Arun B. Saharya, J. ( 1 ) BY this petition under Section 391 (2) and Section 394 of the Companies Act,, 1956 (hereinafter REFERRED TO to as the Act ). M/s. Apex Investments Pvt. Ltd. (hereinafter REFERRED TO to as the transferor company)and M/s. Promain Ltd. (hereinafter REFERRED TO to as the transferee company)have jointly prayed for sanction of a scheme of amalgamation whereby thetransferor company proposes to transfer its entire assets and liablities to vest inthe transferee company to achieve best results of investments and finance activities of both the companies. The transferor company is a private limited company duly registeredand incorporated on 5th of May 1973 under the Act. The authorised capitalof the company originally was Rs. 5 lacs divided into 5,000 equity shares ofrs. 100. 00 each. The share capital was increased to Rs. 10 lacs vide resolutionpassed in the Extra-ordinary General Meeting on 26th of February 1974. Later,by another resolution passed in Extra-ordinary General Meeting held on 26thof May 1988, it was further increased to Rs. 20 lacs divided into 20,000equity shares of Rs. 100. 00 each. Since its incorporation in 1973, the companyhas been carrying on business of an investment company. ( 2 ) THE transferee company is a public limited company registered andincorporated an 29th of October 1965 under the provisions of the Act. Theauthorised share capital of the company was Rs. I lakh originally divided into50,000 equity shares of Rs. 100. 00 each, 30,000 Redeemable Cumulative Preference Shares of Rs. 100. 00 each and 20,000 unclassified shares of Rs. 100. 00each. On 28th of February 1983, vide special resolution passed at the 17thannual General Meeting, the share captial of the company was converted andthe paid-up value of the share was sub-divided. The same now stands as Rs. 1crore divided into 7. 00,000 equity shares of Rs. 10. 00 each, 30,000 Redeemablecumulative Preference Shares of Rs. 100. 00 each. Objects of the company, asenumerated originally in the Memorandum and Articles of Associationinter alia, were to manufacture, hire, sell and lease out machines and plantsetc. , to lend money, and to act as aninvestment company. By a special resolution passed at the 13th Annual General Meeting held on 26th of March 1979general Financing and Investments were specified as the main objects of thecompany. Thereafter the company has been carrying on the business of generalfinance and investments only. , to lend money, and to act as aninvestment company. By a special resolution passed at the 13th Annual General Meeting held on 26th of March 1979general Financing and Investments were specified as the main objects of thecompany. Thereafter the company has been carrying on the business of generalfinance and investments only. ( 3 ) THE salient features of the Scheme are that with effect from thedate of transfer, the undertaking of the transferor company shall vest in thetransferee campany. Every holder of one equity share of Rs. 100. 00 of the transferor company shall get 20 equity shares of Rs. 10. 00 each of the transfereecompany. The employees of the transferor company shall become the employees of the transferee company. The liabilities of the transferor companyshall be taken over by the transferee company; and all pending proceedingsby or against the transferor company, all obligations, rights and claims, byor against the transferor company shall be that of the transferee company. ( 4 ) BY its resolution dated 9th of August 1980, the Board of Directorsof the transferor company resolved to amalgamate the transferor company withthe transferee company. Likewise, the Board of Directors of the transfereecompany in its meeting held on 9th of August 1980, perused and consideredthe draft scheme and resolved that the same be approved and adopted. ( 5 ) ON or about 28th of August 1990, the two petitioners made a jointapplication to this Court under Sections 391 (2) and 393 of the Act seekingdirections for convening and holding meetings of se cured creditors, unsecuredcreditors and members of the transferor and the transferee companies. Byorder dated 25th of October 1990, Sabharwal, J. , after notice to the Central Government and the Official Liquidator, gave directions for convening, holdingand conducting separate meetings of the secured creditors, unsecured creditorsand the members of the two companies. The meetings were directed to beheld on 7th of December 1990. Separate Chairman and alternate Chairmanwere designated to preside over the meetings of the transferor companyand that of the transferee company. Notice of the meetings was directedto be published in newspapers "statesman" and "vir Arjun", in additionto individual notices to the secured creditors, unsecured creditors andmembers of the two companies. By an order dated 5th of November1990, however, certain modifications were made in the earlier order tosubstitute the name of the Chairman and to correct the name of alter. Notice of the meetings was directedto be published in newspapers "statesman" and "vir Arjun", in additionto individual notices to the secured creditors, unsecured creditors andmembers of the two companies. By an order dated 5th of November1990, however, certain modifications were made in the earlier order tosubstitute the name of the Chairman and to correct the name of alter. nate Chairman appointed for holding meetings of the transferee company. further, instead of 7th of December 1990, the meetings in terms of order dated25th of October 1990 were directed to be held on 15th of December 1990. " -Consequently, separate notices convening the meetings were issued to individualcreditors and members of the two companies along with a statement undersection 393 of the Act. Public notices were also advertised in the "statesman"and "vir Arjun". Reports submitted by the respective Chairmen show thatat each of the meetings held on 15th of December 1990. the Scheme wasunanimously approved. ( 6 ) IN a report filed by the Official Liquidator, it is staled, inter alia,that the financial position of the transferor company and the transferee companyis good; that the proposed exchange ratio of 1:20 is favourable to the shareholders of the transferor company; that both the transferor and transfereecompanies are earning profits; that the proposed amalgamation will be beneficialto both the companies and more particularly to the share-holders of thetransferor company; and that the affairs of the transferor company have notbeen conducted in a manner prejudicial to the interests of i ts members orpublic interest. ( 7 ) IN pursuance of the provision made in Section 394-A of the Act,the Central Government has raised no objection to sanction of the scheme, andhas, by a representation dated 2nd of May 1991, helf it to the Court to decidethe case on its merits.- ( 8 ) WITH regard to reasonableness of. the proposed exchange ratio of shares, Counsel for the petitioners has contended that no hard fast rule canbe laid down for this purpose. The exchange ratio of 1:20 has been assessed bym/s. K. Shroff and Co. , Chartered Accountants, by a report dated 6th of August1990, on the basis of an average derived by integration of the asset valuationmethod and the yield method. The exchange ratio of 1:20 has been assessed bym/s. K. Shroff and Co. , Chartered Accountants, by a report dated 6th of August1990, on the basis of an average derived by integration of the asset valuationmethod and the yield method. The Supreme Court in Commissioner of Wealth-Tax, Assam v. Mahadeo Man and Others, 86 (1972) I. T. R. 621, after examiningvarious aspects of valuation of shares in a limited company, laid down sixprinciples for guidance, which are set out below :- " (1) Where the shares in a public limited company are quotedon the stock exchange and there are dealings in them, the priceprevailing on the valuation date is the value of the shares. (2) Where the shares are of a public limited company whichare not quoted on a stock exchange or of a private limited companythe value is determined by reference to the dividends if any, reflecting the profit-earning capacity on a reasonable commercial basis,but, where they do not, then the amount of yield on that basis willdetermine the value of the shares. In other words, the profits whichthe company has been making and should be making will ordinarilydetermine the value. The divided and earning method or yield methodare not mutually exclusive: both should help in ascertaining the profitearning capacity as indicated above. if the results of two methodsdiffer, an intermediate figure may have to be computed by adjustmentof unreasonable expenses and adopting a reasonable proportion ofprofits. (Emphasis added ). (3) In the case of a private limited company also where theexpenses are incurred out of all proportion the commercial venture,they will be added back to the profits of the company in computingthe yield. In such companies the restriction on share transferswill also be taken into consideration as earlier indicated in arrivingat a valuation. (4) Where the dividend yield and earning method break downbyreason of the company s inability to earn profits and declaredividends, if theset-back is temporary then it is perhaps possible totake the estimate of the value of the shares before set-back anddiscount it by apercentage corresponding to the proportionate fall inthe price of quoted shares of companies which have suffered similarreverses. (5) Where the company is ripe for winding up then the breakup value method determines what would be realised by that process. (6) As in Attorney-General of Ceylon v. Mackie, (1952) 2 Alle. (5) Where the company is ripe for winding up then the breakup value method determines what would be realised by that process. (6) As in Attorney-General of Ceylon v. Mackie, (1952) 2 Alle. R. 775 (P. C.) a valuation by reference to the assets would be justified where as in that case the fluctuations of profits and uncertaintyof the conditions at the date of the valuation prevented any reasonable estimation prospective profits and dividends. " ( 9 ) AN arrangement for reconstruction or amalgamation of a companyis essentially in the nature of a contract. What should be the terms andconditions of the contract has to be left for consideration by the concernedparties from a business point of view in a commercial sense. The adequacyof consideration for making the agreement is also for them to decide. Thecourts will not make bargains for the parties. Except in a case of fraud orprejudice to public. interest, if the proposed terms of the arrangement areacceptable to the concerned parties, for considering grant of sanction of thescheme under Section 391 of the Act, the Court will not interfere with it. ( 10 ) THE exchange ratio as per report of B. K. Shroff andco. has been arrived at by taking into account both the asset valuation methodand the yield method on the basis of the last audited balance-sheet as at31st of March 1990 of the two companies with adjustment of appreciation in quoted investments. Profits of the last five years have been taken intoaccount for computing average maintainable profits and an annual yield of 12%has been adopted. It is observed that only shares of the transferee companyare quoted. Keeping in view these factors, among others, the mean of net assetsand yield basis has been adopted for arriving at the exchange ratio. Detailson which share valuation has been made, are indicated in the annexures to thereport. The net assets value per share of the transferee company and thetransferor company has been found to be Rs. 179. 63 and Rs. 3,319. 20 respectively which works out to a ratio of 1:19. On the yield basis, value per shareof the transferor and transferee companies is found to be Rs. 13. 83 andrs. 352. 10 respectively bearing a ratio of I : 25. The main exchange ratiorecommended is 1:20 i. e. one share of the transferor company in relation tothe 20 shares of the transferee company. On the yield basis, value per shareof the transferor and transferee companies is found to be Rs. 13. 83 andrs. 352. 10 respectively bearing a ratio of I : 25. The main exchange ratiorecommended is 1:20 i. e. one share of the transferor company in relation tothe 20 shares of the transferee company. ( 11 ) FOR the present purpose, there appears to be no violation of anyprovisions of law in taking the mean of the two methods. In detemination ofthe exchange ratio, no illegality or fraud is alleged or. discernible. No objectionhas been raised by anyone at any of the meetings of the two companies nor inpursuance of public notices issued for hearing of the petition. The differencein the two methods is not much. The proposal to give to every share-holderfor every holder of one fully paid-up equity share of Rs. 100. 00 in the transferorcompany 20 equity shares, of Rs. 10. 00 each credited as fully paid-up in thetransferor company appears to be fair and reasonable. ( 12 ) THE members, as well as the secured and unsecured creditors ofthe transferor company and the transferee company are agreeable to the proposed scheme of amalgamation. The petitioners have disclosed to the Court andplaced on record all material facts relating to the two companies. No investigation proceedings in relation to the two companies are pending. The proposedamalgamation appears to be in the interests of the members, creditors and employees of the transferor company and the transferee company as also in thepublic interest. The scheme of amalgamation is therefore sanctioned. ( 13 ) THE Registry shall draw and issue the formal order in accordance with the Rules. ( 14 ) IT is hereby declared that he scheme of amalgamation shall bebinding on the transferor and transferee companies as well as on their respectiveshare-holders and creditors. Further, it is directed that the petitioners will file with the Registrarof Companies a certified copy of the order within 14 days from this date. ( 15 ) THE scheme shall be effective from the date when the certifiedcopy of the order is filed with the Registrar of Companies. The petition is, accordingly allowed.