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Our Legal Correspondent

CHENNAI, May 2

THE Madras High Court has declined to approve the scheme of amalgamation of Shiva Texyarn Ltd and Annamalai Finance Ltd (both belonging to the Pollachi-based N. Mahalingam group) under Sections 391 and 394 of the Companies Act.

Mr Justice E. Padmanabhan, in his order dated April 25, while dismissing the petitions preferred by the two companies, observed that the ``avowed object'' of the scheme was to benefit the chosen few shareholders of the two companies.

``It was a calculated design by a few directors who hold substantial number of shares and the objections raised by the respondent on behalf of the Union of India should not be lost sight of.

That apart, the proposal is to change the name of the transferee company (Annamalai Finance) into Shiva Texyarn Ltd, that is, once again going back to square 1, which would also disclose the very intent of the scheme to benefit a few''.

The company petitions had been filed by Shiva Texyarn Ltd (STL-transferor company) and Annamalai Finance Ltd (AFL) to sanction the scheme of amalgamation as approved by the shareholders of STL at their meeting held on September 8, 2001 and by the shareholders of AFL at their meeting held on same date.

STL-transferor company was incorporated on March 23, 2000 as a public limited company and the authorised share capital was Rs 350 lakh divided into 35 lakh equity shares of Rs 10 each.

STL had been incorporated to acquire and take over as a going concern the textile division of Shiva Distilleries Ltd. The transferor company carried on business of manufacture of textile yarn.

AFL,transfereee company, was incorporated initially as a private limited company on May 28, 1980 and was converted into a public limited company on November 25, 1985.

The object of the company was to do business of financing and lending money to industrial entrepreneurs.

As on June 30, 2000, AFL had a public deposit of Rs 6,658.73 lakh and had secured depositors to the extent of Rs 17,777.36 lakh.

During the years 1995-96 and 1996-97, it had declared a dividend of 27 per cent while during 1997-98, the dividend declared was 10 per cent.

During 1998-99 and 1999-2000, it had declared a dividend of 6 per cent.

The textile unit of the transferor company was a profit making export oriented undertaking with 33,408 spindles as installed capacity.

The transferee company owned 56 wind electric generators having an installed capacity of 13445 KW.

The scheme of amalgamation had to be implemented with effect from January 1, 2001 and the assets and liabilities of the transferor company would vest in the transferee company.

Certain objections had been raised to the proposal to amalgamate the two companies by the Regional Director, Department of Company Affairs, in terms of Section 394A of the Companies Act.

These included, among others, about the proposed allotment of equity shares of the two companies. The judge, while elaborating on the various points that had been presented by the counsels, said that though STL was a unit of Shiva Distilleries and it acquired the textile mills only very recently, STL had 8 shareholders in all of which 7 individual shareholders hold 501 shares each, while Shiva Distilleries held 34,47,200 shares.

According to the scheme of amalgamation, the textile unit of the transferor company was to vest with the transferee company for which shareholders of transferee company would be issued 3 equity shares of Rs 10 each with premium of Rs 5 per share for every 1 equity share of Rs 10 each fully paid-up.

Consequent to the amalgamation, 7 shareholders would get allotment of 1503 shares each, wile Shiva Distilleries, which held 34,47,200 shares would be allotted 1,03,52,121 shares.

That apart, they would get additional benefit on an average of Rs 5 per share as premium which came to Rs 1,72,53,535 which would be the liability of the of the transferee company.

The judge observed that the total shareholding of Shiva distilleries and 7 members in AFL would be equivalent to the shareholding public of the entirety of the existing shareholders in AFL.

The scheme would definitely change the very status and pattern of shareholding of AFL, while a large number of public shareholders holding shares would be rendered minority shareholders.

The main fulcrum of the scheme of amalgamation rested on the transfer of the shares held by Shiva Distilleries in STL to AFL.

This appeared to be the apparent move behind the proposal and it was not as if it was in the interest of the 2 companies or shareholders.

As seen from the transfer of the textile unit by Shiva Distilleries to Shiva Texyarn, the value of transfer, the consideration of transfer was far below than what was sought to be claimed or adjusted and allotted now.

That apart, the transferee company, mainly engaged in the business of financing, its main object was not spinning.

The shareholding pattern of the respective companies would show that it was the group that held major shares in Shiva Distilleries and substantial number of shares of Shiva Distilleries itself sought to be allotted in the transferee company, which was a limited company.

But the value of the shares now resolved to be allowed was far disproportionate in value than it was conveyed or purchased by Shiva Texyarn hardly a year ago.

Already, in the transferee company, substantial shares were held by the same group of shareholders and the same shareholders also had major shares in Shiva Distillieries. They were closely related or family members.

The Judge held that if the scheme were approved and amalgamation sanctioned, it would definitely benefit the chosen few and to the detriment of the large number of shareholders who were not represented and who had no say either in the transferee company or in the transferor company. ``It is rather extraordinary and not normal to demerge Shiva Texyarn from Shiva Distillieries and within few months seek to amalgamate Shiva Texyarn with Annamalai Finance and what is sought to be further done is Annamalai Finance after few weeks or months will be known as Shiva Texyarn and its main object being spinning''.

The scheme now placed before the Court was not in good faith and it was neither fair, nor reasonable besides it offended public as well as commercial morality, the judge said.

It was also violative of the Companies (Acceptance of Deposit) Rules, 1975 and the transferee company proposed to undertake a spinning mill when its main object was not spinning, but advancing money to entrepreneurs.

It was clear, the judge added, that the investment in the transferor company and the value of its shares and existing liabilities had not been obviously placed appropriately and this had not been brought to the notice of the shareholders.

It could even be stated that it was an unfair scheme which had been approved by the board as well as the general body to the detriment of the shareholders of the transferee company, which was a listed company. The shares of the transferee company was listed in the stock exchange while that of the transferor company was not so listed.

While comparing the value of the assets sought to be transferred, the converse should have the normal procedure adopted ``By all standards, this court is not satisfied with the scheme since it is intended to benefit the few of the directors as well as the Shiva Distilleries''.

Till date, the approval of the stock exchange had not been secured and this should not be lost sight of.

It was stated that the scheme was to safeguard the interest of AFL from recession, but that overlooked the admitted fact that the textile industry and even the spinning industry was still facing a worse situation and the recession was so bad that none of the spinning mills or textile units was out of red.

For the foregoing reasons, this court after deep consideration declined to approve the scheme and accordingly both the petitions were dismissed, the judge said.

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