In re Gabs Investments Pvt. Limited Vs Ajanta Pharma Limited (NCLT Mumbai)
Conclusion: Scheme of Amalgamation and Arrangement between G Pvt. Ltd. (‘Transferor Company’) and A Limited (`Transferee Company’) and their respective shareholders appeared to be unfair, unreasonable and was not in the public interest as the scheme was devised mainly to benefit the four share holders of G who were also the promoters of A (common promoters) and by this scheme, huge tax liability was being avoided, therefore, the Bench denied to sanction the scheme.
Held: In the instant case, there was a scheme of Amalgamation and Arrangement between G Pvt. Ltd. (`Transferor Company’) and A Limited (`Transferee Company’) and their respective shareholders. Transferor was a private Ltd. company which was a separate legal entity and any transfer of shares to other entity including individuals from the legal entity would attract applicable tax liability. Therefore, the Bench could sanction/approve the scheme only if it complied with all applicable provisions of the Act, Rules and if the scheme was in the interest of public, shareholder etc. However, assessee-companies did not provide details with regard to compliance of tax liability raised by the Income Tax Department, their undertaking to pay the huge tax liability as pointed out by the income department etc. It was noted by the Bench that the scheme was devised mainly to benefit the four share holders of G who were also the promoters of A (common promoters). By this scheme, huge tax liability was being avoided, the scheme did not provide for complying with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011. No benefit was accruing to the thousands of shareholders of A especially the retail shares holders of the transferee company, (the shareholders of A as on 31.03.2017 was 38075) therefore, the scheme appeared to be unfair, unreasonable and was not in the public interest and as such the Bench was of the considered view not to sanction the scheme as proposed.
FULL TEXT OF ORDER OF NATIONAL ANTI-PROFITEERING APPELLATE AUTHORITY
1. Heard the Learned Counsel for the Petitioner Companies. None appears before the Tribunal to oppose the Scheme or to contravene averments made in the Petition.
2. The sanction of the Tribunal is sought under Sections 230 to 232 read with Section 52 and Section 66 and other applicable provisions of the Companies Act, 2013 to the Scheme of Amalgamation and Arrangement between Gabs Investments Private Limited (`Transferor Company’) and Ajanta Pharma Limited (`Transferee Company’) and their respective shareholders.
3. The Learned Counsel for the Petitioner Companies states that the Transferor Company is the group holding company and primarily holds shares in the Transferee Company. The Transferee Company is a specialty pharmaceutical company engaged in development, production and marketing of branded and generic formulations.
4. The Learned Counsel for the Petitioner Companies further submits that the rationale for the Scheme is as under:
a. The merger will result in the promoter group of the Transferor Company directly holding shares in the Transferee Company, which will lead not only to simplification of the shareholding structure and reduction of shareholding tiers but also demonstrate the promoter group’s direct commitment to and engagement with the Transferee Company;
b. The promoter group of the Transferee Company is desirous of streamlining its holding in the Transferee Company. As a step towards such rationalization, it is proposed to merge the Transferor Company into the Transferee Company;
c. The promoters would continue to hold the same percentage of shares in the Transferee Company, pre and post the merger. There would also be no change in the financial position of the Transferee Company. All cost, charges and expenses relating to the Scheme would be borne out of the assets (other than shares of the Transferee Company) of the Transferor Company. Any expense, exceeding the assets of the Transferor Company would be borne by the promoters directly;
d. Further, the Scheme also provides that the shareholders of the Transferor Company shall indemnify the Transferee Company and keep the Transferee Company indemnified for liability, claim, demand, if any, and which may devolve on the Transferee Company on account of this amalgamation.
5. The Petitioner Companies have approved the said Scheme by passing the board resolutions at their respective Board meetings held on 18thMarch 2017 which are annexed to the respective Company Scheme Petition.
6. The Learned Counsel further submits that the Scheme has been approved by 99.99% shareholders of the Transferee Company and unanimously consented by shareholders of the Transferor Company at their respective meetings held on 10th October, 2017.
7. The Learned Counsel further submits that, upon this Scheme becoming effective, the Transferee Company shall, without any application, act or deed, issue and allot equity shares, credited as fully paid up, to the extent indicated below, to the members of Transferor Company holding fully paid-up equity shares of Transferor Company and whose names appear in the register of members of the Transferor Company as on the Record Date, or to such of their respective heirs, executors, administrators or other legal representatives or other successors in title as may be recognized by the Board of Directors of the Transferor Company / Transferee Company in the following proportion:
“83,92,262 fully paid up equity share of Rs 2 each of the Transferee Company shall be issued and allotted as fully paid up to the equity shareholders of the Transferor Company in proportion of their holding in the Transferor Company”
8. The Learned Counsel for the Petitioner Companies further states that, the Petitioner Companies have complied with all the directions in orders passed in Company Scheme Application No. 791 and 792 of 2017 and that the Company Scheme Petitions have been filed in consonance with the orders passed in the respective Company Scheme Application.
9. The Learned Counsel for the Petitioner Companies further states that the Petitioner Companies have complied with all requirements as per the directions of this Tribunal and they have filed necessary Affidavits of compliance in the Tribunal. Moreover, the Petitioner Companies through their Counsel undertakes to comply with all statutory requirements, if any, as required under the Companies Act, 2013 and the rules made there under whichever is applicable. The said undertaking is accepted.
10. The Regional Director has filed his Report dated 27th December, 2017 stating therein that save and except as stated in paragraph IV of the said Report, it appears that the Scheme is not prejudicial to the interest of shareholders and public. In paragraph IV of the said Report, the Regional Director has stated as under:
a) As per Clause 1.2 Definitions of the Scheme, “The Appointed Date” means the April 2016 or such other date as may be approved by the National Company Law Tribunal or any other Competent Authority. In this regard, it is submitted in terms of provisions of Section 232(6) of the Companies Act, 2013, it should be 1st April 2016;
b) The tax implication, if any arising out of this Scheme is subject to final decision of Income Tax Authorities. The approval of the Scheme by this Hon’ble Tribunal may not deter the Income Tax Authority to scrutinize the tax returns filed by the Transferee Company after giving effect to the Scheme. The decision of the Income Tax Authority is binding on the Petitioner Company;
c) As regards Para No. 9 of the Scheme, the Transferee Company may be allowed in respect of fees payable by the Transferee Company on its Authorized Share Capital, subsequent to the Amalgamation for setting-off fees paid by the Transferor Company on its Authorized Share Capital in accordance with the provisions of Section 232(3)(i) of the Companies Act, 2013;
d) In addition to compliance of AS -14 (IND AS — 103), the Transferee Company shall pass such accounting entries which are necessary in connection with the Scheme to comply with other applicable Accounting Standards such as AS-5 (IND AS — 8) etc.;
e) In accordance to proviso to Section 232(3) of the Companies Act, 2013, the Transferee Company may be directed to file a Certificate from the Company’s Auditors to the effect that the accounting treatment as proposed in the Scheme is in conformity with the Accounting Standards as prescribed under Section 133 of the Companies Act, 2013;
f) As regards Para No. 7 and 8.6 of the Scheme, in view of the provisions of proviso to Section 66(3) of the Companies Act, 2013in respect of reduction of share capital of the Transferee Company, the Hon ‘ble Tribunal may kindly direct the Company to submit Certificate from Auditor of the Company that the accounting treatment proposed by the Company for such reduction is in conformity with the Accounting Standards specified in Section 133 or any other provisions of the Companies Act, 2013;
g) The Petitioner ensure compliance of directions issued by Bombay Stock Exchange (BSE) and National Stock Exchange of India (NSE) in their communication vide letters dated 19-07-2017 towards the aforesaid Scheme of Amalgamation;
h) As regards Para No. 8.5 of the Scheme, the difference, if any, of the value of Assets over the value of Liabilities and Reserves transferred to the Transferee Company and the face value of New Equity Shares issued by the Transferee Company, after providing for adjustments shall be adjusted in the Reserves of the Transferee Company, preferably against the Capital Reserve as per the requirements of Para No. 35 of AS-14 notified by the Central Government.
11. In so far as observation of the Regional Director, as stated in paragraph IV (a) of the Report is concerned, the Petitioner Companies through their Counsel submits that the Appointed Date shall be 1 st day of April, 2016.
12. In so far as observation of the Regional Director, as stated in paragraph IV (b) of the Report is concerned, the Petitioner Companies through their Counsel undertakes to comply with all applicable provisions of the Income Tax Act and all tax issues, if any arising out of the Scheme will be met and answered in accordance with law.
13. In so far as observation of the Regional Director, as stated in paragraph IV (c) of the Report is concerned, the Petitioner Companies through their Counsel states that the Petitioner Company shall comply with the provisions of Section 232(3)(i) of the Companies Act, 2013.
14. In so far as observation of the Regional Director, as stated in paragraph IV (d) of the Report is concerned, the Petitioner Companies through their Counsel states that it shall comply with all applicable Accounting Standards and shall pass such accounting entries as may be necessary in connection with the Scheme to comply with any other applicable Accounting Standard.
15. In so far as observation of the Regional Director, as stated in paragraph IV (e) and (0 of the Report is concerned, the Petitioner Companies through their Counsel submits that the Transferee Company has already filed the Company Auditor certificate along with Company Scheme Application of the Transferee Company, stating that the Accounting treatment for the proposed Scheme is in conformity with the Accounting Standards prescribed under Section 133 of the Companies Act, 2013 with the Hon’ble Tribunal.
16. In so far as observation of the Regional Director, as stated in paragraph IV (g) of the Report is concerned, the Petitioner Companies through their Counsel states that the Petitioner Company shall comply with the directions issued by Bombay Stock Exchange Ltd. (BSE) and National Stock Exchange of India Ltd. (NSE) in their communication vide letters dated 19-07-2017 towards the aforesaid Scheme.
17. In so far as observation of the Regional Director, as stated in paragraph IV (h) of the Report is concerned, the Petitioner Companies through their Counsel states that as per the provisions of Section 52 read with Section 66 and as per terms of Para No. 8.6 of the Scheme the Transferee Company shall utilize its Securities Premium to adjust the difference, if any of the value of the assets over the liabilities and reserves transferred to the Transferee Company and the face value of New Equity Shares issued by the Transferee Company, after providing for such adjustments as stated in the Scheme. The utilization of Securities Premium Account, as mentioned in Clause 8.5 of the Scheme, shall be effected without having to follow the process under Section 66 of the Act separately and the order of the NCLT sanctioning the Scheme shall be deemed to be also the order under Section 66 of the Act for the purpose of confirming the reduction.
18. The observations made by the Regional Director have been explained by the Petitioner Companies in paragraphs 11 to 17 above.
19. The Official Liquidator has filed his report on 20th December, 2017 in the Company Scheme Petition No. 995 of 2017 inter-alia, stating therein that the affairs of the Transferor Company have been conducted in a proper manner and that the Transferor Company may be ordered to be dissolved without winding up by this Hon’ble Tribunal.
20. The report of the Registrar of Companies (`ROC’)dated 28th November, 2017 provides that there are six complaints against the Transferee Company. In this regard, the Learned Counsel of the Transferee Company submits that the complaints against the Petitioner Company are not in connection with the Scheme and pertain to past years for which an appropriate reply has already been filed by the Petitioner Company with the ROC. Further, the Learned Counsel of the Transferee Company submits that the outcome of the above complaints shall be decided in accordance with the applicable law since these are not related to the Scheme.
21. Objections of Income Tax Department:-
Income Tax Department raised various objections vide its letter dated 05.10.2017 and the same are narrated below:-
(i) Office of the Deputy Commissioner of Income Tax Mumbai vide reply letter dated 05.10.2017, submitted a detailed report submitting the objection against the scheme of amalgamation and arrangements between Gabs Investment Pvt. Ltd (GIPL) and Ajanta Pharma Ltd. (APL) and respective share holders. This representation has been forwarded with Prior approval of Principal Commissioner Income Tax (Central)-4. The department observed that 61.17% of shares are held by Agrawal Family Members in APL as on 31.07.2017. Share holding of GIPL is controlled by Agrawal Family Members only.
(ii) The income tax department after considering the facts, the family tree of Agrawal Family, background of the scheme, salient features of the scheme, consideration payable, accounting treatments in the books of APL as per the scheme, financials of GIPL, financial implication of the scheme, the departments has made a valid observation as under.
(iii) The department has articulated that GIPL being a private limited company has to be considered as separate entity and any “assets” of the Pvt. Ltd. company cannot be transferred and distributed directly. The company has to pay the Divided Distribution Tax (DDT) @ 20% and accordingly the DDT will be Z 134.16 Crores. This DDT of Rs 134.16 Crores will be loss if this amalgamation scheme is approved.
(iv) The total cost of acquisition of shares of APL by GIPL is Rs. 48,73,20,332/- as per the submissions made by APL. Further, as per the object mentioned in the MOA of GIPL, the investment and dealing in equity/shares is the business of the company and once the equity is sold in the market the business profit will be acquired by GIPL and the amount will at Z 958.34 Crores (Z 1007.07 Crore – Z 48.73 Crore). On this business profit, Income tax @ 30% is payable and accordingly Z 287.50 Crores income tax will be payable by the GIPL. Further, in case the applicability of MAT u/s 115JB @ 20% should also be kept in mind, in case the GIPL adopts another method of computation of income. This tax of 287.50 Crores will be lost if this amalgamation scheme is approved by the NCLT Mumbai.
(v) In view of the above computation, total loss to the revenue will be approximately 421.66 Crores, if this amalgamation Scheme is approved.
(vi) The department has further argued that in view of GAAR provisions, the scheme of amalgamation is a deliberate measure to avoid tax burden by using the via media of NCLT and this scheme is purely Impermissible Avoidance Agreement (IAA) and should not be allowed by the NCLT.
(vii) The proposed scheme of arrangement is nothing but Round trip financing which includes transfer of funds among the parties to the arrangements through the series of transactions.
22. Important provisions of the Scheme:-
(a) The transferee company shall, without any application, act or deed, issue and allot equity shares, credited as fully paid up, to the extent indicated below, to the members of Transferor Company holding fully paid up equity shares of Transferor Company and whose names appear in the register of members of the Transferor Company as on the Record Date, or to such of their respective heirs, executors, administrators or other legal representatives or other successors in title as may be recognized by the Board of Directors of the Transferor Company/Transferee Company in the following proportion: “83,92,262 fully paid up equity share of Rs 2 each of the Transferee Company shall be issued and allotted as fully paid up to the equity shareholders of the Transferor Company in proportion of their holding in the Transferor Company”.
(b) The equity shares of the Transferee Company held by the Transferor Company shall stand cancelled in accordance with Clause 7.1 of the Scheme and as a result equivalent equity share capital of the Transferee Company and the book value of investments held by the Transferor Company in the Transferee Company recorded as per Clause 8.1 above shall stand cancelled.
(c) The utilization of Securities Premium Account, as mentioned above in Clause 8.5 shall be effected as an integral part of the Scheme itself in accordance with the provisions of Section 52 and Section 66 of the Act without having to follow the process under Section 66 of the Act separately and the order of the Tribunal for the purpose of confirming the reduction. The reduction would not involve either a diminution of liability in respect of unpaid share capital or payment of paid-up share capital to the shareholders and the provisions of Section 66 of the Act will not be applicable.
(d) It is proposed in the Scheme that the Transferee Company shall, without any application, act or deed, issue and allot equity shares to the share holders of Gabs. On the scheme becoming effective, the Transferor Company shall stand dissolved without being wound-up.
(e) The transferor company holds 83,92,262 equity shares of the transferee company and pursuant to the merger, the transferee company shall issue the same number of New Equity Shares i.e. 83,92,262 to the shareholders of the Transferor Company.
(f) The new equity shares shall rank pari-passu in all respects including dividend, with the existing equity shares of Transferee Company.
(g) The New Equity Shares of the Transferee Company shall be listed and/ or admitted to trading on the Stock Exchanges on which the existing equity shares of the Transferee Company are listed at that time.
23. Observations of the Bench:-
Upon perusal of the documents submitted, written submissions made by the counsel on behalf of the petitioner companies, Judgments relied upon by the Counsel, Bench made the following observations.
(a.) Gabs Investments Pvt. Ltd (Gabs) was incorporated on 04.01.1995, and Ajanta Pharma Ltd. (APL) was incorporated on 31.12.1975. The petitioner / transferor company is engaged in the business of making investments and hold shares and primarily holds shares in the Transferee Company. The main object of Gabs is to carry on the business as an Investment Company. Gabs have been purchasing share of the APL in the secondary market at various points of time and at various prices.
(b.) The issued, subscribed and paid up capital of Gabs as on 31/03/2016 was 18,410 equity shares of 10 each amounting to 184,100/- and as on 31/03/2017, was 19,110 equity shares of 10 each amounting to 1,91,100. The bench has also noted that Gabs has passed a board resolution on 18.03.2017 for the proposed merger of the company into APL, whereas on the same day 700 equity shares at a value of 8,00,000/- per share was allotted as right issue. The Petitioner Company annexed a copy of the Audited Statements of Account as on 31st March, 2017 and provisional financial statements as on 30th June, 2017 respectively. Upon perusal of the balance sheet for the year ended 31, March 2017, it is observed that the company had issued 700 equity shares of 10 each on 18, March 2017, whereas reserves and surplus as on 31, March 2016, was (-) 2,25,51,523 and as on 31 March, 2017 was 58,84,37,074 predominantly in view of securities premium account. Further, perusal of the Balance Sheet, it is noted that the share holders of Gabs are namely Mrs. Manisha Y. Agrawal, Mrs. Richa R. Agrawal, Mrs. Smriti R. Agrawal, Mr. Ayush M. Agrawal. It is stated in the scheme that Equity shares held by Gabs would be cancelled and new shares will be allotted to the share holders of Gabs.
25. It is also noted that Gabs has passed a board resolution on 18.03.2017 for the proposed merger of the company into APL, whereas on the same day 700 equity shares at a value of 8,00,000/- per share was allotted i.e. after the appointed date fixed as 01st April 2016. It is also noted from the cash flow statements for the year ended 31 March 2017 an amount of 56 Crores was received through rights issue, which translates into 8,00,000 per share and the breakup is 10 towards face value and 7,99,990 towards premium and 255,99,93,000/- was credited towards securities premium account and the securities premium amount is equal to/multiple of 273 times of EPS as on 31.03.2016.
26. Though the share capital of the Gabs was only 1,84,100 and 1,91,100 as at 31.03.2016 and 31.03.2017 respectively, the company had investment in APL amounting to 48.73 Crores, i.e. the book value.
27. However, for the 700 shares issued by the transferor company on 18.03.2017 i.e. after the cutoff date/appointed date of 01.04.2016 the treatment for the same has not been explained in the scheme/petition therefore these 700 shares will not get any shares from the transferee company and it may continue to remain with the share holders of the Transferor Company even after Winding up/dissolution of the Transferor Company which is practically not the case. It is also stated in the scheme that with effect from the appointed date, all the assets and liabilities appearing in the books of account of the transferor company shall stand transferred to and vested in the transferee company. Further it is stated that the equity shares of the transferee company held by the transferor company shall stand cancelled in accordance with clause 7.1 of the scheme. However, treatment for these 700 shares allotted by way of rights issue on 18.03.2017 and amount shown under the head securities premium account have also not been explained.
28. Gabs received divided income from Ajanta Pharma Ltd. amounting Z 11,74,91,668 for the year ended 31, March 2016 and Z 10,90,99,406 for the year ended 31, March 2017.
29. Gabs generated total revenue of Z 11.88 Crores as at 31.03.2016 and Z 11.36 Crores as at 31.03.2017 (more than 92% of dividend income from APL), and for the quarter ended 30.06.2017, total revenue generated was only 26,03,233/- from interest on fixed deposit.
30. Gabs is not a subsidiary of any company including APL.
31. Investments in APL is appearing in the balance sheet of Gabs since FY ended 31.03.2009, and shown as 3,98,930 shares of APL at the market value of Z 51.35 and total value is shown as Z 2,07,45,057 thus, it can be understood that Gabs investment in APL started only in the financial year 2009 and the company had been incurring loss since financial year 2010-11.
(a.) The submissions of the petitioner company i.e. Gabs is a promoter company of APL/ group holding company with the sole object of holding investments in APL is factually incorrect in view of the facts as discussed above. Gabs have been purchasing shares of APL in the open market since 2nd December 2008.
(b.) From the above analysis/facts it is noted that Gabs did not subscribe at the time of formation of APL or at the time of IPO of APL. Gabs started acquiring shares of APL only in the secondary market since 02.12.2008 even in small quantity of 100 shares on 01.01.2009 and 02.01.2009 at 54.69 and 54.55 per share. As on 03.09.2013, cumulative holding of Gabs in APL was 22,37,930 equity shares and because of bonus issue by APL on 19.09.2013 (for 2 share: 1 Share) Gabs was allotted 11,18,965 equity shares thereby total holding went upto 33,56,905 equity shares. Further because of shares split (share of 5 split into 2) on 23.03.2015 it was allotted another 50,35,357 equity shares thereby totaling to 83,92,262 equity shares of APL and total investment for all the shares was only 48.73 Crores approximately.
32. Gabs is holding 83,92,262 equity shares of Z 2 each fully paid up in APL representing about 9.54% of the total paid up share capital of APL and as per the balance sheet, as at 31.03.2017, the book value was only Z 48.73 Crores and the market value was Z 1477.50 Crores as per the records submitted.
33. Profit and Loss, Reserves and Surplus and Earnings per Share of Gabs since 2010 upto the appointed date are given in the Table below to understand the financial strength of Gabs.
