Rejection of Scheme of Merger – Objections from Income Tax Authorities

Indiabulls Real Estate Limited (“Petitioner Company /Transferee Company/IBREL) filed a scheme of amalgamation of companies belonging to Embassy Group – NAM Estates Private Limited (“Non-Petitioner Company/ Transferor Company 1”) and Embassy One Commercial Property Developments Private Limited (“Non-Petitioner Company/ Transferor Company 2”) before the Hon’ble National Company Law Tribunal (NCLT) Chandigarh & Bengaluru Bench.

IBREL’s equity shares are listed on nationwide bourses while the other two entities are private entities pertaining to Bengaluru based Embassy Group. The transaction was peculiarly aiming to consolidate the Embassy Group with listed IBREL. Application was filled by the respective companies in Bengaluru & Chandigarh bench. The Scheme has been approved by the Bengaluru Bench by order dated 22.04.2022 however been rejected by Hon’ble Chandigarh Bench by order dated 09.05.2023.

Objections raised by A Shareholder of Indiabulls:-

There were few objections raised by a particular shareholder however Hon’ble NCLT dismissed the Objection citing the objector do not have 10% shareholding as required under section 230(4) of the Companies Act 2013.

Income Tax objections:

1. Extract of letter found during search and seizure: – Embassy Group has acquired a controlling stake in the listed company, M/s IBREL, to the extent of 42%. To the extent of 13% by way of purchase of equity directly from promoters of IBREL- Mr. Sameer Gehlaut and the balance 29% is supposed to be acquired by way of amalgamation of M/s NAM Estates Pvt Ltd and Embassy One Commercial Development Pvt Ltd (companies owned by the Embassy group) with IBREL.
2. Incriminating material was seized, indicating the overvaluation of the assets of the Embassy group while transferring the same to the M/s. NAM Estates Private Limited and the same over-valued assets formed the basis for the valuation of the shares of NAM Estates Private Limited, which formed the basis for the shares swapping for amalgamation with IBREL.
3. Extensive changes/restructuring of the amalgamating companies during the merger and post-merger preceded the scheme of amalgamation between M/s Nam Estate Private Limited (NEPL), Embassy 1 commercial property development Private Limited and M/s. India Bulls Real Estate Ltd (IBREL).
4. It was pointed out that there are several inconsistencies and incorrect assumptions made while valuing the assets at a much-inflated value. One of the projects, i.e., Embassy Cornerstone Tech Valley, has been undertaken by the Embassy group under the Joint Development Agreement (JDA) model, and the land doesn’t belong to it. The value of this asset has been estimated at Rs. 581 crores. In the case of this project, the initial agreement between the Embassy Group and Cornerstone Group was for the development of 100 acres, and it was decided by the parties that 67% built-up area was for the Embassy Group and 33% belonged to Cornerstone. But Cornerstone Group failed to acquire 20 acres, and currently, the total land available for development is only 80 acres and for developing these 80 acres of land, a JDA dated 15.11. 2021 was entered into by the parties wherein the agreement was revised to 74% built-up area to the embassy and 26% to Cornerstone. It was further stated that as per the Embassy group, this information and the reduction of the measurements of the asset (land) has not been conveyed to IBREL and its shareholders. Embassy Group has entered the JDA and given advance in the form of a non-refundable deposit of the amount of Rs. 105 Crores approximately. It was further pointed out that Cornerstone group has, in fact, not registered land parcels in their name. As per the Embassy group, approximately 8 acres of land still need to be acquired by the Cornerstone group out of the 80 acres. The Embassy Group has valued the said land on the basis of a joint development agreement for 80 acres.
5. On page No. 6 under the head ‘valuation certificate’, the purpose of a valuation is for ‘secured lending purposes’, meaning thereby the valuation report is made for the purpose of giving the same to financial institutions for borrowing purposes and not for any amalgamation or merger purposes.
6. In Page 6, under the head ‘town planning’, it is given clearly that ‘based on a review of revised masterplan 2015 BDA, the subject property is zoned for “residential (main)” use. This means only residential development can take place on the subject property; however, the valuation is made assuming that there will be commercial development and property will be leased for office purposes, which is both erroneous and incorrect. The valuer has also highlighted the fact in his report with a caveat ‘that client has in his first commercial development, and the same has been considered for the purpose of this present report, CBRE has not made any inquiries with the relevant legal/statutory authorities to validate the legality of the same.”
7. The valuer did not certify the property as having a clear and marketable title, no legal advice regarding this title and ownership of the subject property has been obtained for the purpose of the appraisal exercise. Identical observations have been made with regard to the other group companies like Concord India Private Limited and Embassy Knowledge Park. References have been made to the major title litigations pending in respect of the land of these companies.
8. It was also pointed out that the Embassy group has utilised the assets which are part of the scheme of amalgamation as collaterals for raising loans for other projects and purposes which are not part of this process of amalgamation. It is submitted that in the event of a default in servicing the loan of any non-amalgamating company, there is a possibility of an adverse impact on the finances of the amalgamating company.

Response of Petitioner Companies

1. The valuer’s report was specifically prepared for the purpose of determination of the Fair Equity Share Exchange Ratio for the scheme and for the consideration of the Board of Directors of both companies.
2. The valuation exercise of NAM Estates has been carried out on a post-restructuring base as provided in the scheme. The valuer has assumed that NAM Estates is being valued after having acquired the assets and liabilities post-completion of the internal restructuring exercise, which was still going on at the time of valuation.
3. At the time of determining the fair equity share swap ratio, the valuers had considered 100 acres as the total area of the said project, wherein the Embassy’s share is 67%. After going through the Income Tax report and holding a discussion with the company, the valuers understood that though the original JDA was for 100 acres as the total project area, in reality, the Cornerstone Group failed to acquire 20 acres, and hence the sharing ratio has been revised to 74% for the Embassy and 26% for Cornerstone, now on 80 acres, so as not to affect the overall value agreed between the parties.
4. The valuers have not evaluated the legal aspects with respect to the ownership and zoning encumbrances but have received clarification from the company that the said land project can be developed as a commercial project upon meeting certain criteria and clearing certain hurdles, which sometimes come up in large land transactions.

Scheme Rejected by Hon’ble NCLT on the basis of following grounds: –

Observations of SEBI: –

That disclosure of the assets and liabilities of Embassy One Developers Private Limited, Embassy East Business Park Private Limited. (Formerly known as Concord India Private Limited) and Summit Developments Private Limited. (sic) disclosed to the public. This is imperative considering the fact that valuation report, which forms the basis for swap ratio, merely mentions that the value of unlisted entity upon internal restructuring is considered while it does not disclose the assets and liabilities of aforesaid entities.

That disclosure of aforesaid information is although more relevant and utmost necessary considering the fact that public shareholders of Indiabulls Real Estate Limited should be accurately and adequately informed about all the vital information such as assets and liabilities of the aforesaid entities otherwise their interest may be severely impacted. Furthermore, a listed company is duty bound to comply with directions issued by SEBI/BSE. In view of the above email/ direction of SEBI dated December 07, 2022, BSE is to be considered a necessary party and the Company is duty bound to comply with directions issued by BSE and SEBI in the interest of public.”

Considering this, BSE had filed a Company Application before us, however, was withdrawn by BSE on 03.02.2023. We, however, note, that CA No. 05/2023 unequivocally states that the valuation reports merely mentions that the value of a listed entity upon internal restructuring is considered while it does not disclose the assets and liabilities of the aforesaid entities, thus, putting a serious question mark on the level of transparency of the scheme.

Observation Of NCLT

We note that in the present case, the asset and liability positions of the amalgamating companies have not crystallized to the desired level at the time of the preparation of the valuation report. The credibility of the claim of the Embassy group to carry out the extensive internal reorganization needed to be properly appraised by the Registered Valuers and the possible risks should have been clearly mentioned in the valuation reports to make it relevant and reliable for the stakeholders of the present amalgamation.

These valuation reports cannot be considered relevant and reliable material to enable the stakeholders to arrive at an informed decision for approving the scheme in question as laid down in the decision of the Hon’ble Supreme Court in the case of Miheer Mafatlal (supra).

The valuation reports failed to comply with the mandatory provisions of the relevant ICAI valuation standards, the guidelines of the IBBI dated 01.09.2020, and the strict provisions in this regard in the Companies Act, 2013 and The Rules 2016.

Based on the evidence with regard to the adjustment of sharing ratio, post the date of valuation, in the case of Embassy Cornerstone Tech Valley Project in the initial report of the Income Tax Department, we hold that the registered valuers failed to appropriately review, and make enquiries regarding the basis of key assumptions in the context of the business being valued and the industry/economy as laid down in the IBBI notification.

The valuation reports lay down caveats, limitations, and disclaimers, only for limiting the responsibility of the valuers, and do not mention many key factors which have a material impact on the valuations.

The valuation reports placed before this Bench seeking sanction of the scheme and also made available to the shareholders at the time of the meetings ordered by this Bench, contain information, which is not free from material error, and do not represent faithfully that which it either purports to represent or could reasonably be expected to represent.

Conclusion: –

Income Tax Authorities’ objections with respect to the valuation of Embassy group companies and swap ratio were being accepted by Hon’ble NCLT Chandigarh Bench. The order is alarming for all the registered valuers. Registered Valuers are required to be more vigilant and meticulous while arriving at valuations particularly when it has wide implications for stakeholders. Recently, IBREL issued a press release, regarding its intention to file an appeal against the order with Hon’ble NCLAT.