Reduction of Share Capital by RT Exports

RT Exports Limited (‘RTEL’) was incorporated as a Private Limited Company under the name and style of “R.T. Exports Private Limited” on 1^st May, 1980 in the state of Maharashtra having its registered office at Mumbai. The company converted to a Public Limited company and the name was changed to “RT Exports Limited”. The company got listed on BSE on 30^th July,2001. The company is engaged in business of export and local trading of agri-products especially Basmati rice which is procured from Bundi, Rajasthan and exported under the brand name “White Pearl” to various countries like US, UK, European and Gulf countries.

Transaction

The company proposes to reduce its entire issued and paid-up Preference share capital under section 66 of the Companies Act, 2013 (‘Act’). The Company has issued 700,000, 9% Cumulative Preference Shares of Rs. 100/- each fully paid-up which are due to be redeemed on or before March 31, 2020. The Company has further issued 11,98,258, 6% Non-Cumulative Preference Shares of Rs.100/- each fully paid-up off which 4,02,843 shares were redeemed on 2008, and balance 7,95,415 which are due to be redeemed on or before March 31, 2020. The Company is not in a position to redeem the aforesaid preference shares in view of inadequate profits.

Please Note: There is no clarity on redemption terms as there is difference in terms mentioned in the scheme and financial of the company.

Details of preference shares

• It is not listed on any stock exchanges.
• The 6% Non-Cumulative Redeemable Preference Shares of the company were to be redeemed by the company as on 8^th March, 2013 but not redeemed by the company owing to dispute between its holders and the company. The said shares have been transferred during the financial year ended 31^st March, 2018 from Harmony Holding Ltd to Kutch Warehouses Private Ltd. The company received a consent from the subsequent Preference shareholder for further extension of redemption period upto 07.03.2019.

Consideration

The payment of consideration for reduction of Preference Share Capital amounting to Rupees 14,95,41,500/-  would be made to the preference shareholders as and when the funds would be available with the Company within a period of 3 years from the Effective Date and till such time, the amount payable will be treated as loan in the books of accounts of the Company.

The rate of interest payable by the Company on such outstanding loan shall be as per the provisions of Section 186(7) of the Act and rules made thereunder i.e. rate of interest lower than the prevailing yield of one year, three-year, five year or ten year Government Security closest to the tenor of the loan.

Purpose of Reduction

1. The company is not in position to redeem its preference shares in absence of profits
2. As per section 55, preference shares can be redeemed out of the profits of the company only if not than the company to issue further redeemable preference shares equal to the amount due including dividend thereon which shall be deemed to be redemption of the unredeemed preference shares, subject to approval of the Tribunal.
3. No immediate outflow/pay-out of funds from the company for making the scheme effective.
4. Since, the company is into losses, it cannot pay dividends to both the classes of Shareholders and the shareholders have waived off their right to receive dividend on both category of shares till 31^st March, 2020.

Pre – Post Shareholding pattern of Preference Share

Apart from above the scheme also provides that the Scheme would not, in any way affect the Company or its shareholders or its creditors in ordinary course of business.  The company has taken approval of the members via resolution and the same shall be deemed to be their consent\approval to the alteration of Memorandum and Articles of association. Also, the Preference Share certificates held by preference shareholders in the Company shall be deemed to have been automatically cancelled and cease to be negotiable and be of no commercial or legal value.

Valuation

Since this is preference share any valuation method has not been followed, and it has been valued at face value which is also equal redemption price. 

Taxation

No tax implication in the hands of the company and shareholders as redemption is at face value. The scheme does not involve any conveyance or transfer of property and consequently the order of the tribunal approving the scheme will not attract any stamp duty.

Financial

Since preference share has been converted in loan, so interest liabilities will have to be expenses out therefore it will have more loss than current loss.

Conclusion

The preference shares have preferential right towards Dividend and repayment in case of winding up. Payment of dividend by the company is not mandatory and since the company is into losses it cannot pay dividend. There will be no effect of the scheme on the rights of the equity shareholders after the reduction. 

The scheme provides for reductions/redemption of the entire paid-up preference share capital u/s 66 and deemed to be treated as loan. It is also to provide an exit to the Promotors by reduction of the paid-up share capital. Since, the company is into losses it cannot pay dividend nor it has capacity to redeem them by the 31^st March, 2020. Hence, Reduction of shares is the only way through which R T Exports can redeem/reduce/ the shares out of the company.