Mumbai: The Madras high court on Thursday cleared the merger of Essar Telecommunications Holdings Pvt. Ltd, which owns an 11% stake in Vodafone Essar Ltd, with India Securities Ltd (ISL), a listed Essar Group company.
The high court said Vodafone International BV does not have the locus standi to object to the scheme of the merger as it benefited both the Essar companies, shareholders and creditors.
As Vodafone International is neither a shareholder nor creditor to them, it cannot object to the merger, the court said.
The court also quashed the income-tax (I-T) department’s petition objecting to the merger citing tax arrears of around Rs487.76 crore for fiscal year 2008-09. The I-T department feared problems in the recovery of arrears after the merger.
“We are yet to receive the copy of the order and once the company gets to review it internally, a decision will be taken on whether it wants to pursue it further and file an appeal in the Supreme Court,” said P.K. Bhaskar, Vodafone’s legal counsel. Vodafone Essar is India’s second largest mobile telephony firm by subscribers.
“Vodafone is disappointed that the Madras high court did not feel it necessary to further investigate the merger. Vodafone believes that the current disclosure to public investors in ISL is inadequate,” the company said in a statement.
“The ISL reverse listing has no bearing on the underwritten options over the direct shares in Vodafone Essar currently being exercised and we remain confident that the put and call options will be completed no later than November this year,” it added.
The tax payments of various companies are pending and the court observed it is no reason why a merger should be held up, a person familiar with the litigation said. He declined to be identified.
“The decision of the Madras high court vindicates our earlier stand that Vodafone indeed did not have any locus standi in relation to this merger as it was neither a shareholder nor a creditor of the relevant companies. The objections filed by Vodafone were intended to delay the merger, and serve their own commercial interests to prevent the discovery of a fair market value of Vodafone Essar Ltd through a market mechanism,” said an Essar Group spokesperson.
In March, Vodafone had filed two more petitions in the high court, asking for the stock market regulator, Securities and Exchange Board of India, to be made a party to the case and over the valuation of Essar Telecom.
The court order comes soon after Vodafone and Essar decided to exercise their put and call options for the 33% stake held by the Essar Group in Vodafone Essar.
Vodafone has agreed to pay Essar Group $5 billion (Rs.22,150 crore) for the 33% stake it held in the company, according to a joint venture agreement signed in 2007.
Essar Group appointed Standard Chartered Bank for independent valuation of the stake; Goldman Sachs valued the company for Vodafone and UBS AG was the independent valuer.
Vodafone objected to the merger as it did not want a company in which it holds a majority interest to become the subject of a “false” market. It was concerned that the value of ISL, which is engaged in the business of financing, investing and providing consultancy services, could be misinterpreted as a “fair” market value of Vodafone Essar.
“In the absence of violation of substantial law, merely because certain rights of (a) third party are going to be affected, (it) cannot be a ground to the permit third party to file objection to the scheme, once the scheme is as per statutory provisions of section 391 to 394 of the Companies Act and approved by majority,” the court said.
Darshan Upadhyay, associate partner at Economic Laws Practice, a law firm, said, “Under the section 391-394 and past judicial precedents have laid grounds on which there could be objections. Parties, such as, shareholders, employees, creditors or the government who are affected with the merger can oppose to it. Third parties having no locus standi cannot object the merger if the scheme otherwise meets with the legal framework.”
Niranjana Ramesh in Chennai contributed to this story.