Holding

The valuation was not vitiated by any fundamental error; the settlement terms control the valuation, so no control premium or discounted cash flow method was required, and interest at 9% for twelve months was to be paid.

Summary

The petitioners, shareholders of two pharmaceutical companies, filed three suits seeking to restrain the transfer of their 4.91% shareholdings and obtained interim injunctions, which were later vacated by the trial and High Courts. The parties subsequently entered into a written settlement whereby the respondents would purchase the shares and a chartered accountant was appointed to value the shares as going concerns using standard valuation methods, with the valuation to be final and binding. The petitioners challenged the valuation, alleging that a control premium should have been added, that the Vertin and Colopsa brand assets were improperly excluded, and that the discounted cash flow method should have been used. The Supreme Court examined whether judicial intervention was permissible in a valuation made under a settlement and held that the valuation was not vitiated by any fundamental error, that the settlement terms did not contemplate a control premium or DCF method, and that the exclusion of the brands was justified. Consequently, the Court dismissed the petitioners' applications for a supplementary valuation but directed the respondents to pay interest at 9% on the Rs. 8.24 crore share value for twelve months. The Special Leave Petitions were disposed of in accordance with the settlement.

Issues considered

The court may intervene in a valuation made by a court‑appointed valuer under a settlement if the valuation is fundamentally erroneous or a patent mistake.
Whether the omission of a control premium from the valuation constitutes a fundamental error.
Whether the exclusion of the Vertin and Colopsa brand assets from the valuation is permissible.
Whether the failure to apply the discounted cash flow method amounts to a patent mistake.
Whether interest should be awarded for the delay in payment of the share purchase price under the settlement terms.

Legislation cited

Code of Civil Procedure, 1908s. Order 39 Rules 1 & 2, s. Order 43 Rule 1
Companies Act, 1956s. 399(4)

Subjects

share transfervaluation of sharescontrol premiuminterim injunctionsettlement agreementinterest awardCompanies ActCivil Procedure Codediscounted cash flowchartered accountant valuation

Judgment

A DR. MRS. RENUKA DATLA
v.
SOLVAY PHARMACEUTICAL B.V. AND ORS.

OCTOBER 30, 2003

B [S. RAJENDRA BABU, P. VENKATARAMA REDDI AND
ARUN KUMAR, JJ.]

Companies Act, 1956 :

c Transfer of share holdings-Valuation ofshares-Petitioners filed three
suits in the trial court to resolve disputes on share holding-Interim injunction
vacated in one suit but continued in others-High Court upheld vacation of
interim injunction and further vacated interim injunctions in other suits-
Special Leave Petition filed, wherein parties entered into a settlement,
D appointing a Valuer for valuation ofthe shares in question-Petitioners objected
to valuation report as the control premium was not added in the value; values
of Verlin and Colopsa brands were not included; and discounted cash flow
method of valuation was not adopted-Held judicial intervention permissible
if valuation is made on fundamentally erroneous basis or a patent mistake
committed-Valuation not vitiated by any demonstrably wrong approach or
E fundamental error going to the root of the valuation-What has not been
specifically and clearly said in terms ofthe settlement cannot be super imposed
while interpreting the same-Terms of the settlement is the last word on the
subject-Addition of control premium to the value of shares was not
contemplated in the settlement-Discount cash flow method adopted while
p resorting to valuation based on future earnings, caused no prejudice-
Respondents to pay interest to the petitioners at the rate of 9% of the value
of shares, f!Xed by the valuer for 12 months, to meet the er.ds ofjustice, since
!he respondents retained the money for 12 months-:-Civil Procedure Code-
Order 43 Rule /.

G The dispute was regarding transfer of share holdings of two
pharmaceutical companies, the respondents. The petitioners filed three
suits in the trial court impleading the said companies and R-3. One of the
petitioners also applied for an interim injunction restraining transfer/
exchange of share holdings. The trial court did not allow the same and

H 20
RENUKADATLA v. SOLVAY PHARMACEUTICAL 21
also vacated the ex-parte injunction granted earlier. However, the ad A
interim injunction granted in the other two suits filed by other petitioners
remained in force. The aggrieved parties approached the High Court
under Order 43 Rule l CPC, which upheld the vacation of the injunction
by the trial court and further vacated injunctions continuing in the other
suits. The petitioners being aggrieved filed special leave petitions. B
·Thereafter, the parties settled all the disputes and the terms were reduced
to writing, signed by all the parties. The special leave petitions were kept
pending.

According to the terms of settlement, R-1 and R-3 agreed to purchase
4.91 % shares held by the petitioners in the two companies namely Duphar C
Pharma India Ltd. (DPIL) renamed as Solvay Pharma India Ltd. and
Duphar Interfran Ltd. (DIL), the petitioners agreed to sell the said shares.
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". He had to give D
opportunity to the respective parties to make their submissions and his
valuation was to be regarded as final and binding on all the parties to the
settlement. The relevant date for valuation was fixed as 31.3.2001. The
payment for shares was to be made within two weeks ·of the submission
of the valuation report and the statutory approvals thereof failing which E
the respondents were to pay interest at the rate of 15% p.a. simultaneously
with receipt of the total consideration for 4.91% shares, the petitioner was
to effect the transfer of shares. R-3 was to withdraw all litigation likewise,
the petitioners were to withdraw all related litigation as well as the
application filed under Section 399(4) of the Companies Act before the
Central Government. F
The Chartered Accountant submitted his valuation report as per the
settlement after assessing the intrinsic worth of the two companies as going
concerns; the value of 4.9! % shares was arrived at Rs. 8.24 crores.
Discounted cash flow method, which is the commonly used methodology
for future earning based valuation, was eschewed from consideration as G
no independent (third party) projections were provided and both parties
provided substantially different projections. The petitioners objected to
the valuations report on the grounds that the control premium was not
added; that the value of the brands Vertin and Colopsa, which continued
to be the property of DIL, was not included; that the discounted cash flow H
22 SUPREME COURT REPORTS (2003] SUPP. 5 S.C.R.

A method was not adopted though it is a generally accepted method, even
..
according to the Valuer.

The petitioners contended that notwithstanding the finality attached
to the decision of the Valuer, judicial intervention was possible if the
valuation was made on a fundamentally erroneous basis or a patent
B mistake had been committed.

Disposing of the matters, the Court

HELD : I. The principle that notwithstanding the finality attached
to the decision of the Valuer, intervention is permissible if the valuation
C was made on a fundamentally erroneous basis or a patent mistake was
committed by the Valuer, is acceptable but in the present case it cannot
be said that the same is vitiated by a demonstrably wrong approach or a
fundamental error going to the root of the valuation. [29-D, E)

D Dean v. Prince and Ors.. [1954) 1 All ER 749 and Burgess v. Purchase
& Sons, (1983 ( 2 All ER 4, referred to.

2. The Valuer adverted to the respective contentions with regard to
addition of control premium and indicated the implications of treating or
not treating 4.91 % shares as part of the combined shareholding of the
E promoters. He rightly refrained from going into this contentious issue. The
terms of settlement must be kept uppermost in the mind. it may be that
R-3 agreed to purchase only 4.91 % shares of the petitioners on account
of these shares· forming part of the promoters' shareholding and in that
sense they may have had some additional value. But, the terms of
settlement is the last word on the subject. The terms did not, either in
F express terms or by necessary implication, contemplate the valuation by
determining the intrinsic worth of 4.91 ".(o shares, having due regard to
their special or distinctive characteristics. The terms of the settlement
contemplated the valuation of the intrinsic worth of the two companies -
DIL and DPIL as going concerns and the value of 4.91 % shareholding by
G the petitioners had to be worked out on that basis. If the parties wanted
a special treatment to be given to these shares and a control premium, or
the like had to be added, it should have been specifically and expressly
mentioned in the terms of settlement. Such an important aspect would not
have been omitted while framing the terms of settlement if the parties had
agreed to the valuation on that basis. What has not been said in the terms
H of settlement in specific and clear terms cannot be superimposed while
RENUKA DA TLA v. SOLVAY PHARMACEUTICAL 23
.... interpreting the terms of settlement. The language employed in the terms A
of settlement presumably drafted after obtaining expert legal advice did
not even necessarily imply that special weightage in the form of 'control
premium' had to be given to these 4.91 % shares. If the petitioners had
insisted on the incorporation of such a provision, it could very well be that
the other party or parties would not have agreed to such a stipulation. B
(29-G, H; 30-A-E]

; 3. The Valuer gave relevant reasons for non-inclusion of Vertin and
Colopsa brands of drugs, which stood transferred to Solvay
Pharmaceuticals BV from Dupen Laboratories Pvt. Ltd. They were not
the existing assets of DIL. The petitioners themselves had put in issue in C
one of the suits filed, the legality of transfer and sought for a declaration
that DIL continued to be the proprietor of the two brands. They agreed
to withdraw various suits so they cannot be permitted to thwart the terms
of the settlement by going 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. Therefore, no apparent error D
is found in excluding those brands. [30-F-Hf

4.1. The reasons given by the Valuer for not adopting the discounted
cash flow method of valuation is not irrelevant. The said method is adopted
while resorting to valuation based on future earning. It is not the case of
the petitioners that the future earning based valuation is the only reliable E
method of 'earnings based valuation'. The petitioners did not place any
)
facts and figures to show that such method of vacation would result in a
definite increase in the share value going by independent projections. As
there were vast discrepancies between the projection given by the parties
and independent projections had not been provided, the Valuer chose the F
best possible method of evaluation by capitalizing the past earnings. While
doing so, the future maintainable profits based on past performance was
also an element that had to be gone into the calculation. No prejudice
whatsoever is caused to the petitioners by the earnings based valuation.
(31-B-Df G
4.2. The valuation in the instant case does not run counter to the
established principles. The Valuer had arrived at market based valuation
in addition to the other modes of valuation and observed that the
recommended value was higher than the intrinsic value or the market
based value, which gave the petitioners the benefit of higher valuation. H
24 SUPREME COURT REPORTS [2003) SUPP. 5 S.C.R.

A The profit earning method in the context of valuation of shares of a private ..
limited Company was also applied, though future earning based valuation
had not been done in the absence of reliable figures. The profit earning
capacity of the Company was not excluded from consideration. (32-B-DI

Commissioner of Gift Tax, Bombay v. Smt. Kusumben D. Mahadevia,,
B (1980) 2 SCC 238 and Commissioner of Wealth Tax v. Mahadeo Prasad Jalan
and Ors., (1973] 3 SCC 157, relied on.

5. The Valuer approached the question of valuation having due
regard to the terms of settlement and applying the standard methods of
C valuation. The valuation has been considered from all appropriate angles.
No case was made out that any irrelevant material has been taken into
account or relevant material has been eschewed from consideration. The
valuation is not vitiated by any fundamental errors. (32-El

6. Though the grant of interest, as prayed by the petitioners, from
D the stipulated date o~ubmission of valuation report is not called for, but ,
the ends of justice wouM.be adequately met if the respondents concerned
pay the interest at the rat(t(ff 9% on Rs. 8.24 crores, which is the value of
shares fixed by the Valuer, for a period of 12 months. Although, the
petitioners contested the valuation, delaying the implementation of the
settlement, there was a bona fide dispute and the respondents retained the
E money otherwise payable to the petitioners during this period of 12
months, which could have been profitably utilized. (32-G, HJ

CIVIL APPELLATE JURISDICTION : Special Leave Petition (C) No.
18035 of 2000.

F From the Judgment and Order dated 13.10.2000 of the Andhra Pradesh
High Court in C.M.A. No. 1923 of 2000.

WITH

Interlocutory Application No. 2 of 2002.
G
With S.L.P. (C) Nos. 18041-18042/2000

WITH

I.A. Nos. 3 and 4/2002.
H
RENUKA DATLA v. SOLVAY PHARMACEUTICAL [REDDI, J.] 25
Shanti Bhushan,- G.L. Sanghi, K.K. Venugopal, R.F. Nariman, S. A
Madhusudhan Babu, Mukesh K. Giri, Sanjay Pathak, Dhanjay Reddy, S.
Udaya Kumar Sagar, Ms. Bina Madhavan, Prasanth P., Ms. Meena C.R., K.
Maruthi Rao, Mrs. K. Radha, Mrs. Anjani Aiyagari and R. Ayyam Perumal
for the appearing parties.

The Judgment of the Court was delivered by B

P. VENKATARAMA REDDI, J. The dispute is between the
shareholders of two pharmaceutical companies which figure as respondents
herein. Suits were filed by the petitioners, who are the wife and husband, in
the City Civil Court, Hyderabad impleading the Companies and the third C
respondent by name Shri D. Vasant Kumar, the subject matter of the suits
broadly being the transfer of shareholdings. The suit O.S.No. 551 of 2000
was filed by the petitioner in S.L.P.No. 18035/2000. Along with the suit the
petitioner-plaintiff applied for an interim injunction restraining the defendants-
respondents I and 3 (Solvay Pharmaceutical B.V. and Shri D. Vasant Kumar)
from transferring/exchanging their shareholdings in defendant Companies 2 D
& 4 pending disposal of the suit. The other two Suits of similar nature were
filed by the petitioner in S.L.P.Nos. 18041 and 18042 of 2000 and interim
injunction was sought for. The I.A. filed in O.S.No. 551 of 2000 under Order
39 Rules I & 2 was dismissed by the learned trial Judge while vacating the
ex-parte injunction granted earlier. However, the ad interim injunction granted
in the suits filed by the petitioner in SLPs 18041 and 18042/2000 remained E
in force.
)

Aggrieved parties filed three appeals in the High Court under Order 43
Rule I 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 F
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 plaintiffs namely, Mrs.
Renuka Datla and Dr. Vijay Kumar Datla. On the initiative taken by this
Court while hearing the S.L.Ps., the parties settled the disputes and the terms
of mutual settlement were reduced to writing and they were signed by all the G
parties. This Court passed the following order on 15th July, 2002 to give
effect to the settlement.

"Counsel for the parties state that the dispute between them has been
settled. A copy of the terms of mutual settlement signed by the parties
has been filed in Court and initialled by the Court Master. Terms of H
26 SUPREME COURT REPORTS (2003] SUPP. 5 S.C.R.

A 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 Shri Y.M. Malegam, Chartered Accountant, M/s. S.B.
B Billimoria & Co., Mumbai-400 038."

According to the terms of settlement, Mis. Solvay Pharmaceuticals (R 1)
and.Mr. Vasant Kumar (R3) have agreed to purchase 4.91% shares held by
the petitioners in the two companies namely Duphar Pharma India Ltd. (DP1L
C renamed as Solvay Pharma India Ltd.) and Duphar Interfran Ltd. (OIL), the
petitioners having agreed to sell the said shares. Shri Y.H. Malegam, Chartered
Accountant, Mumbai had to evaluate the intrinsic worth of both the Companies
DPIL and OIL 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". Shri Malegam should give
D opportunity to the respective parties to make their submissions. The valuation '
of Shri Malegam shall be regarded as final and binding on all the parties to
the settlement. The relevant date for valuation was fixed -as 31st March,
2001. The payment for shares shall be made within two weeks of the
submission of the valuation report and the statutory approvals thereof failing
E which the respondents shall pay interest at the rate of ~ 5% p.a. simultaneously
with receipt of the total consideration for 4.91 % shares, the petitioner shall
effect the transfer of shares. The respondent Shri Vasant Kumar shall withdraw
the Suits filed in the City Civil Court, Hyderabad; likewise, the petitioners
shall withdraw the Suits filed by them in the City Civil Court and also the
appeals in this Court C.A. Nos. 8316-8321 of 2001 as well as the application
F filed by Smt. Renuka Datla under Section 399(4) of the Companies Act
before the Central Government. It was agreed that the S.L.P. shall be kept
pending for passing the final orders in terms of the settlement.

Mr. Malegam submitted his valuation report with his covering letter
dated 28.9.2002. After assessing the intrinsic worth of the two Companies as
G going concerns, the value of 4.91 % shares was arrived at Rs. 8.24 crores.

A brief reference to the salient features of valuation may be appropriate.

The Valuer considered three methods of valuation. (I) Asset based (2)
Earning based (3) Market based. While working out the earning based
H valuation, the value on the basis of capitalization of past earnings was adopted.
RENUKA DATLA v. SOLVAY PHARMACEUTICAL [REDDI, 1.] 27

The discounted cash flow method which is the commonly used methodology A
for future earnings based valuation was eschewed from consideration. The
reasons given by the valuer are; (I) No independent (third party) projections
have been provided; (2) Both parties have provided projections which differ
substantially as illustrated in Tables 1.1 and 1.2.

The basic principle and method of evaluation has been stated thus: B
"The intrinsic value of the share would be based on the asset and
earnings based value with appropriate weightages given to the two
methods. Since the value of a company/business would be more
influenced by its earnings value a higher weightage is given to the
earnings value as compared to its asset value. The asset value is c
considered as an integral part of the intrinsic value as it has a persuasive
impact. Thus, I have considered the following weightages for
determining the intrinsic value

) • Asset based value I/3rd weightage
D
• Earnings based value 2/3rd weightage

The market (for listed company - its market price) based value indicates
the value ascribed by the buyer/seller of the share at a given point in
time. This is influenced by
E
=> the floating stock and the supply and demand, which gets reflected
) in the volume and price of market transactions

=> market perceptions related to
- the overall market

- the industry
F
- the company

The recommended value is the higher of the intrinsic value or the
market based value. Though rationally speaking, the recommended
value should be the intrinsic value, it may be possible that the market G
based value at a given point of time is higher than the intrinsic value,
which is indicative of a bullish phase I perception of the market and/
or industry and/or the company. Therefore, to take into account this
practical reality, I have suggested the higher of the two.

The intrinsic worth of the two Companies and the value of 4.91% H
28 SUPREME COURT REPORTS [2003] SUPP. 5 S.C.R.

A shares in the two Companies are set out at Para 7.3.1. As already stated, the ,.
value of 4.91% shares has been worked out as 8.24 crores.

It was made clear that the above value has been determined on the basis
that 4.91% shareholding carries no special rights. In this context, the Valuer
has referred to the claim of the petitioners that the value of 4.91% holding
B should be higher than the value derived by applying the percentage to the
intrinsic worth of the Companies. In other words, the contention of the
petitioners was that the shares are to be valued on the basis that 4.91% forms
part of the combined holding of 25% of the Indian promoters' shareholding.
The respective contentions in this regard have been analysed by the Valuer
C as follows :-

"If the shares are to be valued on the basis of a holding of 4.91%,
then this holding does not give any special advantage to the holder
or in this case even to the purchaser since the respondents collectively
hold in the two companies 60.5% of the share capital of each company.
D On that consideration, the value of the shares can only be 4.91% of
the intrinsic worth of the two companies.

On the other hand, if the shares are to be valued on the basis that the
4.91% forms part of the combined holding of 25% and therefore
carries special rights, then there has to be a premium attached to the
E value of the shares. Accordingly, the value of the 4.91% shareholding
would be the value determined by taking 4.91% of the intrinsic worth
of the two companies arid adding thereto a control premium."

The Valuer concluded that he was not competent to decide upon this
controversial legal issue and therefore, the valuation was done without adding
F the element of control premium.

Another aspect debated before the Valuer was whether the value of the
'Vertin' and 'Colospa' brands which are the original research products of the
foreign promoter, should be considered in the valuation of the 4.91% shar~s
in OIL. It was contended by the petitioners that OIL was legally entitled to
G carry on its business in 'Vertin' and 'Colospa' along with other brands. The
rights over these two brands were transferred to Dupen Laboratories Private
Ltd. and such transfer, according to the petitioner, was in breach of contractual
obligations under the Trademark License Agreement dated 15.7.1975 etc. ...
The Valuer, after referring to the contentions, observed thus:
H " ........The brands VERTIN and COLOSPA have been purchased by
RENUKA DATLA v. SOLVAY PHARMACEUTICAL [REDD!, J.] 29
-1 Solvay Phannaceuticals BV from Dupen Laboratories Private Limited. A
As such, these are not the assets of OIL. OIL also has no investment
in Dupen Laboratories Private Limited. Whatever may be the claims
of the petitioners in this matter against the respondents, this is not a
matter which should affect the valuation of the shares of OIL."

The petitioners have objected to the valuation by filing IA Nos. 2, 3 B
and 4 of 2002 wherein a prayer has been made to submit a supplementary
• valuation report after adding 'control premium' to 4.91% shares and by
adopting the DCF method of valuation and including therein the value of
Vertin and Colopsa brands. In other words, the main objections are :

I. That the control premium has not been added; c
2. the value of the brands Vertin and Colopsa, which according to
the petitioners continued to be the property of OIL, has not been
included;
3. discounted cash flow method has not been adopted though it is
D
a generally accepted method, even according to the Valuer.

The learned senior counsel appearing for the petitioners relying on the
decisions in Dean v. Prince and Ors., [1954] I All ER 749 and Burgess v.
Purchase and Sons, [1983] 2 All ER 4 has contended that notwithstanding
the finality attached to the decision of the Valuer, the Court can intervene if
E
the valuation was made on a fundamentally erroneous basis or a patent mistake
has been committed by the Valuer. Even accepting this principle, we are
)
unable to hold that the valuation is vitiated by a demonstrably wrong approach
or a fundamental error going to the root of the valuation.

The first and foremost contention has focussed itself on the non addition F
of control premium. It is the contention of the petitioners that 4.91 per cent
shareholding which the respondents Mr. Vasant Kumar and another have
agreed to purchase is part of the promoters' shareholding of 25% and they
consciously avoided buying the other shares which were acquired by the
'- petitioners from the market. Certain special rights and privileges were attached
to these promoters' shareholding and, therefore, the intrinsic worth of the G
shares should have been assessed by adding the control premium. As already
noticed, the Valuer has adverted to the respective contentions in this regard
,.. and indicated the implications of treating or not treating 4.91 per cent shares
as part of the combined shareholding of the promoters. The Valuer rightly
refrained from going into this contentious issue. However, the Court has to H
30 SUPREME COURT REPORTS [2003) SUPP. 5 S.C.R.

A necessarily address itself to this issue canvassed before us. In answering this
question, the terms of settlement must be kept uppermost in the mind. It may
be that the respondent Shri Vasant Kumar agreed to purchase only 4.91 per
cent shares of the petitioners on account of these shares forming part of the
promoters' shareholding and in that sense they may have some additional
value. But, the Court has to go by the terms of settlement which is the last
B word on the subject. The terms do not, either in express terms or by necessary
implication, contemplate the valuation by determining the intrinsic worth of
4.91 % shares, having due regard to their special or distinctive characteristics.
The terms of the settlement, as already noticed, contemplate the valuation of
the intrinsic worth of the two companies OIL and DPIL as going concerns
C and the value of 4.91 per cent shareholding by the petitioners has to be
worked out on that basis. As rightly contended by the learned senior counsel
for the respondents, if the parties wanted a special treatment to be given to
these shares and a control premium or the like has to be added, it should have
been specifically and expressly mentioned in the terms of settlement. Such an
important aspect would not have been omitted while framing the terms of
D settlement if the parties had agreed to the valuation on that basis. What has
not been said in the terms of settlement in specific and clear terms cannot be
superimposed by the Court while interpreting the terms of settlement. The
language employed in the terms of settlement which we presume would have
been drafted after obtaining expert legal advice does not even necessarily
E imply that special weightage in the form of 'control premium' has to be
given to these 4.91 per cent shares. If the petitioners had insisted on the
incorporation of such a provision, it could very well be that the other party
or parties would not have agreed to such stipulation. The Court cannot, '
therefore, give any direction in regard to control premium.

F The next objection is directed against the non-inclusion of Vertin and
Colopsa brands while valuing the intrinsic worth of the company OIL. In our
view, the learned Valuer has given relevant reasons for non-inclusion of the
said brand of drugs which stood transferred to Solvay Pharmaceuticals BV
from Dupen Laboratories Pvt. Ltd. They are not the existing asse.ts of OIL.
G In fact, the petitioners have put in issue in one of the suits filed by them the
legality of transfer and sought for a declaration that OIL continues to be the
proprietor of the two brands. The petitioners have agreed to withdraw various
suits. In any case, 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
H as per the relevant records have to be taken into account by the Valuer and
RENUKA DATLAv. SOLVAY PHARMACEUTICAL [REDDI ,J.] 31
that has been done. We, therefore, find no apparent error in excluding those A
brands.

The other objection is about DCF method of valuation which the Valuer
has described as a commonly accepted method in adopting 'future earning
based valuation'. This involves "discounting the net free cash flow of a
business at an appropriate discount rate". We have already adverted to the B
reasons given by the Valuer for not adopting this method of valuation. Those
reasons cannot be said to be irrelevant. It is contended that if the data and
projections furnished by the parties is not reliable the Valuer should have
secured the relevant data from independent sources or could have called for
further particulars. We find no merit in this argument. The DCF method is C
adopted while resorting to valuation based on future earnings. It is not the
case of the petitioners that the future earning based valuation is 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.
When there are vast discrepancies between the projection given by the parties D
and independent projections have not been provided, the Valuer has chosen
the best possible method of evaluation by capitalizing the past earnings. In
doing so, the future maintainable profits based on past performance is also
an element that has gone into the calculation. No prejudice whatsoever is
shown to have been caused to the petitioners by the earnings based valuation. E
The petitioners have relied on the decision of this Court in Commissioner
of Gift Tax, Bombay v. Smt. Kusumben D. Mahadevia, [1980] 2 SCC 238.
After referring to Mahadeo Jalan's case [1973] 3 SCC 157 wherein certain
principles regarding valuation of shares were laid down, it was observed
~: F
"It is clear from this decision that where the shares in a public limited
company are quoted on the stock exchange and there are dealings in
them, the price prevailing on the valuation date would represent the
value of the shares. But where the shares in a public limited company
are not quoted on the stock exchange or the shares are in a private G
limited company the proper method of valuation to be adopted would
be the profit.earning method. This method may be applied by taking
the dividends as reflecting the profit·earning capacity of the company
on reasonable commercial basis but if it is found that the dividends
do not correctly reflect the profit·earning capacity because only a H
32 SUPREME COURT REPORTS [2003) SUPP. 5 S.C.R.

A small. proportion of the profits is distributed by way of dividends and
a large amount of profits is systematically accumulated in the form
of reserves, the dividend method of valuation may be rejected and the
valuation may be made by reference to the profits. The profit-earning
method takes into account the profits which the company has been
making and should be capable of making and the valuation, according
B to this method is based on the average maintainable profits."

We do not think that the valuation in the instant case runs counter to
the principles laid down therein. As seen from Enclosures 6.1 and 6.2 to the
valuation report, the Valuer had arrived at market based valuation in addition
C to the other modes of valuation and observed that the recommended value is
the higher of the intrinsic value or the marked based value. Thus, the petitioners
had the benefit of higher valuation. The first principle laid down in the above
decision has been kept in vie•v. Moreover, the profit earning method which
has bem referred to in the above decisions in the context of valuation of
shares of a private limited Company has also been applied, though future •
D 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 anyway infringe the principles laid down in the said decisions to
the extent they are applicable.

E In final analysis, we are of the view 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
p consideration by the Valuer. The plea that the valuation is vitiated by
fundamental errors cannot but be rejected.

In the result IA Nos. 2 to 4/2002 are liable to be rejected. However,
there is one direction concerning the interest which we consider it appropriate
to give in the given facts and circumstances of the case. Though the grant of
G interest, as prayed for by the petitioners, from 31.05.2002 - the stipulated
date 9f submission of valuation report is not called for, we feel that the ends
of justice would be adequately met if the respondents concerned are directed
to pay the interest at the rate of 9 per cent on 8.24 crores, which is the value
of shares fixed by the Valuer, for a period of 12 months. True, the petitioners
H contested the valuation and thereby delayed the implementation of settlement.
RENUKA DATLA v. SOLVAY PHARMACEUTICAL (REDD!, J.) 33

However, having regard to the bona fide nature of the dispute and the fact A
that the respondents have retained the money otherwise payable to the
petitioners during this period of 12 months and could have profitably utilized
the same, we have given this direction taking an overall view. In the result
!As 2,3 and 4 of 2002 are dismissed subject to the above direction as to
payment of interest. The SLP(c) Nos. 18035, 18041-18042 of 2002 shall B
stand disposed of in tenns of the settlement on record coupled with the
direction to pay the sum of Rs. 8.24 crores representing the value of 4.91 %
shares together with interest @ 9 per cent for a period of 12 months within
a period of four weeks from today subject to the receipt of share transfer
fonns and the fulfilment of other fonnalities by the petitioners. The suits
which have given rise to these SLPs, and other suits and proceedings mentioned C
in the Memorandum of settlement shall stand dismissed as withdrawn.
Accordingly, the SLPs are disposed of. No order as to costs.

.1 A.Q . Matters disposed of.