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CASE NO.: Special Leave Petition (civil)  18035 of 2000 Special Leave Petition (civil)  18041-18042 of 2000

PETITIONER: Dr. Mrs. Renuka Datla                          

RESPONDENT: Solvay Pharmaceutical B.V. & Ors.

DATE OF JUDGMENT: 30/10/2003

BENCH: S. RAJENDRA BABU, P. VENKATARAMA REDDI & ARUN KUMAR

JUDGMENT: JUDGMENT WITH INTERLOCUTORY APPLICATION NO.2/2002 With Interlocutory application Nos. 3 & 4/2002

P. Venkatarama Reddi, J.

       The dispute is between the shareholders of two  pharmaceutical companies which figure as respondents  herein. Suits were filed by the petitioners, who are the wife  and husband, in the City Civil Court, Hyderabad impleading  the Companies and the third respondent by name Shri        D. Vasant Kumar, the subject matter of the suits broadly  being the transfer of shareholdings. The suit O.S.No. 551 of  2000 was filed by the petitioner in S.L.P.No. 18035/2000.  Along with the suit the petitioner-plaintiff applied for an  interim injunction restraining the defendants-respondents     1 and 3 (Solvay Pharmaceutical B.V. and Shri D. Vasant  Kumar) from transferring/exchanging their shareholdings in  defendant Companies 2 & 4 pending disposal of the suit. The  other two Suits of similar nature were filed by the petitioner  in S.L.P.Nos. 18041 & 18042 of 2000 and interim injunction  was sought for. The I.A. filed in O.S.No. 551 of 2000 under  Order 39 Rules 1 & 2 was dismissed by the learned trial  Judge while vacating the ex-parte injunction granted earlier.  However, the ad interim injunction granted in the suits filed  by the petitioner in SLPs 18041 & 18042/2000 remained in  force. Aggrieved parties filed three appeals in the High Court  under Order 43 Rule 1 C.P.C. The appeal filed by the  petitioner in the first S.L.P. against the refusal of injunction  was dismissed by the High Court and the other two appeals  filed by the aggrieved defendants were allowed and the      ad interim injunction in both the cases was vacated. Against  this common order of the High Court, the present S.L.Ps.  were filed by the plaintiffs namely, Mrs. Renuka Datla and  Dr. Vijay Kumar Datla. On the initiative taken by this Court  while hearing the S.L.Ps., the parties settled the disputes  and the terms of mutual settlement were reduced to writing  and they were signed by all the parties. This Court passed  the following order on 15th July, 2002 to give effect to the  settlement. "Counsel for the parties state that the dispute  between them has been settled. A copy of the  terms of mutual settlement signed by the parties

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has been filed in Court and initialed by the Court  Master. Terms of settlement are recorded. The  terms contemplate valuation to be done of the  intrinsic worth of the two companies and the value  of 4.91% shares in the said two companies held  by the petitioners. Valuation has to be completed  within a period of four weeks. The terms of    mutual settlement shall form part of this order.  Copy of the order be sent to Shri Y.M. Malegam,  Chartered Accountant, M/s. S.B. Billimoria & Co.,  Mumbai-400 038."

       According to the terms of settlement, M/s. Solvay  Pharmaceuticals (R1) and Mr. Vasant Kumar (R3) have  agreed to purchase 4.91% shares held by the petitioners in  the two companies namely Duphar Pharma India Ltd. (DPIL  renamed as Solvay Pharma India Ltd.) and Duphar Interfran  Ltd. (DIL), the petitioners having agreed to sell the said  shares. Shri Y.H. Malegam, Chartered Accountant, Mumbai  had to evaluate the intrinsic worth of both the Companiesâ\200\224 DPIL and DIL as going concerns and the value of the said  4.91% shares held by the petitioners in those two  Companies "by applying the standard and generally  accepted method of valuation". Shri Malegam should give  opportunity to the respective parties to make their  submissions. The valuation of Shri Malegam shall be  regarded as final and binding on all the parties to the  settlement. The relevant date for valuation was fixed as 31st  March, 2001. The payment for shares shall be made within  two weeks of the submission of the valuation report and the  statutory approvals thereof failing which the respondents  shall pay interest at the rate of 15% p.a. simultaneously  with receipt of the total consideration for 4.91% shares, the  petitioner shall effect the transfer of shares. The respondent  Shri Vasant Kumar shall withdraw the Suits filed in the City  Civil Court, Hyderabad; likewise, the petitioners  shall  withdraw the Suits filed by them in the City Civil Court and  also the appeals in this Courtâ\200\224C.A.Nos. 8316-8321 of 2001  as well as the application filed by Smt. Renuka Datla under  Section 399(4) of the Companies Act before the Central  Government. It was agreed that the S.L.P. shall be kept  pending for passing the final orders in terms of the  settlement.         Mr. Malegam submitted his valuation report with his  covering letter dated 28.9.2002. After assessing the intrinsic  worth of the two Companies as going concerns, the value of  4.91% shares was arrived at at Rs.8.24 crores.         A brief reference to the salient features of valuation  may be appropriate.  The Valuer considered three methods of valuation.     (1) Asset based (2) Earning based (3) Market based. While  working out the earning based valuation, the value on the  basis of capitalization of past earnings was adopted. The  discounted cash flow method which is the  commonly used  methodology for future earnings based valuation was  eschewed from consideration. The reasons given by the  valuer are; (1) No independent (third party) projections  have been provided; (2) Both parties have provided  projections which differ substantially as illustrated in Tables  1.1 and 1.2. The basic principle and method of evaluation has been  stated thus: "The intrinsic value of the share would be based  on the asset and earnings based value with  appropriate weightages given to the two methods.

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Since the value of a company/business would be  more influenced by its earnings value a higher  weightage is given to the earnings value as  compared to its asset value. The asset value is  considered as an integral part of the intrinsic value  as it has a persuasive impact. Thus, I have  considered the following weightages for determing  the intrinsic value

* Asset based value                     1/3rd weightage * Earnings based value          2/3rd weightage                                   The market (for listed companyâ\200\224its market price)  based value indicates the value ascribed by the  buyer/seller of the share at a given point in time.  This is influenced by

?       the floating stock and the supply and demand,    which gets reflected in the volume and price of  market transactions

?       market perceptions related to â\200\224 the overall market â\200\224 the industry â\200\224 the company

The recommended value is the higher of the  intrinsic value or the market based value. Though  rationally speaking, the recommended value  should be the intrinsic value, it may be possible  that the market based value at a given point of  time is higher than the intrinsic value, which is  indicative of a bullish phase / perception of the  market and/or industry and/or the company.  Therefore, to take into account this practical  reality, I have suggested the higher of the two.

       The intrinsic worth of the two Companies and the value  of 4.91% shares in the two Companies are set out at Para  7.3.1. As already stated, the value of 4.91% shares has  been worked out as 8.24 crores.         It was made clear that the above value has been  determined on the basis that 4.91% shareholding carries no  special rights. In this context, the  Valuer has referred to the  claim of the petitioners that the value of 4.91% holding  should be higher than the value derived by applying the  percentage to the intrinsic worth of the Companies. In other  words, the contention of the petitioners was that the shares  are to be valued on the basis that 4.91% forms part of the  combined holding of 25% of the Indian promoters’  shareholding. The respective contentions in this regard have  been analysed by the Valuer as follows:â\200\224 "If the shares are to be valued on the basis of a  holding of 4.91%, then this holding does not give  any special advantage to the holder or in this case  even to the purchaser since the respondents  collectively hold in the two companies 60.5% of  the share capital of each company. On that  consideration, the value of the shares can only be  4.91% of the intrinsic worth of the two companies.

On the other hand, if the shares are to be valued  on the basis that the 4.91% forms part of the  combined holding of 25% and therefore carries  special rights, then there has to be a premium

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attached to the value of the shares. Accordingly,  the value of the 4.91% shareholding would be the  value determined by taking 4.91% of the intrinsic  worth of the two companies and adding thereto a  control premium."

       The Valuer concluded that he was not competent to  decide upon this controversial legal issue and therefore, the  valuation was done without adding the element of control  premium.          Another aspect debated before the Valuer was whether  the value of the ’Vertin’ and ’Colospa’ brands which are the  original research products of the foreign promoter, should be  considered in the valuation of the 4.91% shares in DIL. It  was contended by the petitioners that DIL was legally  entitled to carry on its business in ’Vertin’ and ’Colospa’  along with other brands. The rights over these two brands  were transferred to Dupen Laboratories Private Ltd. and  such transfer, according to the petitioner, was in breach of  contractual obligations under the Trademark License  Agreement dated 15.7.1975 etc. The Valuer, after referring  to the contentions, observed thus: "â\200¦The brands VERTIN and COLOSPA have been  purchased by Solvay Pharmaceuticals BV from  Dupen Laboratories Private Limited. As such,  these are not the assets of DIL. DIL also has no  investment in Dupen Laboratories Private  Limited. Whatever may be the claims of the  petitioners in this matter against the  respondents, this is not a matter which should  affect the valuation of the shares of DIL."

The petitioners have objected to the valuation by filing  IA Nos. 2, 3 and 4 of 2002 wherein a prayer has been made  to submit a supplementary valuation  report after adding  ’control premium’ to 4.91% shares and by adopting the DCF  method of valuation and including therein the value of Vertin  and Colopsa brands.  In other words, the main objections  are : 1.     That the control premium has not been added; 2.     the value of the brands Vertin and Colopsa, which  according to the petitioners continued to be the  property of DIL, has not been included; 3.    discounted cash flow method has not been  adopted though it is a generally accepted method, even  according to the Valuer. The learned senior counsel appearing for the petitioners  relying on the decisions in Dean vs. Prince & Ors. [1954 (1)  All ER 749] and Burgess  vs. Purchase & Sons [1983 (2)     All ER 4] has contended that notwithstanding the finality  attached to the decision of the Valuer, the Court can  intervene if the valuation was made on a fundamentally  erroneous basis or a patent mistake has been committed by  the Valuer.  Even accepting this principle, we are unable to  hold that the valuation is vitiated by a demonstrably wrong  approach or a fundamental error going to the root of the  valuation. The first and foremost contention has focused itself  on  the non addition of control premium.  It is the contention of  the petitioners that 4.91 per cent shareholding which the  respondents Mr. Vasant Kumar and another have agreed to  purchase is part of the promoters’ shareholding of 25% and  they consciously avoided buying the other shares which  were acquired by the petitioners from the market.  Certain  special rights and privileges were attached to these

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promoters’ shareholding and, therefore, the intrinsic worth  of the shares should have been assessed by adding the  control premium.  As already noticed, the Valuer has  adverted to the respective contentions in this regard and  indicated the implications of treating or not treating 4.91 per  cent shares as part of the combined shareholding of the  promoters.  The Valuer rightly refrained  from going into this  contentious issue.  However, the Court has to necessarily  address itself to this issue canvassed before us.  In  answering this question, the terms of settlement  must be  kept uppermost in the mind. It may be that the respondent  Shri Vasant Kumar agreed to purchase only 4.91 per cent  shares of the petitioners on account of  these shares forming  part of the promoters’ shareholding and in that sense they  may have some additional value. But, the Court has to go by  the terms of settlement which is the last word on the  subject.  The terms do not, either in express terms or by  necessary implication, contemplate the valuation by  determining the intrinsic worth of 4.91% shares, having due  regard to their special or distinctive characteristics.  The  terms of the settlement, as already noticed, contemplate the  valuation of the intrinsic worth of the two companiesâ\200\224DIL  and DPIL  as going concerns and the value of 4.91 per cent  shareholding by the petitioners has to be worked out on that  basis.  As rightly contended by the learned senior counsel  for the respondents, if the parties wanted a special   treatment  to be given to these shares and a control  premium or the like has to be added, it should have been  specifically and expressly mentioned in the terms of  settlement.  Such an important aspect would not have been  omitted while framing the terms of settlement if the parties  had agreed to the valuation on that basis.  What has not  been said in the terms of settlement in specific and clear   terms cannot be superimposed by the  Court while  interpreting the terms of settlement.  The language  employed in the terms of settlement which we presume  would have been drafted after obtaining expert legal advice  does not even necessarily imply that special weightage in  the form of ’control premium’ has to be given to these 4.91  per cent shares. If the petitioners had insisted on the  incorporation of such a provision, it could very well be that  the other party or parties would not have agreed to such  stipulation. The Court cannot, therefore, give any direction  in regard to control premium. The next objection is directed against the non-inclusion  of Vertin and Colopsa brands while valuing the intrinsic  worth of the company DIL.  In our view, the learned Valuer  has given relevant reasons for non-inclusion of the said  brand of drugs which stood transferred to Solvay   Pharmaceuticals BV from Dupen Laboratories Pvt. Ltd.  They  are not the existing assets of DIL. In fact, the petitioners  have put in issue in one of the suits filed by them the  legality of transfer and sought for a declaration that DIL  continues to be the proprietor of the two brands.  The  petitioners have agreed to withdraw various suits.  In any  case, the petitioners cannot be permitted to thwart the  terms of the settlement by inviting the Valuer or this Court  to go into the extraneous issue as regards the validity of the  transfer or incidental matters. The assets as per the relevant  records have to be taken into account by the Valuer and that  has been done. We, therefore, find no apparent error in  excluding those brands. The other objection is about DCF method of valuation  which the Valuer has described as a commonly accepted  method in adopting ’future earning based valuation’. This

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involves "discounting the net free cash flow of a business at  an appropriate discount rate". We have already adverted to  the reasons given by the Valuer  for not adopting  this  method of valuation. Those reasons cannot be said to be  irrelevant.   It is contended that if the data and projections  furnished by the parties is not reliable the Valuer should  have secured the relevant data from independent sources or  could have called for further particulars. We find no merit in  this argument. The DCF method is adopted while resorting  to valuation based on future earnings.  It is not the case of  the petitioners that the future earning based valuation is the  only reliable method of ’earnings based valuation’. Moreover,  the petitioners have not placed any facts and figures to show  that such  method of valuation would result in a definite  increase in the share value going by independent  projections. When there are vast discrepancies between the  projection given by the parties and independent projections  have not been provided, the Valuer has chosen the best  possible method of evaluation by capitalizing the past  earnings. In doing so, the future maintainable profits based  on past performance is also an element that has gone into  the calculation. No prejudice whatsoever is shown to have  been caused to the petitioners by the earnings based  valuation.         The petitioners have relied on the decision of this Court  in Commissioner of Gift Tax, Bombay Vs. Smt. Kusumben D.  Mahadevia [(1980) 2 SCC 238]. After referring to Mahadeo  Jalan’s case [(1973) 3 SCC 157] wherein certain principles  regarding valuation of shares were laid down, it was  observed thus: "It is clear from this decision that where the  shares in a public limited company are quoted on  the stock exchange and there are dealings in  them, the price prevailing on the valuation date  would represent the value of the shares. But  where the shares in a public limited company are  not quoted on the stock exchange or the shares  are in a private limited company the proper  method of valuation to be adopted would be the  profit-earning method. This method may be  applied by taking the dividends as reflecting the  profit-earning capacity of the company on  reasonable commercial basis but if it is found that  the dividends do not correctly reflect the profit- earning capacity because only a small proportion  of the profits is distributed by way of dividends  and a large amount of profits is systematically  accumulated in the form of reserves, the dividend  method of valuation may be rejected and the  valuation may be made by reference to the  profits. The profit-earning method takes into  account the profits which the company has been  making and should be capable of making and the  valuation, according to this method is based on  the average maintainable profits."

       We do not think that the valuation in the instant case  runs counter to the principles laid down therein. As seen  from Enclosures 6.1 and 6.2 to the valuation report, the  Valuer had arrived at market based valuation in addition to  the other modes of valuation and observed that the  recommended value is the higher of the intrinsic value or  the marked based value. Thus, the petitioners had the  benefit of higher valuation. The first principle laid down in  the above decision has been kept in view. Moreover, the

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profit earning method which has been referred to in the  above decisions in the context of valuation of shares of a  private limited Company has also been applied, though  future earnings based valuation has not been done in the  absence of reliable figures. As observed by us earlier, the  profit earning capacity of the Company has not been  excluded from consideration. Thus, the Valuer’s mode of  valuation does not in anyway infringe the principles laid  down in the said decisions to the extant they are applicable.  In final analysis, we are of the view that the Valuer  approached the question of valuation having due regard to  the terms of settlement and applying the standard methods  of valuation. The valuation has been considered from all  appropriate angles.  No case has been made out  that any  irrelevant material has been taken into  account or relevant  material has been eschewed from consideration by the  Valuer. The plea that the valuation is vitiated by  fundamental errors cannot but be rejected. In the result IA Nos. 2 to 4/2002 are liable to be  rejected.  However, there is one direction concerning the  interest which we consider it appropriate to give in the given  facts and circumstances of the case.  Though the grant of  interest, as prayed for  by the petitioners, from  31.05.2002â\200\224the stipulated date of submission of valuation  report is not called for, we feel that the ends of justice would  be adequately met if the respondents concerned are directed  to pay the interest at the rate of 9 per cent on 8.24 crores,  which is the value of shares fixed by the Valuer,  for a period  of 12 months.   True, the petitioners contested the valuation  and thereby delayed the implementation of settlement.  However, having regard to the bona fide nature of the  dispute and the fact that the respondents have retained the  money otherwise payable to the petitioners during this  period of 12 months and could have profitably utilized the  same, we have given this direction taking an overall view. In the result IAs 2,3 and 4 of 2002 are dismissed  subject to the above direction as to payment of interest.   The SLP(c) Nos. 18035, 18041-18042 of 2002 shall stand  disposed of in terms of the settlement on record coupled  with the direction to pay the sum of Rs. 8.24 crores  representing the value of 4.91% shares together with  interest @ 9 per cent for a period of 12 months within a  period of four weeks from today subject to the receipt of  share transfer forms and the fulfillment of other formalities  by the petitioners.  The suits which have given rise to these  SLPs, and other suits and proceedings mentioned in the  Memorandum of settlement shall stand dismissed as  withdrawn.  Accordingly, the SLPs are disposed of.  No order  as to costs.