Promoter Takeover Cannot Be Treated As 'Disinvestment' Under The Companies Act: NCLT Chennai

The Chennai Bench of the National Company Law Tribunal (NCLT) on 2 April, held that a promoter-led acquisition of minority shareholding under Section 230(11) of the Companies Act, 2013 does not constitute “disinvestment”.

A Bench comprising Judicial Member Sanjiv Jain and Technical Member Venkataraman Subramaniam dismissed an application filed by the Tamilnadu Industrial Investment Corporation Ltd (TIIC) seeking recall of a scheme of arrangement. The Tribunal observed:

“It is observed that Section 231(1)(b) gives power to the tribunal to give directions or modify the scheme for its proper implementation. In the present case, scheme has been fully implemented and consideration has been distributed to all share holders other than dormant shareholders (0.26% of paid up capital) whose contact details are not available with the company. Applicant has also received its share of consideration.”

TIIC, a state government company, held 71,179 equity shares, constituting 2.39 per cent, in India Forge & Drop Stampings Ltd, an unlisted public company engaged in forging and manufacturing activities.

The promoters, Dipak Raj Sood and Rupa Sood, proposed a scheme of arrangement to acquire the entire public shareholding. Two independent valuation reports assessed the share value at Rs 1,155.60 and Rs 1,147 per share, and the promoters offered Rs 1,156 per share for the takeover. The Tribunal approved the scheme on 31 July 2024.

TIIC opposed the scheme in the shareholders' meeting, contending that the valuation violated the Tamil Nadu Government's Disinvestment Guidelines, which prescribe valuation based on the highest of multiple methods. TIIC claimed that the shares should have been valued at Rs 5,687 per share, entitling it to higher consideration.

Alleging suppression of the government order during the approval process, TIIC moved an application seeking recall of the sanction order. However, it accepted Rs 8.22 crore towards consideration for its shares under protest.

The promoters opposed the plea, arguing that the Disinvestment Guidelines did not apply as the scheme did not amount to disinvestment. They further contended that the government order constituted only an executive instruction and could not override a statutory scheme sanctioned under Section 230 of the Companies Act, 2013.

The NCLT noted that Section 230(12) permits an aggrieved person to raise grievances regarding a takeover offer while the scheme remains under consideration. It also recorded that TIIC filed the application after the scheme had already been approved and implemented.

The Tribunal further held that Section 230(11) enables majority shareholders to acquire minority shareholding and does not confer any inherent right on minority shareholders to retain their shares where fair consideration is offered.

On whether the takeover constituted disinvestment, the Tribunal clarified that disinvestment refers to the government exiting its investment and that valuation guidelines apply only in such cases. It observed:

“In the present case, it is a scheme under which shares of non-promoter shareholders are being taken over by the promoters based on the fair valuation as prescribed by Companies Act and applicable rules. So this process in no way can be termed as disinvestment.”

It also rejected TIIC's claim for differential treatment, stating:

“Further it is observed that under Articles of Association or through any other instrument, the applicant does not get a special right for differential treatment in case of takeover of shares by promoters under Section 230(11) of Companies Act 2013.”

Accordingly, the NCLT dismissed the application.

For Petitioner: Senior Advocate P.H Arvindh Pandian and Advocate Sandeep Kumar Ambalavannan

For Respondents: Advocate T.K Bhaskar