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SUPREME COURT OF INDIA
B.P. SINGH & ALTAMAS KABIR
G.L. Sultania and another - PETITIONER
Versus
The Securities and Exchange Board of India and others - RESPONDENT
Appeal (civil) 1672 of 2006
Decided on, 16/05/2007
SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 - SECTION 15Z - SECURITIES AND EXCHANGE BOARD OF INDIA (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1997 - REGULATION 20(5) - VALUATION OF SHARES - FAIR PRICE - FACTORS TO BE CONSIDERED - INTERFERENCE BY COURT - SCOPE. Held, that the 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. 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 of the judgment or other similar grounds.
Fact of the Case:
The appellants were the promoters of the target company, Hindustan National Glass and Industries Ltd. Respondent Nos.2 and 3 were the acquirers. The acquirers made a public announcement to acquire shares in accordance with the Takeover Code. 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. The Board appointed M/s. Patni & Company to value the shares of the target company. M/s. Patni & Company valued the shares of the target company at the rate of Rs.63.50 per share by one method and Rs.64.17 by another method which had the approval of this Court in Hindustan Lever Employees Union vs. Hindustan Lever Ltd. and Others : 1995 Supp. (1) SCC 499. The appellants still persisted in their objection that the value of each share determined by the aforesaid firm of valuers was not correct. The Board accepted the valuation report of M/s. Patni and Company and by its order of August 19, 2005 approved the draft letter of offer incorporating the revised offer including interest. 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.
Finding of the Court:
The Appellate Tribunal by its order of December 8, 2005 dismissed the appeals preferred before it. The Appellate Tribunal held 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 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 an error in working out the offer price for the public offer. The appellate Tribunal, however, noticed that there was no allegation of mala 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 frequently the valuers had to keep in mind the principles incorporated in Regulation 20 (5) of the Takeover Code. It noticed that 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 relevant considerations M/s. Deloitte had valued each share at Rs.43/- while M/s. Patni and Company valued at Rs.64.17 ps. per share and M/s. 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 keeping in view the other parameters enumerated in clause (c) of Regulation 20(5).
Issues: Whether the valuation of shares by M/s. Patni and Company was arrived at after following the norms laid down in Regulation 20(5) of the Takeover Code and, therefore, it could not be characterized as either erroneous, arbitrary or unreasonable.
Ratio Decidendi: The 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. 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 of the judgment or other similar grounds. The valuation report of M/s. Patni and Company must be tested on the touchstone of Regulation 20(5) of the takeover code which provides as follows:- Offer price (1) 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). (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-regulation (1) 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. (c) other parameters including return on networth, book value of the shares of the target company, earning per share, price earning multimple vis-vis the industry average; Provided that where considered necessary, the Board may require valuation of such infrequently traded shares by an independent 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 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. (ii) In case of disinvestments of a Public Sector Undertaking, the shares of such an undertaking shall be deemed to be infrequently traded, if on the stock exchange, the annualized trading turnover in the shares during the preceding six calendar months prior to the month, in which the Central Government of the State Government as the case may be opens the financial bid, is less than five per cent (by the number of shares) of the listed shares. For this purpose, the weighted average number of shares listed during the six months period may be taken. (iii) In case of shares which have listed within six months preceding the public announcement, the trading turnover may be annualized with reference to the actual number of days for which the shares have been listed.
Final Decision: The appeals were dismissed but without any order as to costs.
JUDGMENT:
WITH
CIVIL APPEAL NO. 1704 OF 2006
H.L. Somany and others.- Appellants
Versus
The Securities and Exchange Board of India and others - Respondents
AND
CIVIL APPEAL NO. 1740 OF 2006
R.K. Somany and others -Appellants
Versus
The Securities and Exchange Board of India and others - Respondents
B.P.SINGH, J.
1. This batch of appeals has been preferred by the appellants under Section 15Z 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 Civil Appeal No.1672/2006 arises out of Appeal Nos. 134 and 138 of 2005; Civil Appeal No.1704/2006 has been filed against Appeal Nos. 137, 159, 160, 161 and 164 of 2005 and Civil Appeal No.1740 of 2006 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.
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 of India (Substantial Acquisition of Shares and Takeovers) 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 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, M/s. Patni and Company.
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 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 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 Courts interference and resultantly necessitated a fresh valuation in accordance with the provisions of the Takeover Code. Learned senior counsel submitted
that in the facts of this case there was no justification for not accepting the valuation suggested by M/s. Patni and Company who had been appointed for the purpose by the Board.
4. Though the issue involved in the appeals lies within a narrow compass, 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 Containers Ltd., and Shri C.K. Somany respectively. Resp
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