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An estimated 20-minute read

Case Study: Amalgamation / Merger of a Sort

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This blog is off-shoot of a BIFR Order dated 30.09.2010 in the case of India Foils Limited. The BIFR sanctioned and approved the merger of M/s India Foils Limited (IFL Transferor Company) with M/s Ess Dee Aluminium Limited (EDAL Transferee Company).

The strange & absurd exchange ratio of the scheme is- the shareholders of India Foils will get 1 share of Ess Dee Aluminium Ltd for every 1285 shares held of India Foils Ltd.

I have recorded a letter to SEBI. I have questioned the legal possibility of the Merger and not of the exchange ratio. It is quite interesting, I think. Complaint / Notice

27.11.2010
From,
Sandeep Jalan, Advocate
C/o Janhit Manch,
Kuber Bhuvan,
Bajaj Road, Vile Parle West,
Mumbai – 400056.


To,
Shri C. B. Bhave,
Chairman, SEBI,
SEBI Bhavan, Bandra Kurla Complex,
Bandra (E), Mumbai - 400051.


Subject of the Complaint

The Order passed by Hon'ble Board dated 30.09.2010 in the case of India foils limited, is illegal, inasmuch as, the said Amalgamation is beyond the contemplation of Sick Industrial Companies (Special Provision) Act 1985 [For short SIC Act 1985]

There is a “Legal Impossibility” of the Amalgamation of M/s India Foils Limited (IFL Transferor Company) with M/s Ess Dee Aluminium Limited (EDAL Transferee Company), in the light of section 17(1) of SIC Act 1985 & Regulation 30 of BIFR Regulations 1987.

INDEX

Particulars Page No.
1. Facts of the case

2. Relevant provisions of law

3. Application of law to facts of the case

4. Provisions of law under which the public authority is obliged under the law

5. Legal Expectation

6.The consequences that may follow

7. SC Judgment in Salem Advocate Bar Association, Tamil Nadu Vs. Union of India

8. Important Points Revisited

9. Attachments

10. Post Script:

Dear Sir

In continuation of my earlier communiqué in this regard, received by your above office on 23.11.2010, again I am writing to you, under instructions and on behalf of my Client Mrs Laxmi Girish Jalan, residing at 56 C Amba Jyoti Apartment, flat no.303, near SBI, Trimurti Nagar, Nagpur.

1. Facts of the case-

A. My Client is holding about 17,300 shares of India Foils Limited.

B. On date: 19-05-2006 India Foils Ltd has informed the Exchange that the Company has been registered as Sick Company with The Board for Industrial and Financial Reconstruction under Case no.08/2006 and after hearing, the Bench of BIFR was satisfied that the Company fulfilled the various criteria for sickness under the ACT and have become a sick industrial company in terms of section 3(1)(o) of the Act and accordingly declared it to be sick company. The Bench of BIFR has further appointed ICICI as the Operating Agency with directions to prepare a viability study report and revival scheme for Company.

C. On date: 20-11-2008 India Foils Ltd has informed the Exchange that: "In terms of the rehabilitation scheme ("Scheme") sanctioned by Hon'ble BIFR dated August 18,2008, the Board of Directors of India Foils Limited in their meeting held on November 19, 2008, has altered its Authorized Equity Share Capital by splitting the unissued equity shares of Rs.10/- each into equity shares of Re.1/-each. (i) Pursuant to Scheme mentioned herein above the Board of Directors has issued and allotted the following equity and equity linked instruments. 13,60,00,000 equity shares of face value Rs.1/- each fully paid up to Ess Dee Aluminium Limited and 1250000, 0.01% optionally convertible redeemable non-cumulative preference shares of face value Rs.100/- each fully paid up to Sterlite Industries (India) Limited, an affiliate of Madras Aluminium Company Limited. (ii) Further the Board has also issued and allotted 13953423, 0.01% redeemable non-cumulative non-convertible preference shares of face value Rs.100/- each fully paid up and 9628115, 0.01% redeemable non-cumulative non-convertible preference shares of face value Rs.100/- each fully paid up to Sterlite Industries (India) Limited and Ess Dee Aluminium Limited respectively. (iii) With the issue of above shares, Ess Dee Aluminium Limited has become the majority stakeholder in the India Foils Limited and thereby it has became the subsidiary of Ess Dee Aluminium Limited".

D. The Hon'ble Board / BIFR, vide its Order dated 30.09.2010, inter alia, sanctioned and approved the merger of M/s India Foils Limited (IFL Transferor Company) with M/s Ess Dee Aluminium Limited (EDAL Transferee Company) in terms of the modified Rehabilitation Scheme. The above BIFR or Board Merger Order could not be located on the website of the BIFR. Therefore, the Appellant relies on the communiqué issued by Ess Dee Aluminium Ltd in this regard. The undated communiqué of Ess Dee Aluminium Ltd underlines the salient features of BIFR or Board Merger Order. Pls find Attachment 'A', the copy of this communiqué.

2. Relevant provisions of law: The Role of BIFR or Board comes into play once a reference is made to it or a information is received by it under section 15 of the SIC Act 1985.

Section 16 contemplates, among other things, Inquiry into the working of the Sick Industrial Company by the BIFR or Board. When a reference is made to a BIFR or Board, the BIFR or Board makes such inquiry or appoint any operating agency to determine whether the referred Industrial Company has really become a Sick Industrial Company within the meaning of this Act of 1985.

Section 16(4) stipulates the appointment of a Special Director by BIFR or Board. This sub section 4 of section 16 is pressed into by the Parliament to safeguard the interest of the Company from the likely ill-doings of the present management, the incompetent management / Board of Directors who have made the Company Sick and were forced to refer the Company to the Board. According to information available, Shri K. Raghuraman has been appointed as the Special Director under Section 16(4) of the Sick Industrial Companies ( Special Provisions ) Act, 1985 on the Board of India Foils Limited.

Section 17 outlines the Powers of the BIFR or Board to make suitable order on the completion of the inquiry. The section says- after making an inquiry under section 16, if the BIFR or Board is satisfied that the referred Company has become the Sick Industrial Company within the meaning of this Act of 1985, then, after taking into consideration all relevant facts and circumstances of the referred Sick Industrial Company, the BIFR or Board proceeds to decide whether or not the said Sick Industrial Company can make its net worth exceed the accumulated losses within a reasonable time.

Here the section makes it obligatory on the part of BIFR or Board to take into consideration all relevant facts and circumstances of the referred sick industrial company before reaching to the decision as whether the said Sick Industrial Company can make its net worth exceed the accumulated losses within a reasonable time.

When the BIFR or Board considers all relevant facts & existing circumstances of the referred Sick Industrial company and decides that the said Sick Industrial company cannot make its net worth exceed the accumulated losses within a reasonable time, it may undertake to adopt all or any measures specified in section 18 of the SIC Act 1985.

The measures under section 18 broadly enumerate (i) financial reconstruction of the sick industrial company, (ii) take over or change in the management of the Company, (iii) the amalgamation of the sick Industrial company with any other company or amalgamation of any other company with the said sick industrial company; and such other preventive, ameliorative and remedial measures as may be appropriate. Section 18 is a elaborate section comprising various measures that can be undertaken to revive the referred Sick Industrial Company.

The Regulation 30 of the of BIFR Regulations 1987 is under Chapter VI of-- Procedure & Preparation And Sanction of Scheme under section 18. Regulation 30 contemplates the consideration by the Board / BIFR of the suggestions and objections that it may receive from the Sick Industrial Company or from the Transferee company or from the Operating Agency or from any other company concerned in the proposed amalgamation.










3. Application of law to facts of the present case-

At this point, I will be primarily agitating on the “Legal Impossibility” of the Amalgamation of M/s India Foils Limited (IFL Transferor Company) with M/s Ess Dee Aluminium Limited (EDAL Transferee Company) provided vide BIFR or Board Order dated 30.09.2010.

I am advancing argument on the presumption that the Order of BIFR or Board dated 30.09.2010 was made under section 18(1)(c) of the SIC Act 1985.

(A) It is my grand argument that a measure stipulated under Section 18(1)(c) contemplates a new management for the sick industrial company. Amalgamation under section 18(1)(c) of SIC Act 1985 presupposes the change of Managament. The words in the statute “any other company” contemplates other company, a different managament.

(B) And, therefore, it is imperative to understand how this section 18(1)(c) has evolved.
(i) Section 18(1)(c) comes in the backdrop of section 17(3). Section 17(3) is the off-shoot of section 17(1).
(ii) Section 17(1) speaks about consideration of all relevant facts and circumstances by the Board before adopting the course of measures contemplated under section 18.

(C) Thus, it can safely be submitted that all measures sought to be undertaken by the BIFR or Board under section 18 is based on its consideration under section 17(1) of relevant facts and circumstances of the case.

(D) To illustrate this--
(i) I say that, when the BIFR or Board under section 17(1) considers “all relevant facts and circumstances” of the Sick Industrial company, can we take a pause to ponder for a while as what could be the relevant facts & circumstances which the Board may be considering to reach to the decision that the said Sick Industrial company can or cannot make its net worth exceed the accumulated losses within a reasonable time.
(ii) In this respect, I can safely argue that the Board of Directors of a Company are the most important people of the Company. In fact they are the people who are the driving force behind the success or failure of the Company. They are the people who make the Company Sick and take the Company to BIFR.
(iii) Again, I can safely argue that-- “Who are the persons in the Board of Directors of a sick industrial Company” is the principal & paramount fact of consideration of the BIFR or Board in reaching to the decision that whether the said Sick Industrial company can or cannot make its net worth exceed the accumulated losses within a reasonable time. (iv) Therefore, when the Board decides that the said Sick Industrial company cannot make its net worth exceed the accumulated losses within a reasonable time, it actively takes into account the worth or the competence of the present Board of Directors of the sick industrial company.

(E) If for a moment, it is presumed that section 18(1)(c) can be invoked for the amalgamation of companies which are run by same management, then we reach to this absurd proposition, i.e. --
“The BIFR or Board while looking at the present management of the sick industrial company comes to the conclusion that the said Sick Industrial company cannot make its net worth exceed the accumulated losses within a reasonable time and therefore decides that the sick industrial company, under section 18(1)(c) should be amalgamated with another company. The Management of the new amalgamated company will be the same old management of that sick industrial company.”

(F) Without prejudice to my right to rely on earlier submissions--
(i) If the amalgamating companies relying on the words “any one or more of the following measures”, contained in section 18(1) to say that amalgamation of this sort is permissible under the Act of 1985; Then it may also be noted that this measure of amalgamation contained in clause (c) was not existent in the original Act of 1985, when the words “any one or more of the following measures” were there. This clause (c) came into effect from 01.02.1994 by virtue of Act 12 of 1994.

(G) Without prejudice to my right to rely on earlier submissions-- I say that- conflict of interest of litigating parties forms the basic feature of our adversary style of litigation. I invite the attention of SEBI to Regulation 30 of BIFR Regulations 1987. The Regulation 30 of the of BIFR Regulations 1987 is under Chapter VI of-- Procedure & Preparation And Sanction of Scheme under section 18. Regulation 30 contemplates the consideration by the Board / BIFR of the suggestions and objections that it may receive from the Sick Industrial Company or from the Transferee company or from the Operating Agency or from any other company concerned in the proposed amalgamation.

Tell me, if the Management of both - Sick Industrial Company and of Transferee company are same, then, the rights of the Sick Industrial Company to forward any objection to the Board or BIFR with regard to proposed amalgamation with the transferee company becomes meaningless.

And, therefore, it can again be safely argued that measure contemplated under section 18(1)(c) of Amalgamation pre-supposes two entirely distinct entities, being run by different management.

(H) While looking at the rehabilitation scheme ("Scheme") sanctioned by Hon'ble BIFR or Board dated August 18, 2008 wherein, among other things, Ess Dee Aluminium has become the majority stakeholder in the India Foils Limited and thereby the India Foils Limited has became the subsidiary of Ess Dee Aluminium Limited". At present, India Foils is already under the active management of Ess Dee Aluminium Limited.


















4. Provisions of law under which the recipient Public Authority is obliged under the law to attend the nature of the Complaint narrated hereinbefore and to take needed action in this regard..

I invite attention of the Chairman to Section 11(1) of SEBI Act 1992 which reads as -- “Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit.”

I invite attention of the Chairman to Section 14 of General Clauses Act 1897. Powers conferred to be exercisable from time to time.- (1) Where, By any (Central Act) or Regulation made after the commencement of this Act, any power is conferred then (unless a different intention appears) that power may be exercised from time to time as occasions requires. This section applies also to all (Central Acts) and Regulations made on or after the fourteenth day of January, 1887.


















5. Legal Expectation:
Therefore, in this whole background, I humbly request you to, in the exercise of powers vested upon you under section 11(1) of the SEBI Act 1992, and in all seriousness, look into the matter of this amalgamation / Merger, and make suitable representation before the BIFR or before the Appellate Authority to quash its said Order dated 30.09.2010.

However, if you are satisfied that there is no anomaly in the said BIFR or Board Order of 30.09.2010 and my submissions are merit less OR if, SEBI argues that it has no powers to approach BIFR or AAIFR to make suitable representation on behalf of the Retail investors--

then, SEBI may please record its such satisfaction OR lack of powers, as the case may be, and please make a reply to us of SEBI's such satisfaction or lack of powers, as the case may be, within 30 days of receipt of this Complaint / Notice.




























6. The consequences that may follow: This is to inform you that your failure to comply to legal expectation as stated hereinbefore may compel us to institute legal Proceedings under Writ Jurisdiction, at your personal cost, as settled by Hon'ble Supreme Court of India in below Salem Advocate Bar Association, Tamil Nadu Vs. Union of India case.













































7. SC Judgment in Salem Advocate Bar Association, Tamilnadu Vs. Union of India: I wish to inform you that in Salem Advocate Bar Association, Tamilnadu Vs. Union of India (UOI), (2005) 6 SCC 344, the Hon'ble Supreme Court has, among others, observed and directed “…

The Governments, government departments or statutory authorities are defendants in a large number of Cases pending in various courts in the country. Judicial notice can be taken of the fact that in a large number of cases either the notice is not replied to or in the few cases where a reply is sent, it is generally vague and evasive. It not only gives rise to avoidable litigation but also results in heavy expenses and costs to the exchequer as well.

A proper reply can result in reduction of litigation between the State and the citizens. In case a proper reply is sent, either the claim in the notice may be admitted or the area of controversy curtailed, or the citizen may be satisfied on knowing the stand of the State.

Having regard to the existing state of affairs, we direct all Governments, Central or State or other authorities concerned, whenever any statute requires service of notice as a condition precedent for filing of suit or other proceedings against it, to nominate, within a period of three months, an officer who shall be made responsible to ensure that replies to notices under Section 80 or similar provisions are sent within the period stipulated in a particular legislation.

The replies shall be sent after due application of mind. Despite, if the court finds that either the notice has not been replied to or the reply is evasive and vague and has been sent without proper application of mind, the court shall ordinarily award heavy costs against the Government and direct it to take appropriate action against the officer concerned including recovery of costs from him.”.

It may happen that the High Court, like the Supreme Court had questioned the Prime Minister Manmohan Singh's silence on application received from Subramanium Swamy on 2G Scam, may question – why you have remained silent -EXPLAIN.















8. Important Points Revisited
(i) On 19-05-2006 India Foils Ltd has informed the Exchange that the Company has been registered as Sick Company with The Board for Industrial and Financial Reconstruction under Case no.08/2006

(ii) On 20-11-2008 India Foils Ltd has informed the Exchange that: "In terms of the rehabilitation scheme ("Scheme") sanctioned by Hon'ble BIFR dated August 18,2008, among other things, Ess Dee Aluminium Limited has become the majority stakeholder in the India Foils Limited and thereby India Foils Limited has became the subsidiary of Ess Dee Aluminium Limited"..

(iii) The Hon'ble Board / BIFR, vide its Order dated 30.09.2010, inter alia, sanctioned and approved the merger of M/s India Foils Limited (IFL Transferor Company) with M/s Ess Dee Aluminium Limited (EDAL Transferee Company) in terms of the modified Rehabilitation Scheme.

(iv) It is legitimately presumed that the Order of BIFR or Board dated 30.09.2010 was made under section 18(1)(c) of the SIC Act 1985.

(v) It is my grand argument that a measure stipulated under Section 18(1)(c) contemplates a new management for the sick industrial company. Amalgamation under section 18(1)(c) of SIC Act 1985 presupposes the change of Management. The words in the statute “any other company” contemplates other company, a different management.

(vi) Section 18(1)(c) comes in the backdrop of section 17(3). Section 17(3) is the off-shoot of section 17(1).Section 17(1) speaks about consideration of all relevant facts and circumstances by the Board before adopting the course of measures contemplated under section 18.

(vii) All measures sought to be undertaken by the BIFR or Board under section 18 is based on its consideration under section 17(1) of relevant facts and circumstances of the case.

(viii) If for a moment, it is presumed that section 18(1)(c) can be invoked for the amalgamation of companies which are run by same management, then we reach to this absurd proposition, i.e. -- “The BIFR or Board while looking at the present management of the sick industrial company comes to the conclusion that the said Sick Industrial company cannot make its net worth exceed the accumulated losses within a reasonable time and therefore decides that the sick industrial company, under section 18(1)(c) should be amalgamated with another company. The Management of the new amalgamated company will be the same old management of that sick industrial company.”

(ix) The Regulation 30 of the of BIFR Regulations 1987 is under Chapter VI of-- Procedure & Preparation And Sanction of Scheme under section 18. Regulation 30 contemplates the consideration by the Board / BIFR of the suggestions and objections that it may receive from the Sick Industrial Company or from the Transferee company or from the Operating Agency or from any other company concerned in the proposed amalgamation. Tell me, if the Management of both - Sick Industrial Company and of Transferee company are same, then, the rights of the Sick Industrial Company to forward any objection to the Board or BIFR with regard to proposed amalgamation with the transferee company becomes meaningless.

(x) SEBI is the Principal & Solemn institution to safeguard the interest of retail investors. In fact SEBI came into being to safeguard the interest of retail investors. The retail investors are simply incapable of engaging themselves into the conventional expensive and time consuming court litigation. And, therefore, whenever the retail investors face unlawful loss to their investment, they turn to SEBI.

(xi) I submits that my Client has a very good case on merit and serious prejudice & irreparable loss will occasion to my Client and to many other shareholders of India Foils Limited. Moreover, by allowing this Amalgamation, a wrong precedent will set in, which may encourage such illegal mergers in future.

Thanking you in the anticipation of your effective action in this regard.

With Regards

Sandeep Jalan

Advocate


9. Attachment ' A'.






























10. Post Script:

Discretionary powers of Public Servant: Discretion being an element in all powers, but the concept of discretion imports a duty to be fair, candid and unprejudiced; not arbitrary, capricious or biased; much less, warped by resentment or personal dislike. Discretion allowed by the statute to the holder of an office is intended to be exercise according to the rules of reason and not according to personal opinion.

Discretionary powers are never absolute. Even if a statutory pronouncement state explicitly that the discretion it grants is absolute, this discretion is interpreted as requiring the holder of the authority to act strictly according to some procedure such as granting a hearing and acting impartially and acting in such a way to achieve the goal of the legislation for which the authority has been granted.

If a decision on a matter is so unreasonable that no authority could ever have come to it, then the courts can interfere. The repository of discretion must be prepared to justify in court the reasonableness of his belief and in arriving at a decision in the exercise of his discretionary powers. It is not enough to say that the discretion was exercised honestly by the authority.

It is pertinent to note that any action, decision or order of any statutory or public authority bereft of reasoning would be arbitrary, unfair and unjust violating article 14 of the Constitution of India or would be deemed to have been taken or arrived at by adopting unfair procedure offending article 21 of Constitution of India. Krishna Swami Vs Union of India. AIR 1993 SC 1407

LORD GREENE, MR in Associated Provincial Picture House Ltd Vs Wednesbury Corp observed that it is a established law that a Person entrusted with a discretion must direct himself properly in law. He must call his own attention to the matters which he is bound to consider. He must exclude from his considerations matters which are irrelevant to the matter that he has to consider. If he does not obey those rules, he may truly be said, and often is said, to be acting unreasonably.

The abuse of discretionary power is like saying- “as an Authority of Public Power- I may decide but declines to let you know the reasons or grounds of my decisions or provide reasons without being reasonable.

Reasons disclose how the mind is applied to the subject matter for a decision whether it is purely administrative or quasi judicial; and reveal a rational nexus between the facts considered and conclusions reached. Union of India Vs Mohan Lal Capoor (1973) 2 SCC 836

The Apex Court in one case viewed that when statute confers discretion on a holder of public office that should be exercised reasonable and rationally. U.P. State Road Transport Corporation V Mohd Ismail (1991) 3 SCC 239.

In our humble view- The basis of every law or every rule OR EVERY EXERCISE OF DISCRETION or every decision govt or govt agencies take, is on the premise of greatest good of the greatest number of people. The forms of accountability may differ but the basic idea remains the same that the holders of High Public Office must be able to publicly justify their exercise of power not only as legally valid but also socially wise just and reasonable, chiefly designed to add something more to the quality of life of the people. Every exercise of Power depend on this ideal for its validity.

A note was struck by Apex Court in Superintending Engineer, Public health, U.T. Chandigarh V Kuldeep Singh when it observed: “Every Public servant is a trustee of the society; and in all facets of public administration, every public servant has to exhibit honesty, integrity, sincerity and faithfulness in the implementation of the political, social, economic and constitutional policies to integrate the nation, to achieve excellence & efficiency in public administration. ...”

End

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