benches of Tribunal. -

(3) The powers of the Tribunal shall be exercisable by Benches consisting of two Members out of whom one shall be a Judicial Member and the other shall be a technical Member:

Provided that it shall be competent for the Members of the Tribunal authorised in this behalf to function as a Bench consisting of a single Judicial Member and exercise the powers of the Tribunal in respect of such class of cases or such matters pertaining to such class of cases, as the President may, by general or special order, specify:"

15. We note that sub-section (3) of section 419 of the Companies

Act, 2013 provides that if a Single Member Bench comprising of a

Single Judicial Member is constituted by President of NCLT in

respect of such class of cases or such matters pertaining to such

class of cases, then such a Bench would be considered competent

to hear such cases. We also note that the Single Member (Judicial)

Bench constituted at NCLT, Chennai by the order of the Hon'ble

President, NCLT on 27.11.2017 in exercise of powers under section

419 of the Companies Act, 2013, whose copy is attached with the

report of the Learned Amicus Curiae, the Single Judicial Member,

Bench was entrusted with powers to dispose of cases relating to

Companies Act, 2013 and the Insolvency and Bankruptcy Code,

2016. Thus, it is clear that the Single Judicial Member Bench that

heard the case and passed the Impugned Order was validly Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 22 of 42 constituted by the Hon'ble President of NCLT. We also note that

while the case was being reheard by NCLT, Chennai Bench, after

remand by order dated 17.4.2017 of the NCLAT, the Appellant

never raised any question or issue regarding any defect in the

constitution of the Single Judicial Member Bench. We are,

therefore, of the view that the Single Judicial Member Bench that

heard the Company Petition bearing No. CA/212/66(1)/CB/2017

and passed order dated 18.9.2019 was a validly constituted bench

to hear cases under the Companies Act, 2013 by Hon'ble

President, NCLT and was fully empowered and competent to hear

and dispose of the said company petition.

16. Regarding the second issue in para 13 (ii) whether the

Special Resolution passed under section 100-104 of the erstwhile

Companies Act, 1956, the buy-back of non-promoters' shares is a

valid modality for providing exit to the shareholders, we note that

section 100 of the erstwhile Companies Act, 1956 states as

follows:-

'100. SPECIAL RESOLUTION FOR REDUCTION OF SHARE CAPITAL

(1) Subject to confirmation by the 1 [Tribunal], a company limited by shares or a company limited by guarantee and having a share capital, may, if so authorised by its articles, by special resolution, reduce its share capital in any way, and Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 23 of 42 in particular and without prejudice to the generality of the foregoing power, may -

(a) extinguish or reduce the liability on any of its shares in respect of share capital not paid-up ;

(b) either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up share capital which is lost, or is unrepresented by available assets ; or

(c) either with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share capital which is in excess of the wants of the company;

(2) A special resolution under this section is in this Act referred to as "a resolution for reducing share capital".

17. A perusal of section 100 provides for the Special Resolution

for reduction of shares capital in three cases viz. clauses (a), (b)

and (c) of sub-section (1) of section 100. Since the share capital of

the non-promoters who were to be provided option by the

company, sub-sections (a) and (b) are not applicable and sub

section (c) makes it clear that any paid-up share capital, which in

excess of the wants of the company, can be paid off. Insofar as the

present case of providing exit to the shareholders of the company,

it is clear that the payoff of any paid up share capital is not in

excess of the wants of the company, but due to the reason that

this exclusively listed company Reed Relays on Madras Stock

Exchange has got delisted because Madras Stock Exchange has

been de-recognized. Therefore, either Madras Stock Exchange has

Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 24 of 42 to get itself listed on any other nationwide stock exchange or

provide exit to its shareholders following its various Exit Circulars,

particularly Exit circular dated 10.10.2016. Since Madras Stock

Exchange had decided not get itself listed on any nationwide stock

exchange, it has to provide exit to its non-promoters' shareholders

and the mechanism/modality for providing exit to such

shareholders was stipulated by SEBI in the various Exit Circulars

starting with circulars dated 29.12.2008, 13.5.2014, 22.5.2014,

17.4.2015 and 10.10.2016. These circulars which are reproduced

in Appeal paper book, Vol. II of the documents filed by the

Appellant (vide dy. No. 30794), take note of the fact that

exclusively listed company has got de-listed and therefore, the

exiting non-promoters' shareholders have to be provided exit

option as stipulated in these circulars, particularly circulars dated

29.12.2008 and 17.4.2015 and finally circular dated 10.10.2016.

18. We note that the application for reduction of share capital

has been certified by the company under section 66 of now

prevailing Companies Act, 2013. Clause (ii) of sub-section (b) of

section 66 of the Companies Act, 2013 allows a company to payoff

any paid up share capital, which is in excess of the wants of the

company, which is the reason given by the company in its section Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 25 of 42 66 application regarding reduction of its share capital preferred

before the NCLT. Section 68 of the Companies Act, 2013 allows

the company to purchase its own shares and otherwise securities

(buy-back) out of Securities Premium Account and the buy-back of

shares has to be in accordance with the regulations made by SEBI

in this behalf. On the other hand, the buy-back of shares using

Securities Premium Account of the company is not permissible as

is clear from various Exit Circulars, particular Exit Circular dated

10.10.2016, wherein in Annexure 'A' of the Circular it is made

clear that the promoters of the company shall acquire shares of

such companies from the public shareholders by paying them

such value determined by the valuer. Thus, the buy-back of

shares of exiting shareholders cannot be done by using the

Securities Premium Account reserve of the company, though in the

present case, the Securities Premium Account of the company has

been used for buy-back of the shares. Moreover, we also note that

while the reduction of share capital was made under section 100- 104 of the erstwhile Companies Act, 1956, the application for

reduction of share capital has been made under section 66 of the

new Companies Act, 2013 by the company claiming that the new

section 66 is pari-matera with the erstwhile section 100 of the

Companies Act, 1956, whereas section 66 cannot be used when a Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 26 of 42 company buy-back its own securities, as was done in the present

case.

19. The third issue that falls for our consideration which is

stated in para 13 (iii) is whether the company Reed Relays was

obligated to follow various Exit Circulars issued by SEBI for

providing exit to its non-promoters' shareholders consequent to the

de-recognition of a stock exchange where the company was

exclusively listed. In this connection, we note that the first Exit

Circular dated 29.12.2008 makes it clear in para 8 that the

companies which are listed in such derecognized regional stock

exchanges, and Madras Stock Exchange is one of them, has to

provide exit option to shareholders as per SEBI De-Listing

Guidelines/Regulations after taking shareholders' approval for the

same within a time frame, which is to be specified by SEBI.

Thereafter, circular dated 17.4.2015 allows a timeline of 18

months within which such companies have to obtain listing after

complying with the listing requirements of the nationwide stock

exchange subject to certain conditions or provide exit to its public,

non-promoter shareholders. Again, an Exit Circular issued by

SEBI on 10.10.2016 (called the 5th Exit Circular), provides a

'procedure to provide exit to investors' in para 4 (d), wherein it is Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 27 of 42 clarified that the exclusively listed companies shall be required to

ensure compliance with the procedure for exit which is prescribed

in 'Annexure A' attached to this circular. Further para 5(a) of this

5th Exit Circular provides that the period of three months from

10.10.2016 i.e. date of the circular, is provided to the ELC to

submit its plan of action to the designated stock exchange for

providing exit to its public shareholders. The provision in

Annexure A make it clear that the promoter of the Company shall

acquire shares of such companies from public shareholders and a

procedure outlining public announcement in at least one national

daily newspaper with wide circulation and one regional language

newspaper by the promoters of the company has also been

stipulated. This announcement shall contain certain material

information as stipulated in Annexure A and the exit offer has to

remain open for a period of minimum 5 working days during which

the public shareholders shall tender their shares. This entire

process of providing exit to public shareholders has to be

completed in 75 working days as per para (iii) of Annexure A

starting from 10.10.2016.

Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 28 of 42

20. We also note from the perusal of the application submitted

by the Company under section 66 of the Companies Act, 2013 to

NCLT regarding reduction of share capital in the process of

providing exit to its public shareholders, that the various Exit

Circulars issued by SEBI are mentioned in the application but

curiously the application fails to mention Exit Circular dated

10.10.2016, which provides clarity about the procedure for

providing exit to public shareholders. Moreover, while this

application is made on 9.2.2017, the manner in which the public

shareholders have been provided exit option, is through reduction

of share capital and not in accordance with the stipulations in the

various Exit Circulars of SEBI.

21. Regarding the issue mentioned in para 13 (iv) of this

judgment, the Learned Counsel for Respondent Company has

claimed that the appointment of an independent valuer was done

in the board meeting of the Company dated 5.10.2016 and the

report of the valuer was received on 8.10.2016 which pre-dates the

issue of Exit Circular dated 10.10.2016. He has also claimed that

since the 18 months period given for providing exit to the public

shareholders was expiring on 16.10.2016, the Company being

mindful of this time period continued with the process to complete Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 29 of 42 it by 16.10.2016 and it did not restart the process of providing exit

to public shareholders, as was stipulated in the Exit Circular dated

10.10.2016 and Annexure A therein. We note that the Board

meeting dated 13.10.2016 considered the valuation report of

shares and decided and resolved to provide exit to its public

shareholders through reduction of the Company's paid-up equity

capital from Rs.1,07,68,090 consisting of 10,76,809 equity shares

of Rs. 10/- each fully paid up to Rs.43,48,470 consisting of

4,34,847 issued, subscribed and fully paid-up equity shares of Rs.

10 each by cancelling 6,41,962 issued, subscribed and paid up

equity shares of Rs. 10/- each, which are the shares held by the

non-promoters' shareholders by paying against the each cancelled

share a sum of Rs.107/- per equity share of Rs. 10/-. It is clear

that while the circular dated 10.10.2016 of SEBI had already been

issued, which the company should have known, the Company's

Board did not take note of this circular in its Board meeting on

13.10.2016 and followed a procedure that had not been stipulated

by SEBI through its Exit Circulars, and which actually meant

compulsory buy-back of shares rather than the opportunity of

voluntary exit option.

Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 30 of 42

22. The Learned Senior Counsel for Appellant has also pointed

to certain assumptions and conditions stated in the valuation

report, which make the valuation report itself not fully reflective of

the correct valuation of shares. In particular, he has adverted to

the following statements in the valuation report of the valuer P.

Pattabiraman & Company (attached pp. 653-659 of the appeal

paperbook, Vol IV) :-

'5. LIMITATIONS

Xx xx xx xx

o. We have not studied the Company's statutory obligations and procedures to be complied with regard to exit opportunity.

Xx xx xx xx

6. Capital & Reserves:

An amount of Rs.11,00,000/- is transferred in general reserve every year in the future. This is the average of transfers made to general reserves during the past 5 years. The effect of share capital reduction and buy back is not considered.

Xx xx xx xx

17. Other assumptions:

a. The present available cash and bank balances,

non-current investments and liabilities are not considered in the Enterprise value calculations.

As on 31.03.2016, the balances are Rs.22,40,20,314/-, Rs. 49,91,472 and Rs. Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 31 of 42 65,91,693/- respectively. The impact of this on the share valuation shall be an incremental amount of Rs.207/- per equity share.

b. projected Non-operative Income and Expenses have been ignored by us in this valuation, since the details are not made available."

Thus, it becomes clear that the valuer had itself pointed to severe

and important deficiencies and drawbacks arising out of

assumptions in making the valuation. (The valuation report can

be seen at pp. 651-663 of the appeal paperbook. Vol. IV.) The

valuation report also states that if the present available bank

balances, investments, liabilities and cash reserves available with

the company are taken into account, they would add an amount of

Rs. 207/- per share to the valuation of Rs. 107 per share. The

valuer has finally left it to the discretion of the Company's Board to

consider its report in the light of such observations/comments,

but the Company's Board does not seem to have considered such

drawbacks and deficiencies in the valuation report, in the Board

meeting dated 13.10.2016 which accepting the valuation of

Rs.107/- per share. This makes the entire exercise of valuation of

shares and its acceptance replete with fatal drawbacks and its

hasty acceptance by the Board has no doubt adversely affected the

interest of the Company's exiting shareholders, rather than

protecting the interest of such shareholders.

Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 32 of 42

23. For the above stated reasons, we find it quite curious that

when the company had a total available time of 75 days, which

was stipulated in circular dated 10.10.2016, to provide exit to its

public shareholders, why it did not take note of this stipulation,

but on the contrary rushed through with the appointment of an

auditor/valuer, who was not taken from the panel of valuers by

SEBI, and thereafter, after receipt of the valuation report finalized

payoff to the shareholders, all within a period of 7 days. In our

view, once SEBI has issued very detailed and clear guidelines vide

its circular dated 10.10.2016, it was incumbent on the Company

to take it into consideration and restart the procedure, since it had

a total time period of 75 days to provide exit option to its public

shareholders starting from 10.10.2016. Such a move would have

brought in greater confidence among its exiting shareholders,

regarding transparency and fairness in the entire process, an

obligation that the Company had towards its public shareholders,

even if they were in minority. Moreover, the use of Premium

Security Account by the Company to buy-back the shares instead

of the buy-back by the promoters using their own funds, is also an

infringement of the procedure laid down by the SEBI in its Exit

Circular dated 10.10.2016 and it is clear that thereby the Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 33 of 42 remaining promoter shareholders have been 100% owners of the

company.

24. In examining and answering the issue no. (iii) stated in

paragraph 13, we have also examined the issue no. (v) in

paragraph 13, which is whether the company's funds could have

been used for buy-back of shares of the exiting non-promoter

shareholders in view of the guidelines issued by SEBI for providing

exit to public shareholders after de-recognition of the Regional

Stock Exchange (Madras Stock Exchange in the present case). The

Exit Circulars issued by SEBI dated 17.4.2015 and 10.10.2016

(with Annexure A) are in exercise of the powers conferred under

Section 11(1) and 11(2)(j) of the Securities and Exchange Board of

India Act, 1992. These circulars make it very clear that it is the

responsibility of the promoters and directors of the exclusively

listed companies in a de-recognized regional stock exchange to

provide exit to the company's shareholders.

25. It is clear from the procedure outlined to provide exit to

investors in Annexure A of the Exit Circular dated 10.10.2016 that

the promoters of the company shall acquire shares of such

companies from public shareholders by paying them such value Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 34 of 42 determined by the valuer. Further, in Annexure A, a procedure

has been laid down as to how the promoters of the company will

make a public announcement, the material information to be

included in the public announcement, liability of the promoter to

acquire the shares of the shareholders, and the time period for

which the exit offer shall remain open for the public shareholders

to tender their shares is all very clearly stipulated. Further,

Clause (viii) of Annexure A states that 'the promoter shall make

payment of consideration within 15 working days from the date of

completion of offer. Thus, two facts are clear from these Exit

Circulars. viz (i) that the Exit Circulars have been issued in

exercise of powers conferred under the Securities and Exchange

Board of India Act, 1992 by SEBI to provide exit option to public

shareholders of ELCs of a de-recognised Regional Stock Exchange,

and (ii) the promoters of the ELCs shall be responsible for making

payment of consideration to the exiting public shareholders.

26. Hence, we find that in the present case, where the company

has used its Securities Premium Account to make payment to the

exiting public shareholders, the procedure adopted is not in

accordance with the procedure stipulated for providing exit to

public shareholders by SEBI consequent to de-recognition of an Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 35 of 42 exclusively listed company after de-recognition of a Madras Stock

Exchange.

27. We also find that for ELCs exclusively listed companies that

have moved to dissemination board and have been delisted, exit

option is to be given to its public shareholders (other than

promoters) at a value to be determined as per the methodology of

valuation of share provided in Exit Circular dated 10.10.2016.

This exit option to be given to the shareholders is voluntary,

whereas the Special Resolution adopted by the company in its

EGM held on 12.12.2016 under Section 100 of the Companies Act,

1956 provides for compulsory buyback of shares, which is not in

consonance to SEBI guidelines issued for providing exit option to

the public shareholders of ELCs of a de-recognized Regional Stock

Exchange. Thus, we note that under the guise of providing an exit

option to non-promoter shareholders in terms of the Exit Circulars

issued by SEBI, the company has resorted to reduction of share

capital under Section 66 of the Companies Act, 2013 leading to

compulsory buyback of shares. By such an action the promoters

have become 100% shareholders of Respondent No. 1 company by

using company's funds to buy-back the non-promoters' share,

which is certainly not the intention in providing voluntary exit to Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 36 of 42 these shareholders.

28. The Learned Sr. Counsel for Appellant has also

distinguished the judgment of Hon'ble Supreme Court in the

matter of Hindustan Lever Employees Union (supra) and G.L

Sultania (supra), by pointing out that the ruling of Hon'ble

Supreme Court holds that valuation of shares being a technical

and complex matter should not be interfered with. As opposed to

this, in the present case, the valuer has himself mentioned serious

drawbacks and assumptions while doing the valuation of shares

which make the valuation unreliable and unauthentic. Moreover,

the appointment of valuer in the manner stipulated by Exit

Circular dated 10.10.2016 has not been done and hence the

independent nature of the valuation exercise is itself doubtful and

under question.

29. We also consider the point raised by Learned Counsel for

Respondent No.1 Company that the principle of Res Judicata

would apply in the case since Appellant's contentions have already

been rejected by Securities Appellate Tribunal vide its order dated

23.11 2017 passed against the Appellant. In this connection, we

note that the principle of Res Judicata would apply if on the Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 37 of 42 questions and issues raised by the Appellant, the Security's

Appellate Tribunal has given its finding. A perusal of the SAT

order shows that the overall effect of SEBI's Exit Circular and

uncertainties in the valuation of share are not considered

therence. That being the case, we are of the opinion that the

principle of Res Judicata would not be applicable in the present

case viz-a-viz the order of SAT dated 23.11. 2017.

30. The Learned Counsel for Respondent No.1 Company has

cited the judgment of Delhi High Court on Reckitt Benchkiser

(India) Ltd. (supra), and Hon'ble Bombay High Court in the matter

of Sandvik Asia Limited (supra) to claim that there was no

illegality/inequality in offering exit opportunity to non-promoter

shareholders, because section 66 of the Companies Act, 2013

allows for reduction of share capital to be carried out in any way,

and permits extinguishing some of its shares without dealing in

the same manner with all the other shares of the same class. We

note that in the present case, the exit option to be given to public

shareholders is voluntary, and has to be undertaken in the

manner provided in Exit Circular dated 10.10.2016 which is

issued under the statutory mandate of SEBI. Therefore, we are of

the opinion that the two judgments cited by Learned Counsel for Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 38 of 42 Respondent No. 1 would not be applicable in the present case.

31. We also note that the judgment of Hon'ble Delhi High Court

in the matter of Nestle India Limited (supra) and of Hon'ble

Madras High Court in the matter of Parry's Confectionaries Ltd.

(supra) would also not apply in the present case because the use of

promoters' funds has been stipulated in the Exit Circular dated

10.10.2016 whereas in the cases cited the use of Securities

Premium Account in paying off shareholders was found to be

permitted under section 52 (1) of the Companies Act, 2013.

32. We also note that the judgment of Hon'ble Supreme Court in

the matter of GL Sultania vs SEBI (supra) regarding non-

interference by the court in the matter of valuation of shares would

hold when the experts have valued the shares using their expertise

and knowledge, whereas in the present case, the basis of selection

of the valuer and the valuation of shares done by the selected

valuer are both under question due to uncertainties in valuation

arising out of many assumptions. The valuer has himself

mentioned these drawbacks in the valuation report, and noted that

in case the cash reserves, bank balance etc. of the company were Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 39 of 42 to be taken into account, the valuation of shares by DCF method

would be substantially different from that suggested without

considering the cash reserves and bank balance of the company,

and has left it to the discretion of the company to take a

considered decision in the matter. We note that in the Board

meeting dated 13.10.2016 as well as the EGM dated 12.12.2016,

there is nothing in the minutes to show that the Board or the EGM

took these drawbacks and assumptions into consideration and

took an informed decision after due discussions.

33. We thus, find that the Respondent No. 1 company has not

provided voluntary exit option to its public shareholders but

resorted to compulsory buy-back of shares under section 100 -

104 of the Companies Act, 1956, when SEBI through its Exit

Circulars, particularly the Circular dated 10.10.2016, had

provided a very clear and unambiguous modality/ procedure for

providing an exit to non-promoter, public shareholders. Moreover,

in buying back the shares Respondent No.1 company used its own

funds available in the Securities Premium Account, when the

funds of the promoters were to be used for such purpose.

Moreover, as a result of compulsory buy-back of all shares,

promoters have become 100% shareholder of Respondent No.1 Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 40 of 42 company and the shares held by the promoter/non-promoter

shareholders have been cancelled/bought back without any option

given to them whether to accept or reject the offer made by the

company.

34. In view of the infirmities in the procedure employed by

Respondent No. 1 company in providing purported exit to its

public shareholders through compulsory buyback of their shares,

we find that the interests of the public shareholders have not been

duly protected and preserved, as was required to be done by

complying with the various Exit Circulars issued by SEBI in this

regard. The Impugned Order has erred grossly by not considering

these factors when passing the Impugned Order.

35. We, therefore, set aside the impugned order and direct that

the Respondent No.1 company shall provide voluntary exit to its

non-promoter, public shareholders in the manner outlined in the

Exit Circular of SEBI dated 10.10. 2016. Since it appears that a

number of non-promoter shareholders have already availed of the

buy-back of shares and accepted demand drafts/warrants in

payment, the company shall now engage an independent valuer

from amongst the SEBI approved panel and cause a valuation Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 41 of 42 exercise to be undertaken based on financials as they existed on

10.10.2016. Those non-promoter shareholders shall be paid the

difference amount if the valuation comes to be more than Rs.

107/- per share. The non-promoter shareholders who have not

accepted any payment till now shall be entitled to receive the full

value of their shareholding as per the accepted valuation. Further,

the non-promoter shareholders shall be given interest @ 9% p.a.

on the amount due to them for the period 10.10.2016 till the date

of this order. This entire exercise shall be completed within 75

days from the date of this order. With the above directions, the

appeal is disposed of.

36. In the facts and circumstances of the case, there is no order

as to costs.

(Justice Rakesh Kumar Jain) Member (Judicial)

(Alok Srivastava) Member (Technical)

New Delhi 16th November, 2022

/aks/ Company Appeal (AT) No. 287 of 2019 & I.A. No. 3313 of 2019 Page 42 of 42