NCLT Blocks Merger of Embassy Group with Indiabulls: Asset Valuation is Critical in Scheme of Amalgamation to Determine Share Swap Ratio

NCLT Blocks Merger of Embassy Group with Indiabulls: Asset Valuation is Critical in Scheme of Amalgamation to Determine Share Swap Ratio

The National Company Law Tribunal (NCLT), Chandigarh bench comprising of Harnam Singh Thakur (Judicial Member) and Subrata Kumar Dash (Technical Member), has withheld the merger of realty firm Embassy Group’s certain residential and commercial projects with Indiabulls Real Estate, a development.

In the present case, a second motion company petition was filed by the petitioner Companies, namely; Indiabulls Real Estate Limited (for short hereinafter referred to as Amalgamated Company/Petitioner Company), under Section 230-232 of Companies Act, 2013 (the Act) and other applicable provisions of the Act read with Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (the Rules) in relation to the Scheme of Amalgamation between NAM Estate Private Limited (for short hereinafter referred to as Amalgamating Company No.1) Embassy One Commercial Property Developments Private Limited (for short hereinafter referred to as Amalgamating Company No. 2).

One of the major issues which was present in the present application before the Tribunal was to decide whether the valuation reports forming the basis of the Fair Equity Share Swap Ratio Report was complete in all material respects and whether the underlying information in the valuation reports was reliable and could be relied upon by the stakeholders while deciding on their consents to the proposed amalgamation.

The NCLT stated that in a scheme of amalgamation, the values of the assets of all the amalgamating companies in the Scheme are critical for deciding the swap ratio of the shares of the amalgamating companies. Hence, the necessity to analyze the information regarding all companies in the scheme by both the stakeholders and this Tribunal.

In this connection, a reference was made to the Second Explanation to Rule 6 Companies (Compromises, Arrangements and Amalgamations) Rules 2016, which lays down that for the purposes of the said rules, disclosures (including a declaration that the valuation report is available for inspection by the stakeholders at the registered office of the companies), are required to be made by a company in respect of all the companies which are a part of the Compromise or Arrangement. As the valuations of the companies are to be considered parallelly both by the stakeholders as well as the Tribunal, all the evidence relating to the same must be considered by the Tribunal, opined the bench.

Therefore, the NCLT disagreed with the argument that the Tribunal should restrict itself to considering the evidence relating to the applicant transferee company before it.

Apparently, there were several incomplete negotiations which were ongoing at the time of the valuations, especially in the cases of the entities of the Embassy group, and as laid down in the Insolvency and Bankruptcy Board of India’s (IBBI) notification, it was necessary for the Registered Valuers to specify in their reports the extent of investigation of these documents and furnish details of other supporting documentation undertaken by the registered valuers, noted the bench.

The NCLT reckoned that, “the IBBI notification clearly states under the head ‘illustrative caveats, limitations, and disclaimers in a valuation report not to be used’, that if the assessment of market value is based on the assumption that the proposed lease agreements outlined earlier in the report are all executed, signed and stamped, upon being stamped, those documents are to be referred to the Registered Valuer to confirm that the particulars of the document concur with those set out in their reports.”

In the present case, the NCLT was of the view that this was not complied with, and the Registered Valuers had stated that their conclusions were based on these assumptions and information given by/on behalf of the management, and they had not assumed or accepted any liability or responsibility for any independent verification of such information or any independent technical evaluation or appraisal of any of the assets.

“On the basis of the facts placed before us, we note that the assets and liabilities positions of the amalgamating companies were not placed on the websites of the amalgamating companies. Subsequently, the Income Tax Department, during its Search and Seizure operations on the petitioner companies in this application, has pointed out several instances where the amalgamating companies have deviated from the original proposal for amalgamation,” the bench stated.

The NCLT further noted that in the present case, the asset and liability positions of the amalgamating companies were not crystallized to the desired level at the time of the preparation of the valuation report.

The bench emphasized that the credibility of the claim of the Embassy group to carry out the extensive internal reorganization was required 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.

Therefore, the NCLT was of the clear view that the contents of the valuation reports were in the teeth of the relevant Institute of Chartered Accountants of India (ICAI) valuation standards 102 and the IBBI notification dated 1 September, 2020, and the same could not form the basis for a correct equity swap ratio among the amalgamating companies.

Accordingly, the NCLT ruled that it was not a fit case to sanction the scheme of amalgamation and dismissed the petition.