Supreme Court of India
G.L. SULTANIA AND ANR.versusTHE SECURITIES AND EXCHANGE BOARD OF INDIA AND ORS.
- Citation
- 2007 INSC 607
- Decided
- 16 May 2007
- Disposal
- Dismissed
- Bench
- B P SINGH
Holding
The Court held that SEBI’s approval of the offer price, based on the independent valuer’s report that complied with Regulation 20(5), was reasonable and not subject to judicial interference.
Summary
The appellants challenged the price approved by SEBI for a public offer to acquire the minority shares of Hindustan National Glass and Industries Ltd., alleging that the valuation by the independent valuer did not comply with Regulation 20(5) of the Takeover Code. SEBI appointed an independent merchant banker, Patni & Co., whose valuation (Rs. 63.50‑Rs. 64.17 per share) was accepted despite higher valuations submitted by the appellants. The Supreme Court held that the Board had acted reasonably, that the valuer had considered all mandatory parameters and applied accepted valuation principles, and that the Court should not interfere with an expert’s valuation absent a fundamental error. Consequently, the appeals were dismissed.
Issues considered
- The adequacy of the valuation of shares under Regulation 20(5) of the Takeover Code.
- Whether SEBI was required to pass a reasoned order before approving the offer price.
- Whether the Court can intervene in the expert valuer’s report absent patent error or omission of required factors.
- The propriety of rejecting the appellants' high valuation reports.
Legislation cited
Subjects
SEBITakeover CodeRegulation 20(5)share valuationpublic offerminority shareholdersindependent valuerboard discretionreasoned ordervaluation methods
Judgment
....
A G.L. SULTANIA AND ANR.
v.
THE SECURITIES AND EXCHANGE BOARD OF INDIA AND ORS.
MAY 16, 2007
B [B.P. SINGH AND ALTAMAS KABIR, JJ.]
Securities and Exchange Board of India Act, 1992-Section 157-
Securities and Exchange Board of India (Sz;bstantial Acquisition of Shares
C and Takeovers) Regulations, 1997-Regulation 20(5)-Public offer made by
acquirer to purchase shares of minority shareholders at a price under the
Regulations-Objections by shareholders before Board contending that the
offer price was not fixed in accordance with the parameters laid down in the
Regulations-Board appointing an independent valuer and approving draft
offer letter by adopting valuation done by the independent valuer-Appeals
D by shareholders before Appellate Tribunal dismissed-Correctness of-Held,
Court b·enerally should not interfere with an expert valuer's report unless it
is shown that some well accepted principle of valuation has been departed
from without any reason or that the approach adopted is patently erroneous
or that the parameters laid down in the Regulations have not been considered
E by the vaiuer-On facts, the valuer had considered all the factors relevant
under the Regulations and have adopted a reasonable approach which
warrants no interference and the Board has'acted in a reasonable manner
to secure a reasonable price for the shares of the shareholders.
The shares of respondent no. 4 - target company- were originally held
F by a family of four brothers equally. About 40% of the share capital was
transferred in favour of one of the brothers-respondent no. 3 - pursuant to a
family settlement arrived at between tlie brothers. Thereafter, a Memorandum
ofUnderstandin~ was entered into between one of the brothers and respondent
no. 3 to sell certain percentage of shares to the latter at the rate of Rs. 40
per share. This agreement attracted the provisions of Securities and Exchange
G Board oflndia (Substantial Acquisition of Shares and Takeovers) Regulations,
1997 (fakeover Code) under which a public offer was made by the respondents
to acquire the balance share capital of the target company at Rs. 40 per share.
Having regard to the objections raised by the appellants that the offer price r
was very low and that it had not been determined in accordance with the
H 1152
G L SULTANIA 1·. SECURITIES AND EXCHANGEBOARDOF INDIA 1153
parameters laid down in Regulation 20(5) of the Takeover Code, the Board A
appointed an Independent valuer which valued the shares at the rate of Rs.
63.50 by one method and at Rs.64.17 by another method. On the objections by
the respondents about the higher valuation, the shares came to valued by
another valuer which valued the shares at Rs. 60.04. The appellants filed
objections on the low valuations and filed two valuation reports of their valuers B
before the Board showing the higher valuation at Rs.408/- and Rs. 590-/- per
share to support their case. The Board rejected the objections of tt1e appellants
and accepted the valuation report given by the independent valuer and approved
the draft letter of offer. Appeals preferred by the appellants against the order
of the Board before Securities Appellate Tribunal were dismissed.
c
In appeal to this Court, the appellants contended that the price approved
by the Board was not a fair price and that the valuer had failed to take into
account all the relevant factors enumerated in Regulation 20(5) of the
Takeover Code; that the Board failed in performance of its !luty as required
under the Act and the Regulations and consequently failed to pass appropriate D
directions to revise the offer price in terms of the mandate under the Takeover
Code; and that the valuer erred in relying on the principles approved by this
Court in Hindustan Lever Employees' Union v. Hindustan Lever Ltd. & Ors.,
[1995) Supp. 1 SCC 499 as it was applicable in the present case.
The contesting respondents 2 and 3 contended that the valuation of E
shares was done having regard to the parameters laid down under Regulation
20(5) of the Takeover Code and that the Board had taken all necessary
precautions to safeguard the interest of the shareholders so as to ensure
payment of best price for the shares to be sold by them; that, under the
Regulation, the Board cannot play the role of a valuer itself and that it should F
only be satisfied that the valuation of shares is not arbitrary, perverse or
capricious and that the expert valuer has taken into account all the factors
mentioned in the Regulation; and that the Court cannot interfere with the
valuation of shares made by an expert unless the valuer has lost sight of the
requirements of the Takeover Code or committed such grav~ error of law or
principle which necessitated Court's interference. G
Dismissing the appeals, the Court
HELD: 1.1. The provisions in the Securities and Exchange ~ard oflndia
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997
(Takeover Code) are intended to ensure fairness to the shareholders of the H
company. Therefore, when a public offer made under the Takeover Code is
1154 SUPREME COURT REPORTS (2007) 6 S.C.R.
A challenged on the ground that the shares had not been properly valued and
the price offered in the public offer document does not represent the fair price
of the share in question, the Court must examine whether the provisions of
the Takeover Code have been scrupulously observed, and whether the Board
as the regulatory authority has exercised its authority and discretion in a
B proper manner so as to ensure fairness to the shareholders.
(Para 25f (1164-D-Gf
1.2. The valuation of shares is not only a question offact, but also raises
technical and complex issues which may be appropriately left to the wisdom
of the experts, having regard to the many imponderables which enter the
C process of valuation of shares. If the valuer adopts the method ofvaluation
prescribed or in the absence of any prescribed method, adopts any recognized
method ofvaluation, his valuation cannot be assailed unless it is shown that
the valuation was made on a fundamentally erroneous basis, or that a patent
mistake had been committed, or the valuer adopted a demonstrably wrong
approach or a fundamental error going to the root of the matter.
D (Para 32] (1167-B, CJ
Mis S.C. Cambatta & Co. Private Ltd., Bombay v. Commissioner of
Excess Profits Tax, Bombay, AIR (1961) SC 1010 = (1961) 2 SCR 805;
Commissioner ofGift Tax, Gujarat v. Executors and Trustees ofthe Estate of
Late Shri Ambala/ Sarabhai, Ahmedabad, (1988) (Supp) SCC 115; Bharat
' -
E Hari Singhania & Ors. v. Commissioner of Wealth Tax (Central) & Ors., (1994)
Supp 3 SCC 46; Renuka (Datla) Mrs. v. Solvay Pharmaceuticals B. V. & Ors.,
(2004) l SCC 149; Duncans Industries Ltd. v. State of U.P. & Ors., (2000] 1
SCC 633 and Miheer H. Ma/at/a/ v. Mafatla/ Industries Ltd., [1997] 1 SCC
579, referred to.
F
1.3. The parameters laid down under Regulation 20(5) of the Takeover
Code are by no means exhaustive. The Regulation mandates that the
...,..
parameters expressly laid down must in all cases be considered by the valuer
since they are basic and essential to the valuation ofinfrequently traded shares
of a company. If the valuation report discloses non-consideration of any of the
G enumerated parameters, the report shall stand vitiated for that reason. This,
however, does not prevent the valuer from considering other relevant factors
according to accepted principles of valuation of shares.
(Para 36) [1169-B, CJ
1.4. Not any one of the parameters laid in Regulation 20(5) of the
H Takeover Code is in itself decisive. Many imponderables enter the exercise
of share valuation. It must, therefore, follow that the weightage to be given to
G.L.SULTANIA•·. SECURITIESANDEXCHANGEBOARDOFINDIA 1155
the different factors that go into the process of valuation, must be left to the A
wisdom, experience and knowledge of the experts in the field of share
valuation. Such being the method of share valuation which involves subjective
and objective considerations, there is considerable scope for difference of
opinion even amongst experts. (Para 37] (1169-D, E]
1.5. The Board, as the regulator, is not bound to accept the offer price B
which is required to be incorporated in the public offer, if it suspects that the
offer price does not truly represent the fair value of the shares determined in
accordance with Regulation 20(5) of the Takeover Code. It has, therefore, been
provided that if considered necessary, the Board may require valuation of such
shares by an independent merchant banker. In doing so, the Board has to act C
prudently and within the limits of its jurisdiction. If the valuation determined
by the acquirer or his merchant banker agrees with the valuation of the
Board's valuer, more or less, then the Board has no option but to accept the
offer price of the acquirer. (Para 41] (1170-E, F, G]
1.6. The Regulations does not require that the Board has to pass a D
reasoned order for all it does as a regulator. If there is material on record to
show that the Board applied its mind to the offer made and considered it in
the light of the relevant provisions of the Regulations and all factors
enumerated therein, its decision to approve the offer price to be incorporated
in the letter of offer cannot be faulted on the ground that it has not passed a
reasoned order. In the present case, the Board not only considered the offer E
document submitted by the acquirers along with the report of the valuer but
also took precaution to seek the opinion of another expert valuer in view of
complaints made by some shareholders. The appellants cannot therefore make
a grievance that their objections were not given due weight The Board acted
in a reasonable manner and in consonance with the Regulations. F
(Para 45) [1172-D; 1173-B, C, E]
1.7. For determining the value of shares of the companies for the purpose
of equivalence and to determine the ratio in which the shares were to be
allotted, the valuer had to apply the same accounting principles of valuation
which are usually applied by the valuer in valuation of shares for other G
purposes as well. Hence, the valuer had not committed a mistake in applying
the principles approved by this Court in Hindustan Lever Employees' Union.
[Para 61] [1176-E, F)
Hindustan Lever Employees' Union v. Hindustan Lever Ltd & Ors.,
H
1156 SUPREME COURT REPORTS (2007] 6 S.C.R.
A (1995) Supp. 1sec499, referred to.
1.8. This Court would not interfi:re with the valuer's report unless it is
shown that some well accepted principle of valuation has been departed from
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
B was made on a fundamentally erroneous basis or that the valuer adopted a
demonstrably wrong approach or a fundamental error going to the root of the
matter. The valuer has not committed any such error which may justify this
Court's interference. The valuer had considered all the factors relevant under
Regulation 20(5)(c) of the Takeover Code and had adopted a reasonable
C approach which does not call for interference by this Court.
(Paras 80 and 81) (1180-G-H; 1181-A, B)
1.9. The valuers of the appellants have valued the shares at abnormally
high rates. This great disparity itself furnishes a good ground for rejecting
these reports particularly, when the valuation reports of three other valuers
D had valued the shares at much lower rates. It is not as if the regulator, newly,
the Board did not take notice of these reports. The Board committed no error
in accepting the valuer's report. The Board has acted in a reasonable manner
and made its best efforts to secure a reasonable price for the shares of the
shareholders. It has exercised its discretion wisely and we find no reason to
interfere. (1181-D, E, F, G)
E
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1672 of2006.
From the Judgment and Order dated 08.12.2005 of the Securities Appellate
Tribunal, Mumbai in Appeal Nos. 134 and 138 of2005.
F WITH
C.A. Nos. 1704 and 1740 of2006.
Dushyant Dave, S.N. Mukherjee, Sr. Adv., Ramesh Singh, Shruti
Choudhary, Avinash Menon and R. Banerjee (for Khaitan & Co. A.0.R.) for
G the Appellants.
C.A. Sundram, Altaf Ahmed and Ranjeet Kumar, Sr. Adv., Amar Gupta, ,_
Somashekhar Sundaresan, Karan Vhariyog, Mayank Mishra, Inklee Barrooah,
Rohini Musa, Bina Gupta, Pallavi Raj Chowdhary, Bhargava V. Desai, Rahul
Gupta, Rakhi Ray and S.S. Ray for the Respondents.
H
G.L. SUL TANIA 1·. SECURITIES AND EXCHANGE BOARD OF INDIA [B.P. SINGH. l.] l J57
The Judgment of the Court was delivered by A
B.P. SINGH, J. I. This batch of appeals has been preferred by the
appellants under Section I 5Z of the Securities and Exchange Board of India
Act, 1992 (hereinafter referred to as the 'Act') impugning the common
judgment and order of the Securities Appellate Tribunal, Mumbai dated
December 8, 2005 disposing of eleven appeals before it. While Ci~il Ap~
No.1672/2006 arises out of Appeal Nos. 134 and 138 of2005; Civil Appeal
No.1704/2006 has been filed against Appeal Nos. 13 7, 159, 160, 161 and 164
of2005 and Civil Appeal No.1740 of2006 has been filed against Appeal Nos.
158, 162, 163 and 139 of 2005. The Appellate Tribunal by its impugned
judgment and order dismissed all the appeals. C
2. The grievance of the appellants before the Securities Appellate
Tribunal was that the Securities and Exchange Board (hereinafter referred to
as the 'Board') as well as the Merchant Banker had not properly valued the
shares of the target company in accordance with the parameters laid down
in Regulation 20(5) of the Securities and Exchange Board oflndia (Substantial D
Acquisition of Shares and Takeovf ·s) Regulations, 1997 (hereinafter referred
to as the 'Takeover Code'). Respondent No.3, who is the real contesting
respondent, on the other hand contended before the Appellate Tribunal that
the valuation of shares was done having regard to the parameters laid down
under Regulation 20(5) of the Takeover Code and the Board had taken all
necessary precautions to safeguard the interest of the shareholders so as to E
ensure payment of best price for the shares to be sold by them. It was further
contended that the shares were valued by three reputed firms of valuers and
the Board ultimately approved the highest price per share determined by the
firm of valuers appointed by the Board namely, Mis. Patni and Company.
F
3. Learned counsel for the appellants argued at length in his effort to
satisfy us that the price approved by the Board for incorporation in public
offer under the provisions of the Takeover Code was not a fair price and that
in reaching that valuation the valuer had committed mistakes in as much as
it had not properly appreciated the requirements of Regulation 20 (5) of the
Takeover Code. On the other hand counsel for the respondents with equal G
vehemence supported the conclusion reached by the Appellate Tribunal and
submitted that the valuers had taken into account the parameters laid down
under Regulation 20(5) of the Takeover Code and a valuation so arrived at
could not be successfully challenged. It was also submitted that valuation
of shares is a technical matter and this job must be entrusted to the specialists H
1158 SUPREME COURT REPORTS [2007) 6 S.C.R.
A in the field. Interference by the Court must be limited to those cases where
it is shown that while working out the valuation the valuer completely lost
sight of the requirements of Regulation 20 (5) of the Takeover Code or
committed some such grave error of law or principle which necessitated
Court's interference and resultantly necessitated a fresh valuation in accordance
with the provisions of the Takeover Code. Learned senior counsel submitted
B that in the facts of this case there was no justification for not accepting the
va:uation suggested by Mis. Patni and Company who had been appointee for
the purpose by the Board.
4. Though the issue involved in the appeals lies within a narrow compass,
C in view of the submissions vehemently urged on either side it becomes
necessary to recapitulate the essential facts which provide the background
in which the dispute has arisen. These facts are more or less admitted by
the parties.
5. The acquirers are Respondent Nos. 2 and 3 herein namely, ACE Glass
D Containers Ltd., and Shri C.K. Somany respectively. Respondent No.4 is the
target company Hindustan National Glass and Industries Ltd.
6. It is not in dispute that the Somany family comprising of four brothers
managed several companies including the target company. All the brothers
held equal shares in the target company and the public share-holding in the
E target company was negligible, that is less than 0.30%. The shares of the
target company are infrequently traded. In the year 1994 about 40% of the
equity capital of the target company was transferred to Shri C.K. Somany
pursuant to a family settlement arrived at between the brothers. According
to the appellants on August 5, 1994 there was an agreement between Shri C.K.
F Somany, Respondent No.3 and his brothers for the sale of the entire balance
•
shareholding in the target company held by his brothers to Respondent No.3,
Shri C.K. Somany at the price of Rs.267/- per share. This, however, is
disputed by Respondent No.3, Shri C.K. Somany. In this background disputes
arose between the parties and the brothers of Respondent No.3, Shri C.K.
Somany filed Civil Suit No.3 5 of 1997 before the Calcuatta High Court against
G Respondent Nos.2 and 3 and others for specific performance of the agreement
dated August 5, 1994. In that suit an ex-parte order of injunction was passed
restraining Respondent No.3 Shri C.K. Somany from selling the shares obtained
from the other brothers in the target company. In his written statement
Respondent No.3 Shri C.K. Somany made a counter claim and prayed for a
H mandatory injunction directing Shri R.K. Somany to sell 3,40,000 shares of the
G.L. SULTANIA 1•. SECURITIES AND EXCHANGE BOARD OF INDIA [B.P. SINGH,J.J 1159
target company to him @ Rs.15 per share, and the remaining two brothers to A
sell their shareholding in the target company @ Rs.40 per share which was
the prevailing price on the date of the filing of the suit.
7. During the pendency of the Suit Shri S.K. Somany one of the brothers
of Respondent No.3 offered to sell 7.30% share held by him in the target
company on the basis of price mutually acceptable to the parties. In view B
of the agreement arrived at bew.·een the two brothers, Respondent No.3 Shri
C.K. Somany moved the Calcutta High Court for modification of the interim
order thereby permitting him to acquire 7.30% shares ofShri S.K. Somany in
the target company. This triggered the provisions of the Takeover Code
which obliged Respondent No.3, Shri C.K. Somany to make a public C
announcement to acquire shares in accordance with the Takeover Code. In
accordance with Regulation 16 of the Takeover Code he was obliged inter-
alia to include in the public announcement the minimum offer price for each
fully paid up or partly paid up share. The application made by Respondent
No.3, Shri C.K.Somany for exemption for making an open offer was rejected
by the Board and he was directed to comply with the requirements of the D
Takeover Code particul. Tly those contained in Chapter 3 thereof. · A
Memorandum of Understanding had been recorded on October 7, 2002 between
Respondent No.3, Shri C.K. Somany and his brother Shri S.K. Somany to
acquire 7.30% of the shares of the latter in the target company @ Rs.40 per
share. However, in view of the directions of the Board, Respondent No.3 was E
required to make an open offer to all the share-holders of the target company
including his brothers.
8. The public announcement was made by respondent Nos.2 and 3
herein to acquire the balance 19.19% share of the target company held by the
minority shareholders on November 30, 2003. The offer price proposed to be p
mentioned in the public announcement was Rs.40 per share as determined by
the Merchant Banker namely, Mis. UTI Bank on the basis of the MOU dated
October 7, 2002 between Respondent No.3 Shri C.K. Somany and his brother
Shri S.K. Somany for sale of the shares of the target company @ Rs.40 per
share.
G
9. The appellants complained to the Board that the price offered for the
, shares in the public announcement was very low and had not been determined
.... in accordance with the parameters laid down in Regulation 20(5) of the
Takeover Code. Since the price offered by the acquirers respondents 2 and
3 as determined by the Merchant Banker was not acceptable to the appellants, H
1160 SUPREME COURT REPORTS [2007) 6 S. C.R.
A respondents 2 and 3 in consultation with the Merchant Banker namely, }
Mis. UT! Bank appointed Mis. Deloitte Haskin and Sells, a firm of Chartered
Accountants, 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 Ps. The appellants still persisted in their objection that the value of
B each share determined by the aforesaid firm of valuers was not correct.
I0. Before approving the draft letter of offer, and having regard to the
objections raised by the appellants, the Board appointed Mis. Patni & Company
to value the shares. The aforesaid valuers namely, Mis. Patni & Company
valued the shares of the target company at the rate of Rs.63 .50 per share by
C one method and Rs.64.17 by another method which had the approval of this
Court in Hindustan lever Employees' Union v. Hindustan lever ltd. and
Ors., (1995] Supp. I SCC 499.
11. Respondent Nos. 2 and 3 were not satisfied with the higher valuation
.
of M/s. Patni and Company and, therefore, the Merchant Banker wrote to the
D Board objecting to the same on March 9, 2005. The Board permitted the
Merchant Banker to get the shares valued by any other Chartered Accountant.
In these circumstances, the Merchant Bankers in consultation with the Board
appointed Mis. T.R. Chadha and Company to value the shares of the target
company. According to the report of Mis. T.R. Chadha & Company submitted
on April 13, 2005 the fair market value of each share of the target company
E was Rs.60.04.
12. From the facts stated above it will appear that the shares of the
target company have been valued by three firms of Chartered Accountants,
namely, Mis. Deloitte Haskin and Sells who valued the shares of the target
F company at Rs.43.02 per share, Mis. Patni and Company who valued each
share of the target company at Rs.64.17 and Mis. Chadha and Company who
valued each share of the target company at Rs.60.04.
13. It may be noticed at this stage that by letters dated March 11, 2004
and June 11, 2004 appellant G.L. Sultania had complained to the Board against
G the valuation of shares by the Merchant Banker and while doing so he had
enclosed copies of two valuation reports of Mis. Anand K. Associates and
M/s. Sanjay Bajoria and Associates valuing the shares of the target company
at much higher rates namely, Rs.408/- and Rs.590/- per share.
14. In the circumstances set forth above the Board accepted the valuation
H report of M/s. Patni and Company and by its order of August 19, 2005
G.L. SULTANIA r SECURITIES AND EXCHANGE BOARD OF INDIA [B.P. SINGH. J.] 1161
approved the draft Jetter of offer incorporating the revised offer including A
interest. Certain other matters were also incorporated in the original public
announcement as directed and a corrigendum was issued accordingly. The
offer was opened on August 31, 2005 and closed on September 19, 2005. The
appellants tendered the shares without prejudice to their rights and contentions
but challenged the order of the Board before the Appellate Tribunal.
B
15. The Appellate Tribunal by its order of December 8, 2005 dismissed
the appeals preferred before it. Having noticed the background facts in which
the controversy arose, the appellate Tribunal observed that the valuation of
shares could be impeached on the ground of fraud, mistake or miscarriage of
justice. It could also be interfered with if there was an apparent or arithmetical C
error or the valuers took into account something, which ought not to have
been taken into account or interpreted the regulations wrongly, or proceeded
on some erroneous principles. The interest of the shareholders had to be
protected. The appellate Tribunal could also be asked to interfere if it was
found that the offer price arrived at was so extravagantly high or so
inadequately low that one could infer that the valuer must have committed D
an error in working out the offer price for the public offer. The appellate
Tribunal, however, noticed that there was no allegation of ma/a fide either
against the Board in approving the public offer or against the three valuers
whose reports were considered by the Board. Since the shares were not
traded fr equently the valuers had to keep in mind the pthrinciples incorporated .E
in Regu 1ation 20 (5) of the Takeover Code. It noticed at if only clauses (a)
and (b) of Regulation 20(5) were to be considered, the only negotiated price
under (a) being Rs.40/- per share the minimum offer price to be incorporated
in the public offer could be Rs.40/- per share. However, the merchant bankers
as well as the valuers also considered the matters which were relevant under
Regulation 20(5)(c) of the Takeover Code. After taking into account all F
relevant considerations Mis. Deloitte had valued each share at Rs.43/- while
Mis. Patni and Company valued at Rs.64.17 ps. per share and Mis. Chadha
and Co. at Rs.60.04 per share. There is no dispute that the offer price
incorporated in the public offer is more than what it could be under Regulation
20(5)(a) and (b) of the Takeover Code. The only question, therefore, which
fell for consideration was whether the shares had been valued by the valuers G
keeping in view the other parameters enumerated in clause (c) of Regulation
20(5).
16. It was argued before the appellate Tribunal that neither the Board
nor the Merchant Banker applied their mind in determining the fair market H
1162 SUPREME COURT REPORTS [2007] 6 S.C.R.
A value of the shares which resulted in gross under-valuation of the shares. It
was also argued that the principles laid down in Hindustan Lever Employees'
Union v. Hindustan Lever Limited and ors., [1995] Supp I SCC 499 did not
apply to the facts of this case as that was a case of amalgamation whereas
in the instant case Regulation 20(5) had to be strictly complied with. An
argument was also advanced that since Mis. Ace Glass Containers Ltd. was
B a subsidiary of the target company its assets should also have been taken
into account while valuing the shares of the target company. It was the case
of the appellants that the total assets of the subsidiary company should be
added to the total assets of the target company, which was the holding
company, and the value of the shares of the target company be worked out
C on that basis. The appellants also contended that the valuation report of
Patni & Co. did not take into account the return of net worth, the book value
of the shares, or the earning per share. If these factors were considered the
value of each share would have been more than Rs.2001- each.
17. The appellate Tribunal noticed the fact that the Board had exercised
D its discretion under the proviso to sub-regulation (5) of Regulation 20 by
requiring the shares to be valued by an independent merchant banker or an
independent Chartered Accountant of minimum 10 years' standing or a
public financial institution. Since the appellants objected to the valuation
report of Mis. Deloitte the Board exercised its discretion and appointed
E Mis. Patni & Co. to go into the matter and submit a valuation report.
18. The appellate Tribunal held that Mis. Ace Glass Containers Ltd. was
a sick company under the BIFR. The valuers had taken into account the net
value of its shares. The submission that the entire assets of its subsidiary
should have been taken into account in working out the value of the shares
p of the target company was untenable. It further held that the said Mis. Ace
Glass Containers Ltd. was not a subsidiary of the Target Company within the
meaning of that term in Section 4( I) of the Companies Act since the target
company did not own more than 1/2 in nominal value of the equity share
capital of Mis. Ace Glass Containers Ltd. It also held that the Target
Company did not control the composition of the Board of Directors of Mis.
G Ace Glass Containers Ltd.. Moreover even Mis. Bajoria, whose valuation
report had been relied upon by the appellants, proceeded on the basis that
Mis. Ace Glass Containers Ltd. was not a subsidiary company of the target ,.
company. This position was also accepted by Shri Sultania, one of the
appellants before it. The appellate Tribunal held that there was nothing on
H record on the basis of which it could be reasonably concluded that the
G.L. SULTANIA••. SECURITIES AND EXCHANGE BOARD OF INDIA [B.P. SINGIUJ J J63
valuation reports of the three valuers suffered from the vice of perversity or A
gross error.
19. Considering the submission that Mis. Patni & Co. had not taken into
account the net worth of the target company, it held that return on net worth
was only indicative of the profitability of the company and was not in itself
a method of share valuation. It was, however, one of the factors to be B
considered in evaluation. M/s. Patni & Co. applying the ratio in Hindustan
Lever Ltd. (supra) had calculated the yield value and in paragraph 3.2.I
worked out the return on net worth for the year 2001-2002 to be 5.38 % taking
into account the book value as the basis for valuation.
20. So far as the net asset value was concerned it held that the accounting C
law mandated exclusion of revaluation from computation of net worth.
Therefore, the contention that revaluation of resources ought to have been
added to the net worth was rejected as untenable. It was held that in the
instant case the calculation was done in accordance with the provisions of
{the Companies Act; Sick Industrial Companies (Special Provision) Act, 1956 D
and the SEBI (Disclosure and Investor Protection Guidelines), 1999. It also
rejected the contention that the earning per share had not been worked out
by the valuer and in this connection reference was made to paragraph 3.3.2
wherein the earning per share had been calculated. Regarding adopting
15 % as the capitalization ratio the appellate Tribunal held that the CCI
Guidelines which were adopted by the Government of India and the Controlle; E
of Capital Issues had been taken into account and even though the SEBI had
abolished the CCI guidelines, the principles and the norms enunciated therein
could be taken into account.
21. The appellate Tribunal did not accept the valuation reports of F
Mis. Agarwal and Mis. Bajoria 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.
G
22. In view of these findings the appellate Tribunal held that the Board
. had acted strictly in terms of the Takeover Code and approved the public
offer. There was no ground, therefore, to assail the approval to the public
offer. The valuation of shares by Mis. Patni & Co. 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 H
1164 SUPREME COURT REPORTS (2007] 6 S.C.R.
A unreasonable.
23. Aggrieved by the order of the. appellate Tribunal the appellants have
filed the instant appeals under Section 15(Z) of the Securities and Exchange
Board of India Act, 1992. The appeal to this Court against the decision or
the order of the Securities Appellate Tribunal may be entertained on any
B question of law arising out of such order.
24. Counsel for the appellants submitted that questions of law do arise
for consideration of this Court. He referred to several decisions of this Court
and submitted that the Board failed to appreciate that the valuation report of
Patni & Co. failed to take into account all the relevant factors enumerated in
C Section 20(5) of the Take Over Code, in particular he referred to the factors
mentioned in clause (c) of sub-regulation (5) of Regulation 20 and submitted
that for failure to properly appreciate those factors the Board ought to have
rejected the report of the aforesaid valuer.
D 25. It cannot be denied that the Board under the Act is a regulatory
authority charged with the duty to protect the interest of investors in securities
and to promote the development of, and to regulate the securities market, by
such measures as it thinks fit. The Takeover regulations have been framed
with a view to provide transparency in transfers arising out of substantial
acquisition of shares and takeovers. The object is to bring about fairness in
E such transactions as also to protect the interests of the investors in securities.
In the Takeover Code there are provisions which are intended to protect the
interests of small shareholders so that in any substantial acquisition of shares
they get a fair price for the shares transferred by them. The entire scheme
designed for this purpose, including the making of a public offer as also a
F counter offer, is to protect the interests of the investors, particularly the
smaller ones who run the risk of getting an unfair deal in such transactions.
Ultimately the entire exercise is undertaken under the regulatory eye of the
Board with a view to ensure fairness to the shareholders of the company.
Therefore, when a public offer made under the Takeover Code is challenged
on the ground that the shares had not been properly valued and the price
G offered in the public offer document does not represent the fair price of the
share in question, the Court must examine whether the provisions of the
Takeover Code have been scrupulously observed, and whether the Board as
the regulatory authority has exercised its authority and discretion in a proper
,.
manner so as to ensure fairness to the shareholders. At the same time one
H cannot lose sight of the fact that a public offer made by a person intending
G.L. SULTANIA 1•. SECURITIES AND EXCHANGE BOARD OF INDIA[B.P. SINGH.J.] 1165
to acquire substantial shares in a company is a commercial venture of A
acquisition of shares, but the law steps in obliging him to offer a fair price
for the shares which the shareholders may part with in response to the
statutory public offer.
26. We may notice some of the decisions cited at the Bar by counsel
for the parties on the question of scope of interference by this Court in such B
appeals.
27. In Mis. S.C. Camba/ta and Co. Private Limited, Bombay v.
Commissioner of Excess Profits Tax, Bombay AIR (1961) SC 1010 = (1961]
2 SCR 805, a question arose in connection with the valuation of the goodwill. C
This Court observed that the goodwill of the business depends on. a variety
of circumstances or a combination of them. The location, the service, the
standing of the business, the honesty of those who run it, and the lack of
competition and many other factors go individually or together to make up
the goodwill, though locality always plays a considerable part. M the same
time, locality is not everything. In the case of a theatre or restaurant, what D
is catered, how the service is run and what the competition is, contribute also
to the goodwill. In that case a question arose whether the goodwill of the
company in question was calculated in accordance with law. This, the Court
observed was a question of law. It was found that the Tribunal had taken
into account only the value of the lease hold of the site to the subsidiary
company, and rejected the other considerations which go to make up the E
goodwill of the business. This Court concluded that it was manifest that the
matter of goodwill needed to be considered in a much broader way than what
the Tribunal did. A question of law did arise in the case. It will thus appear
that this Court held that a question of law did arise for consideration if in
valuing the goodwill only one factor was considered and other ignored i.e. F
all relevant factors were not considered. The question was whether the
goodwill was calculated in accordance with law.
28. In the case of Commissioner of Gift Tax, Gujarat v. Executors and
Trustees of the Estate of Late Shri Ambalal Sarabhai, Ahmedabad [1988]
Supp sec 115 shares in a private limited company not quoted on the stock G
exchange were gifted. In valuing the shares the High Court adopted the break
up value method for determination of the value of shares. It was contended
that the profit earning method was more appropriate in the facts of the case.
In this context the Court observed :-
"The correct principle of valuation applicable to a given case is a H
I-
1166 SUPREME COURT REPORTS (2007) 6 S.C.R.
A question of law. The parties can agree upon a principle pennissible
under and recognized by law. If two or more alternative principles are
equally valid and available, it might be pennissible for the parties to
agree upon one of the alternative modes of valuation in preference to
another. Jn this case, the revenue cannot be said to be precluded
from urging the correct legal position. In the ultimate analysis, it
B requires to be held that the view of the High Court as to the principle
of valuation in detcnnining the value of the kind of shares concerned
in this case cannot be h!! Id to be correct."
This decision is clearly an authority for the proposition that the correct
C principles of valuation applicable to a given case is a question of law.
29. Bharat Hari Singhania and Ors. v. Commissioner of Wealth Tax
(Central) and Ors .. [1994] Supp 3 SCC 46 was a case which arose under the
Wealth Tax Rules. The aforesaid rules provided only one method for assessing
market value of unquoted equity shares namely, the break up method. In this
D context it was observed that where a method of valuation is prescribed by
the rules, then notwithstanding the fact that there may be several methods
of valuing an asset, and even assuming that there was another method which
was more appropriate, still the method chosen by the rules, which was also
one of the recognized methods, must be adopted. This was a case of
determination of market value of unquoted equity shares.
E
30. Reliance is placed on the decision of this Court in Dr. Renuka Darla
(Mrs.) v. Solvay Pharmaceuticals B. V. and Ors., [2004] I SCC 149 for the
proposition that even where finality attaches to the decision of the valuer, the
Court could still intervene if the valuation was made on a fundamentally
F erroneous basis, or a patent mistake had been committed by the valuer, or that
the valuation was vitiated by a demonstrably wrong approach or a fundamental
error going to the root of the valuation. ·Tue same decision also lays down
that if the valuer applied the standard methods of valuation, considered the
matter from all appropriate angles without taking into account any irrelevant
material or eschewing from consideration any relevant material, his valuation
G could not be challenged on the ground of its being vitiated by fundamental
error.
31. In Duncans Industries Ltd. v. State of U.P. and Ors., [2000] 1 SCC
633 this Court held that the que:tion of valuation is basically a question of
fact and this Court is nonnally reluctant to interfere with the finding on such
H a question of fact if it is based on relevant material on record. Similarly in
G.L. SULTANIA 1·. SECURITIES AND EXCHANGEBOARDOF INDIA (B.P. SINGH.J.) 1167
Miheer H. Ma/at/al v. Mafatlal Industries Ltd (1997] l SCC 579 this Court A
sounded a note of caution observing that valuation of shares is a technical
and complex problem which can be appropriately left to the consideration of
experts in the field of accountancy. So many imponderables enter the exercise
of valuation of shares.
32. These decisions clearly lay down the principle that valuation of B
shares is not only a question of fact, but also raised technical and complex
issues which may be appropriately left to the wisdom of the experts, having
regard to the many imponderables which enter the process of valuation of
shares. If the valuer adopts the method of valuation prescribed, or in the
absence of any prescribed method, adopts any recognized method of valuation, C
his valuation cannot be assailed unless it is shown that the valuation was
made on a fundamentally erroneous basis, or that a patent mistake had been
committed, or the valuer adopted a demonstrably wrong approach or a
fundamental error going to the root of the matter. Where a method of
valuation is prescribed the valuation must be made by adopting scrupulously
the method prescribed, taking into account all relevant factors which may be D
enumerated as relevant for arriving at the valuation.
33. Learned counsel for the appellant rightly submitted that the valuation
report of Mis. Patni and Company must be tested on the touchstone of
Regulation 20(5) of the takeover code which provides as follows:-
E
"Offer price - (I) The offer to acquire shares under regulation 10, 11
or 12 shall be made at a price not lower than the price determined as
per sub-regulation (4) and (5).
F
(5) Where the shares of the target company are infrequently traded,
the offer price shall be determined by the acquirer and the merchant
banker taking into account the following factors:-
(a) the negotiated price under the agreement referred to in sub- G
regulation (I) of regulation 14;
(b) the highest price paid by the acquirer or persons acting in
concert with him for acquisitions, if any including by way of
allotment in a public or rights or preferential issue during the
twenty-six week period prior to the date of public announcement. H
1168 SUPREME COURT REPORTS [2007) 6 S. C.R.
A (c) other parameters including return on networth, book value of
the shares of the target company, earnif!g per share, price earning
multimple vis-a-vis the industry average;
Provided that where considered necessary, the Board may require
valuation of such infrequently traded shares by an independent
B merchant banker (other than the manager to the offer) or an
independent chartered accountant of minimum ten years' standing
or a public financial institution.
Explanation ; (i) For the purpose of sub-regulation (5), shares shall
be deemed to be infrequently traded if on the stock exchange, the
c annualized trading 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.
D (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
E 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
F with reference to the actual number of days for which the shares have
been listed".
34. 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
G company under the Memorandum of Undertaking dated 7th October, 2002 was
Rs.401- 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 not less than Rs.40/- per share. This cannot be disputed.
H 35. The thrust of the challenge to the valuation is founded on non-
G.L. SULTANIA 1•. SECURITIES AND EXCHANGEBOARDOFINDIA(BP. SINGH,!.] 1169
compliance with clause (c) of Regulation 20(5). It is argued before us that A
either the parameters enumerated therein have not been considered at all, or
if considered there is complete disregard of well settled principles of valuation
of shares depicting clearly a fundamentally erroneous approach.
36. At this stage we may make a few observations about Regulation
20(5). This Regulation applies to infrequently traded shares of a company. B
It lays down the parameters that must be taken note of and considered in
arriving at the valuation. But it must be understood that the parameters laid
down are by no means exhaustive. There are many other considerations
which may be factored into any valuation process. What the aforesaid
Regulation, however, mandates is that the parameters expressly laid down C
therein must in all cases be considered by the valuer since they are basic and
essential to the valuation of infrequently traded shares of a company. If the
valuation report discloses non consideration of any of the enumerated
parameters, the report shall stand vitiated for that reason. This however does
not prevent the valuer from considering other relevant factors according to
accepted principles of valuation of shares. D
37. It may also be observed that not any one of the parameters is in
itself decisive. All the factors have to be considered and the valuation arrived
at. The Regulation itself does not prescribe the weightage to be assigned to
different enumerated parameters. As noticed earlier, many imponderables
enter the exercise of share valuation. It must therefore follow that the E
weightage to be given to the different factors that go into the process of
valuation, must be left to the wisdom, experience and knowledge of the
experts in the field of share valuation. Such being the method of share
valuation which involves subjective and objective considerations, there is
considerable scope for difference of opinion even amongst experts. Even if F
the correct principles are applied, different valuers may arrive at different
valuations. Each one of them may be right, yet the valuations may differ.
Mathematical precision and exactitude are not the attributes of share valuation,
for at best the valuation arrived at by an expert is only his opinion as to what
the value of the share should be. No doubt the variation may not be very
wide between two valuations prepared honestly by two valuers applying the G
correct approach and the correct principles, but some variation is unavoidable.
38. There is one other factor which cannot be ignored. The Regulation
seeks to protect the interest of an investor by ensuring that he gets a fair
price for his shares in the target company.
H
1170 SUPREME COURT REPORTS (2007] 6 S.C.R.
A 39. For the acquirer the decision to acquire shares is a commercial
decision. The same block of shares may have different value for different
acquirers. An acquirer who intends to control the management of the target
company by acquisition of the shares in question, without acquiring majority
shares, may value the shares differently from an acquirer who is already in
management of the Company but wishes to acquire the majority of shares to
B strengthen his voting rights. A majority shareholder may also wish to acquire
st.ares so as to hold 75% of the equity capital which will ensure passage of
special resolutions. Such an acquirer may value the shares differently from
his point of view. Similarly a shareholder already holding 75% shares may
acquire more shares only to consolidate his holding in the target company.
C It may not suit his objectives to pay a higher price than the other three
categories noticed above.
40. For the purpose of Regulation 20(5) we are not concerned with the
price that a particular acquirer may be willing to offer on subjective
consideration or for his special reasons. The Regulation is meant to provide
D guidance to arrive at a fair value of shares objectively which the acquirer is
expected to offer to the shareholders of the target company.
41. The question there arises as to who shall determine whether the
valuation of shares is reasonable and acceptable. Undoubtedly Regulation
20(5) mandates that the offer price shall be determined by the acquirer and
E the merchant banker taking into account the factors mentioned therein. The
Board as the regulator is not bound to accept the offer price which is required
to be incorporated in the public offer, if it suspects that the offer price does
not truly represent the fair value of the shares determined in accordance with
Regulation 20(5). It has therefore been provided that if considered necessary
p the Board may require valuation of such shares by an independent merchant
banker. The purpose is only to ensure that the valuation arrived at is a fair
valuation after taking into consideration all the enumerated factors in
Regulation 20(5). In doing so the Board has to act prudently and within the
limits of its jurisdiction. It cannot object to the price offered by the acquirer
unless it has reasons to suspect that the price offered has not been determined
G fairly taking into account the enumerated factors. In case of doubt, it may
require valuation of the shares by an independent merchant banker or chartered
accountant. If the valuation determined by the acquirer or his merchant
banker agrees with the valuation of the Board's valuer, more or less, then the
Board has no option but to accept the offer price of the acquirer. It may
H suggest changes in the draft letter of offer, but it is doubtful if it can compel
GL SULTANIA•·. SECURITIES ANO EXCHANGE BOARD OF INDIA [B.P. SINGH. J.j 1171
the acquirer to improve his offer even if the offer price is found to be fairly A
arrived at after due consideration of the matters enumerated in the Regulation.
We do not wish to express any considered opinion in this regard, because
that question does not arise in the facts of this case. The acquirer in the
instant case did not challenge, rather accepted the suggestion of the Board
to incorporate in his offer document the offer price based on the valuation B
report of Mis. Patni and Company which was the highest.
42. Learned counsel for the appellants submitted that the Board in
approving the letter of offer of the acquirers failed in performance of its duty
as required under the Act and Regulations and consequently failed to pass
appropriate directions including, to revise the offer price in terms of the C
mandate under the Takeover Code. According to him, the Board ought to
have passed a reasoned order after giving to the appellants and other
complainants an opportunity of hearing before determining the offer price for
the public announcement. He contended that apart from the report of Mis.
Patni and Company, the Board had before it several communications of the
appellant pointing out the statutory scheme and evidence to support the D
contention that the offer price approved by the Board was substantially lower
and ought to be much higher. In particular he referred to the valuation reports
obtained by the appellant from Mis. Anand K. Associates and Mis. Sanjay
Bajoria and Associates which supported a much higher valuation of the
shares in question.
E
43. On the other hand, counsel for the respondent/acquirers submitted
that under Regulation 20(5) the Board does not exercise appellate jurisdiction
over the valuation but only exercises its powers akin to judicial review as
a regulator to oversee that there is no palpable illegality. The Board being
a regulator is bound to oversee that substantial acquisition of shares and F
takeovers occurs in accordance with the relevant Regulations. It must be
satisfied that the valuation of shares is not arbitrary, perverse, or capricious
and that the expert valuer has taken into account all the factors mentioned
in the relevant Regulation applicable to the acquisition in question. It does
not play the role of a valuer itself, but whenever considered necessary it may
get the shares valued by an expert nominated by it. This is necessarily so G
because the valuation of shares lies within the domain of experts and the
Board cannot arrogate to itself the role of an expert valuer though it cannot
be denied that the members of the Board are conversant with the working of
the securities market and in that sense they may have considerable experience.
Reliance was placed on the judgment of this Court in Miheer H. Mafatlal H
1172 SUPREME COURT REPORTS (2007] 6 S.C.R.
A (supra) and submitted that the Court must not sit in appeal over opinion
rendered by experts.
44. Learned counsel appearing on behalf of the Board submitted that
the Board had done all that was necessary before approving the letter of offer.
It had considered the letter of offer and also the complaints received by it
B from the appellants and others. Since there was a serious dispute as to the
ro~~~~~~~~~~~~~~~~~
shares independently. After receiving the valuation report of Mis. Patni and
Company, it also considered the grievance of the acquirers against the said
report and permitted them to get a valuation report from another expert valuer.
C That is how the acquirers got a report from Mis. T.R. Chadha and Company.
Having considered the letter of offer, the three valuation reports before it in
the light of the provisions of the Regulations, the Board was satisfied that
the valuation of shares done by Mis. Patni and Company represented the fair
value of the shares. It was also the highest and therefore favourable to the
interest of shareholders. There is nothing in the scheme of Regulation 20
·D which requires the Board to pass a reasoned order while approving the offer
price declared in such public offer document.
45. We are of the considered view that the submission urged by the
appellants is not tenable. There is nothing in the Regulations which requires
the Board to pass a reasoned order for all it does as a regulator. Being a
E regulator the Board has to take various steps, issue directions from time to
time and pass appropriate orders. While considering the offer price to be
incorporated in the letter of offer it must no doubt apply its mind to the offer
price proposed to be incorporated in the letter of offer and the basis thereof.
If it finds that the offer price is reasonable and the valuation report is
F satisfactory it may approve the offer price to be incorporated in the letter of
offer. The power of the Board under Regulation 44(f) must be understood in ._
the context of the scheme of the Regulations. Any price which it might
"determine" under the aforesaid Regulations must also be determined having
regard to the factors enumerated in Regulation 20(5). If it finds that the
valuer's report takes into consideration all the relevant factors and the offer
G price has been determined applying the principles applicable to such valuation,
it may have no reason to differ. It may not approve the offer document, if
it finds the price offered to be low and unreasonable, applying the parameters
laid down in Regulation 20(5). It must, therefore, follow that the Board must
approve the price offered unless it is shown that the valuation arrived at must
H be faulted for non compliance with the Regulations which lay down the norms
G.L SULTANIA 1·. SECURITIES AND EXCHANGE BOARD OF INDIA(BP. SINGH.I.] 1173
and parameters which must be observed. It cannot be lost sight of that the A
scheme of the Regulations is to permit an intending acquirer to make his offer
to the shareholders whose shares are sought to be acquired. Despite the
regulatory powers of the Board, the offer still remains that of the acquirer and
not the Board. The Board has only to be satisfied that the offer made is
reasonable and fair and in the interest of the shareholders. In case of doubt
it may seek the opinion of another expert valuer which impliedly supports the B
contention that it is not expected to act as an expert valuer. If there is material
on record to show that the Board applied its mind to the offer made and
considered it in the light of the relevant provisions of the Regulations and
all factors enumerated therein, its decision to approve the offer price to be
incorporated in the letter of offer cannot be faulted on the ground that it has C
not passed a reasoned order. The facts of this case disclose that the Board
not only considered the offer document submitted by the acquirers along with
the report of the valuer, it took t'1e precaution to seek the opinion of another
expert valuer in view of complaints made by some shareholders. The appellants
cannot therefore make a grievance that their objections were not given due
weight. Thereafter, it also gave an opportunity to the acquirers to get the D
opinion of another expert valuer. Ultimately the Board reached the conclusion
that the share price fixed by the expert valuer appointed by it represented the
true and fair value of the shares in question and being the highest was also
in the interest of the shareholders. The suggestion of the Board to the
acquirers to incorporate in the public offer, the offer price on the basis of the E
valuation report of Mis. Patni and Company was accepted by the acquirers
and the offer price earlier suggested by them was enhanced. We are, therefore,
satisfied th:it the Board acted in a reasonable manner and in consonance with
the Regulations. Only after considering all relevant matters it approved the
offer price to be incorporated in the public offer document.
F
46. We shall deal with the valuation reports ofM/s. Anand K. Associates
and Mis. Sanjay Bajoria and Associates later.
47. It was next contended that the appellate authority also failed to
exercise its powers inasmuch as it failed to appreciate that the Board had
clearly failed in discharge of its duty and had further failed in not exercising G
powers conferred upon it which were to be exercised in favour of the investors.
We find from the impugned order of the appellate authority that it has
considered all aspects of the matter and has reached a firm conclusion that
the Board had acted in a judicious manner having regard to all relevant
considerations. There were good reasons to reject the valuation reports of H
•
1174 SUPREME COURT REPORTS (2007) 6 S.C.R.
A Mis. Sanjay Bajoria and Associates and Mis. Anand K. Associates submitted
by the appellants.
48. We shall now consider the specific points raised by the appellants
to support the contention that the relevant factors were not considered by
Mis. Patni and Company and both the Board as well as the appellate authority
B failed to notice non-compliance of the provisions of Regulation 20(5) which
vitiated the report of Mis. Patni and Company and also the approval of the
offer price by the Board.
49. Before we advert to the rival submissions urged on behalf of the
C parties pertaining to specific points in the report of Mis. Patni and Company,
it is necessary first to notice the salient features of the report.
50. Mis. Patni and Company has proceeded on the basis of financial
data made available to it by the target company, which included inter- alia its
audited financial statements for the financial years ending 31st March, 2002
D and 2003, and the unaudited results of quarter ended June, 2003. It 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. It observes that each method proceeds on different fundamental
assumptions, which have greater or lesser relevance, and at times there is no
relevance of a particular methodology to a given situation. While the Net
E 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.
The common method employed to derive the value of the business is to
F multiply estimated maintainable earnings with the price earning ratio of
comparable companies in the industry. The report also refers to the approval
of this Court in Hindustan Lever Employee's Union, (supra) of the method
adopting a combination of all three methods of valuation after giving
appropriate weightage to them.
G 51. Applying the Profit Earning Capacity Method, it has calculated the
"yield value" by taking the average of 9 years, from 1993-1994 to 2001-2002.
The year 2002-2003 was excluded for the reasons recorded in the report which
show that on account of abnormal situations the profits of the Company had
decreased. In Hindustan Lever, the principle that for working out the average
profit, profit of only those years which were normal and not affected by
H abnormal situations should be considered, was approved. Taking the
G.L. SULTANIA.-. SECURITIES AND EXCHANGE BOARD OF INDIA(B.P. SINGH,J.) 1J75
capitalization rate as 15% as suggested for manufacturing Companies in A
erstwhile Controller of Capital Issues guidelines, the value of shares has been
worked out to Rs.55.06 per share.
52. By adopting the Net Asset Value Method the value of Rs.77 per
share has been worked out by dividing the Share Capital of the Company plus
Reserves and Surplus (excluding Revaluation Reserve and Contingent B
Liabilities) by the number of equity shares of the Company.
53. Applying the Market Value Method, having regard to the infrequently
traded shares of the Company, the average of market price of six months prior
to October 7th , 2002, the reference date as stated in the letter of offer has C
been taken resulting in a value of Rs.66.87 paise per share.
54. Combining all the three values and giving them appropriate weightage,
. value of each share has been worked out to Rs.64.18 paise. In applying the
weightage, the precedent in Hindustan Lever (supra) has been followed.
55. The valuer M/s. P~tni and Company has expressly noticed the D
provisions of Regulation 20(5). It has concluded that applying clause (a) and
(b) of Regulation 20( 5) the offer price of the shares cannot be less than
Rs.40/- per share being the rate at which the shares were negotiated under
the agreement referred to in sub-regulation (I) of Regulation 14, also being
the price at which the acquirers were permitted to buy the shares of the target E
company by the Calcutta High Court.
56. Adverting to the parameters enumerated in clause (c) of Regulation
20(5), the Book Value has been worked out to Rs.83.02 paise per share.
57. Profit Earning Capacity Value has been worked out to Rs.34.39 paise F
per share.
58. The earning per share has been worked out by multiplying average
earning per share by Industry Profit Earning which is taken as 9.60 for the
sector Glass and Glass Products (as per capital market dated March 1-14,
2004). So calculated the price per share comes to Rs.67.97 paise. G
59. After taking the values worked out by the three methods PECV, NA V
and EPS and giving them weightage, the value per share comes to Rs.57.55
per share.
60. To arrive at the fair market value, WJ/s. Patni and Company after H
1176 SUPREME COURT REPORTS (2007] 6 S.C.R.
A analyzing the financial results of the target company for the financial years
1993-1994 to 2002-2003, as also the unaudited results of three quarters of the
current year, decided to exclude the financial year 2002-2003 on account of
abnormally low profits in that year as a result of abnormal circumstances. It
also decided to exclude the current financial year because of abnormally high
profits as a result of general boom in economic scenario and upward trend
B of Rupee in comparison to Dollar. Thereafter applying the same weightage
as in Hindustan Lever, (except for ·the r.iarket price) the fair value per share
has been found to be Rs.63.50 paise. The weightage for market value was
reduced from 2 to I because in the case of infreque:itly traded shares, the
market price has less relevance.
c 61. We have carefully examined the report submitted by Patni and
Company. It is quite apparent to us that the report cannot be assailed on the
ground that it does not take notice of various factors mentioned in Regulation
20(5)(c) of the Takeover Code. The valuer has in fact referred to the said
Regulations and enumerated the factors to be taken into account. It has
D thereafter proceeded to make the necessary calculations after giving due
weightage to various factors. In doing so the valuer has relied upon the
principles approved by this Court in Hindustan Lever Employees Union
(supra). Learned counsel for the appellants submitted that the principles
approved in Hindustan Lever Employees Union (supra) were not relevant
E and should not have been applied by the valuer. This was because that was
a case of amalgamation of two companies and it was in that context that the
valuation of the shares had to be determined. It is true that Hindustan Lever
Employees Union (supra) related to a case of amalgamation but for determining
the value of the shares of the companies for the purpose of equivalence and
to determine the ratio in which the shares were to be allotted, the valuer had
F to determine the value of the shares of the amalgamating companies applying
the same accounting principles of valuation which are usually applied by the
valuer in valuation of shares for other purposes as well. We, therefore, find
no substance in the submission of learned counsel for the appellants that the
valuer had committed a mistake in applying the principles approved by this
G Court in Hindustan Lever Employees Union (supra).
62. The question then arises as to whether having noticed the relevant
factors the valuer adopted the accepted principles and practice of valuation.
63. We heard the parties at length on this question only to find out
H whether there was any such error committed by the valuer which vitiated its
G.L SULTANIA•·. SECURITJESANDEXCHANGEBOARDOFINDIA(B.P.SINGH.J.) 1177
report. We have found none. In fact the argument before the Court was that A
in following a particular practice or giving a particular weightage or selecting
a date for assuming a particular value, the valuer committed mistakes.
64. On the other hand the respondents have supported the reasons
given by the valuer in its report. The valuer has really estimated the value
of the shares adopting all the three well-known methods of valuation, namely B
- the net assets value method, the market value method and the pr~fit earning
capacity method. Thereafter after giving appropriate weightage it has worked
out the value of the shares of the target company.
65. We shall briefly notice some of the objections raised before us by
the appellants and the reply of the respondents to those objections only to c
demonstrate that they are really matters within the realm of the experts to
determine and the Court may not be justified in delving into those matters,
which must be left to the wisdom, expertise and experience of a qualified
valuer.
D
66. According to the appellants while applying the Earning Per Share
method for arriving at an alternate value the valuer took P/E ratio at 9.6
instead of 20.9. According to the appellants the figure pertaining to March
1 to 14, 2004 which had been taken into account by the valuer was not
relevant and it should have taken the figures relevant to the public
announcement date 13th November, 2003 and the letter of offer dated 25th E
August, 2005 which was represented in the issues of Capital Market relevant
to the period, November 1-2003, and not March 1-14, 2004. According to him
in both the periods there were only three profit making companies and
therefore there was no reason why the valuer should have taken the industry
PIE ratio as represented during the period March 1-14, 2004.
F
67. On the other hand the respondents contended that the Capital
Market which is a fortnightly magazine gives the necessary data in regard
to each industry. The data pertaining to every industry category reflect the
"full year'', the "latest quarter" and the "trailing twelve months" figures. The
Capital Market source itself says that the companies with an earning per G
share (EPS) of less than (1) are not considered. According to him the
"trailing twelve months" reflects the most current computation of the price
earnings multiple and that period includes more companies with an EPS of
more than ( 1) and was, therefore, more representative of the market.
68. The valuer in its report has observed that the Industry PIE of 20.9 H
1178 SUPREME COURT REPORTS (2007) 6 S.C.R.
A is not the correct indicator of the industry. As the industry (glass and glass
products) covers 12 companies out of which 6 companies are loss making
hence having a negative PIE ratio and the other 3 companies having minimal
profit, the Industry Composite P/E ratio of 20.9 is calculated based on PIE
ratio of 3 profit making companies only, thereby ignoring the performance of
other 9 companies. Moreover PIE ratio of glass and glass product industry
B is very fluctuating because of infrequent trading of shares of most of the
companies in this sector. It is for these reasons that P/E ratio of 9.6 (Source
- Capital Market dated 1-14, 2004 sector glass and glass product) was
,. considered as the industry PIE ratio.
c Rs.13369..27The appellants then submitted that the Net Asset Value comes to
if reserves and surplus as per consolidated accounts of the target
company and subsidiaries at book value was taken. This was not done by
the valuer. 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 which also the valuer failed to do.
D 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.
70. Learned counsel for the respondents submitted in reply that ACE
E 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 inunediate 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 ea.-ning capacity of ACE
F Glass with the profit earning capacity of the target company. The valuer was
aware of the existence of the accounts of the subsidiaries and has proceeded
to value the shares of the target company in accordance with the norms for
valuation of shares. He further submitted that cumulative revenue of the two
wholly owned subsidiaries is around 4 % of the revenue of the target company.
Similarly the cumulative assets of the two subsidiaries (on a net block basis)
G is also around 2 % of the total net block of the target company. He submitted
that it is well recognized that a shareholder in a company does not ipso facto
have a right in the assets of the company and that his right is Ol)lY to receive
dividends from the company. The value of the assets of the target company
cannot be included to the value of the assets of the holding company, more
H so in the case of an associate company,
G.L. SULTANIA 1•. SECURITIES AND EXCHANGE BOARD OF INDIA (B.P. SINGH,J.) 1179
1. 71. The valuer has also recorded reasons to the effect that it is not A
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.
B
72. The appellants made a grievance that the capitalization ratio of
15 % was taken by Patni & Company whereas the capitalization ratio should
have been 8 %. It was submitted that the guidelines issued by the CCI had
been repealed and, therefore, reliance could not be placed on the aforesaid
guidelines. C
73. To this the respondents have replied by saying that the CCI
guidelines have always been and continued to be a material and significant
indicator for purpose of valuation in India. The mere fact that the CCI as a
statutory authority has since been abolished does not make the CCI guidelines
redundant. D
74. The report of Patni & Company shows that the 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.
E
75. Another objection of the appellants is that if revaluation .reserve was
considered the Net Asset Value would have come to Rs.124.82 but this was
not done by the valuer.
76. In reply to the said submission, learned counsel for the respondents
submitted that the revaluation reserves are n.:ver considered as part of the F
net-worth computation. Referring to Section 2(29A) of the Companies Act,
which defines "net worth", he submitted that the definition expressly excludes
revaluation reserves. Moreover the CCI guidelines clearly provided that the
revaluation reserves arising out of revaluation of fixed assets should ordinarily
be ignored. Only after an effiux of 15 years would it be reasonable to consider G
non-exclusion ofrevaluation 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.
77. In its report the valuer has submitted that while calculating Return H
1180 SUPREME COURT REPORTS [2007] 6 S.C.R.
A on Networth (5.38 %) of the company for the year 2001 - 2002 revaluation t
reserve has been included. As per paragraph 6.2 of CCI guidelines only
genuine reserve should be included while calculating "True Networth" of the
company. Therefore, Return on Net Worth should have been calculated after
deducting the revaluation reserve. The valuer has, however, commented that
B in the present case valuation of shares would not be affected by this inclusion
of the valuation of shares while calculating return on Net Worth.
78. Another objection raised by the appellants is that 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. The fallacy
C of the valuation lies in the fact that while valuing the shares in accordance
with PECV method, the valuer has arrived at a figure of 55.06 per share while
undertaking the said exercise in accordance with HLL guidelines and the said
value is reduced to Rs.34.39 while adopting the very same method but while
valuing the shares in terms of Regulation 20(5)(c).
D 79. To this the reply of the respondents is that 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
E 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 applying the
yield value and without applying .'ILL 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.
F 80. We have only referred to some of the objections raised by the
appellants and we must observe that several other similar objections were
raised by them. We have also noticed the reply of the respondents and in
most cases the observations of the valuer. It appears to us that the appellant
expects this Court to act as an expert itself. This, we are forbidden from
G doing. Unless it is shown that some well accepted principle of valuation has
been departed from 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 going to the root of the matter, this court would not interfere with the
H valuation of an expert. As noticed in Miheer H. Mafatlal (supra), valuation
G.L. SULTANIA 1•. SECURITIES AND EXCHANGE BOARD OF INDIA [B.P. SINGH,J.J 118 J
of shares is a technical and complex problem which can be appropriately left A
to the consideration of experts in the field of accountancy, So many
imponderables enter the exercise of valuation of shares.
81. Having considered all aspects of the matter, we are satisfied that the
valuer, Patni & Company have not committed any such error which may
justify our interference. They have considered all the factors relevant under B
Regulation 20(5)(c) of the Takeover Code and have adopted a reasonable
approach which does not call for interference by us. It may be that views
may differ and it is no gain saying that even experts may differ in their
conclusions or even reasoning. The court must take notice of this fact and
must not interfere unless there are compelling reasons to upset the finding
of the expert valuer on grounds such as those enumerated in the earlier part C
of the judgment or other similar grounds.
82. We are then left with the valuation reports of two other Chartered
Accountants submitted by the appellants before the Board, namely reports
of Mis. Sanjay Bajoria & Associates and Mis. Anand K. Associates. Sanjay
Bajoria & Associates valued the shares of the target company at Rs.590/- per D
share while the other Chartered Accountant valued the shares at Rs.408/- per
share. The Board, in our opinion, has given good reasons for rejecting those
> reports. It is noticed that the shares were valued at abnormally high rates
and as between the two reports there was a vast different (Rs.182/- per share).
This great disparity itself furnishes a good ground for rejecting these reports E
particularly, when the valuation reports of three other valuers had valued the
shares at much lower rates. It is not as if the regulator, namely, the Board
did not take notice of these reports. On the contrary, having noticed the
objections of the appellants it decided to appoint its own valuer to value the
shares of the target company. Ultimately the report of the valuer appointed
by the Board was accepted by the acquirer and that value was permitted to p
be incorporated in the offer document by the Board.
83. We are, therefore, satisfied that the Board committed no error in
accepting the report of Patni & Co. The Board has acted in a reasonable
manner and made its best efforts to secure a reasonable price for the shares
of the shareholders. It has exercised its discretion wisely and we find no G
reason to interfere.
84. We, therefore, find no merit in these appeals and they are accordingly
dismissed but without any order as to costs.
B.S. Appeals dismissed. H
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