Dice is loaded against minority shareholders

V Ranganathan | Updated on July 23, 2021

Caught In the crossfire   -  istock.com

The courts have left few avenues for grievance redressal in the event of undervaluation of their stake

The rule of majority is the holy grail of the corporate law, and holding the field for almost two centuries since the decision in Foss v Harbottle. When the majority tires of the sight of the minority, it would show them the door! Many situations of such corporate actions seeking to expel the minority have come before the courts.

Notably, the Bombay High Court decisions in the case of Sandvik Asia Ltd v Bharat Kumar Padamsi (2009) and Cadbury India Ltd (2015) had stamped the judicial approval to capital reduction schemes that sought to extinguish the shares held by the minority shareholders.

While the court did pause to adjudge on the need for a proper valuation to be adopted to squeeze out the minority holdings, it reiterated the principle that the majority decision to effect such extinguishment was binding on the minority and the courts had little role to interfere.

While the matters stood thus, it is a fact that there is still some cloud over this process of forcibly exiting only certain of the shareholders and there is apprehension that some court may choose to give elbow room for dissenting shareholders to stay and thereby frustrate the purpose of the selective capital reduction.

In this background a different approach to exiting minority shareholders may be relevant. This is a camouflaged one and lacks even the so called candour of capital reduction under Section 66 of the CA 2013(S100 of CA1956)! Companies have a right to change the face value of its shares and even an existing share’s face value can be bumped up or down.

Cases galore

In Hewlett and Packard Global Soft Ltd, the company increased the face value of its shares from ₹10 to a whopping ₹2,50,000. Obviously, only shareholders holding more than 25,000 shares of FV ₹10 were eligible to receive even a single share.

Chembra Peak Estates Ltd v RoC, Karnataka (CA 36 of 2019) was a case involving consolidation of face value that reached the NCLAT. In this case the shares of FV of ₹10 was consolidated to FV of ₹60,550, a very intriguing number for a face value.

Seven shareholders holding collectively less than about 18,000 shares out of 4,84,400 shares objected to the scheme and the Registrar of Companies resisted the matter before the NCLT and later filed an appeal to NCLAT when the decision was in favour of the company in the first instance.

But five of the shareholders holding almost 17,500 shares had sold their shares to one of the promoters, during the pendency of the case. The NCLAT held that the two shareholders with a fraction of the shares had no legs to stand on and upheld the NCLT’s decision and the valuation adopted to compensate the shareholders for the fractions arising on the consolidation and paved the way for all small shareholders being eliminated.

Simpson and Company Ltd approached the NCLT Chennai in 2019 for consolidating its ₹10 FV as ₹2,500 FV and offered ₹14,860 for each ₹10 share to compensate for the fractions arising in the consolidation.

A few shareholders dissented and contended that the value of underlying business of Simpsons like Tractors and Farm Equipment Ltd, AGGO Corporation USA and the 10-acres Mount Road land in the heart of Chennai were underestimated. The company contended that its book value was only ₹2,212 as on March 31, 2019 and the previous buyback price was ₹10,500 offered a year before the consolidation was initiated.

The NCLT by its order dated July 13, 2021 approved the petition filed under sec61(1)(b) of the CA 2013 and Rule71 of the NCLT rules but with an interesting rider that the fractional shares pertaining to the dissenting shareholders should be held in a trust constituted for this purpose and for the benefit of such shareholders. Has the tribunal granted an unusual relief to the dissenting shareholders that sets a precedent for future cases?

Actually, No! The tribunal seems to have left the door open for the dissenting shareholders to get a better valuation in future. Is it any more real than finding an oasis in the Sahara desert? The company is practically 100 per cent owned by the promoters. It may even become private going by the example set by another conglomerate. The dissenting shareholders are entirely at the mercy of the company and its promoters who are under no obligation to buy or relieve the trust of its holdings once the consolidation process is completed and the consenting shareholders get paid the value for their fractional holdings. This remedy has only made matters worse for the complainants.

All share consolidation cases proceed on the premise of simplifying administration and reducing the folios to service. This is a specious argument in the age of demat, sending soft copy of annual report and shareholder meetings being held on zoom!

With the cause of the minority further weakened in the decision of the highest court in the Tata Sons case, the fly in the ointment is better placed than this species!

The writer is a chartered accountant

Published on July 23, 2021

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