# G.L. SUL TANIA AND ANR v. THE SECURITIES AND EXCHANGE BOARD OF INDIA AND ORS

- **Citation:** [2007] 6 S.C.R. 1152
- **Court:** Supreme Court of India
- **Decided:** 2007-05-16
- **Case number:** Civil Appeal No. 1672 of2006
- **Bench:** B.P. Singh, Al Tamas Kabir
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/g-l-sul-tania-and-anr-v-the-securities-and-exchange-board-of-india-and-ors-22944
- **Pages:** 30

## Headnote

Securities and Exchange Board of India Act, 1992-Section 157Securities 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 SUL TANIA 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 intere

## Text

_Characters 0–39,910 of 79,932. This is a partial read: ask again with offset=39910 for what follows._

A
B
G.L. SUL TANIA AND ANR.
v.
THE SECURITIES AND EXCHANGE BOARD OF INDIA AND ORS.
MAY 16, 2007
[B.P. SINGH AND AL TAMAS KABIR, JJ.]
Securities and Exchange Board of India Act, 1992-Section 157Securities 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 SUL TANIA 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 of Gift Tax, Gujarat v. Executors and Trustees of the 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
F
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.
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.
H
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.
,_
G.L. SUL TANIA 1·. SECURITIES AND EXCHANGE BOARD OF INDIA [B.P. SINGH. l.] l J 57
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
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.
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
E
F
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. SUL TANIA 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 interalia 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.
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
G
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.
I 0. 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. San jay 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. SUL TANIA 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
1
equently the valuers had to keep in mind the pthrinciples incorporated .E
in Regu ation 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. SUL TANIA••. SECURITIES AND EXCHANGE BOARD OF INDIA [B.P. SINGIUJ J J 63
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.
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
G
· 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
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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. SUL TANIA 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
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(2007) 6 S.C.R.
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
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
I-
G.L. SUL TANIA 1·. SECURITIES AND EXCHANGEBOARDOF INDIA (B.P. SINGH.J.) 1167
Miheer H. Ma/at/al v.