SHARE CAPITAL REDUCTION sought under SECTION 66 is denied by the NCLT

Recently, the Hon’ble Kolkata Bench of the National Company Law Tribunal (“NCLT”) rejected a scheme of Capital Reduction (“Scheme”) filed by Phillips India Limited (“PIL” or Petitioner Company”) which inter-alia provides for the compulsory exit of minority shareholders.

Facts of the Case:

• In the Petitioner Company, 96.13% of the shareholding is held by a group Company, namely, Koninklijke Philips N. V. (in short “KPNV”), which holds 5,52,90,182 shares of Rs. 10 each and Philip Radio B. V. The public shareholders (Retail Shareholders) hold 18,16,948 equity shares of Rs. 10 each, representing 3.16% of the shareholding. Remaining shares are held by the Investor Education Protech Fund.
• The equity shares of the Petitioner Company were delisted from the stock exchanges in the year 2004.
• It is the claim of the petitioner that public shareholders are put to a lot of hardship and inconvenience as there is no liquidity for their shareholding.
• Considering the requests from these shareholders and to help them liquidate their shares, the Petitioner Company took a decision to reduce the share capital of the Company and pay to such public shareholders based on the “fair value” of the shares as consideration and provide an exit to such specified shareholders in a fair and transparent manner.
• The Board of Directors at their meeting held on 31st October 2023 considered and approved the proposed Capital Reduction of the Petitioner Company under section 66 of the Companies Act, 2013 as per the terms set out in the resolution which includes consideration of INR 915 per share.

Objections by some of the minority shareholders:

• Some of the minority shareholders of the PIL objected to the scheme stating the fair value offered by the Company is not fair and the value per share is substantially higher than what is been offered by the Company.
• Minority shareholders also submitted valuation reports by other valuer which valued the shares in the range of INR 4,605 to 6,119 per equity share.
• The Scheme of capital reduction is unjust or unreasonable or if it unfairly discriminates a class of shareholders, such a scheme should be rejected, by this Tribunal.
• The valuation of the equity shares is in breach of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.

Hon’ble NCLT Decision:

• This petition has been filed under Section 66 of the Companies Act, 2013, predominantly for buying out the minority shareholders who are large in number compared to the promoter shareholder.
• It would be appropriate to examine the relevant parts of the report submitted by Regional Director MCA on the proposed capital reduction.
• Hon’ble NCLT examined whether for buying out the shareholding of the minority shareholders, Section 66 of the Companies Act 2013 which deals with capital reduction can be invoked.
• As per Section 66(1)(a), the Company can reduce the share capital for
            (a) extinguishing or reducing the liability of any of its shares in respect of the share capital not paid-up or
            (b) either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up capital which is lost or is unrepresented by available assets or pay off any paid-up share capital which is in excess of the wants of the Company.
• NCLT is of the view that sub-Section (1)(a) of Section 66 has no application in this case, as the capital reduction is not sought for extinguishing or reducing the share capital that has not been paid-up.
• Nothing has been pleaded in the petition or during the course of hearing that the reduction in share capital is for cancellation of paid-up capital, which is lost or unrepresented by available assets, and therefore the first part of Section 66(1)(b) has no application to the case in hand.
• It has also not been the case of the Petitioner Company in their pleadings that they wanted to pay off capital which is in excess of the wants of the Company.
• the Petitioner Company has claimed only two grounds (a) wanted to provide liquidity/exit for the minority shareholders (b) the Company wanted to save on administrative cost of servicing large public shareholders with negligible percentage of shareholding.
• In the erstwhile Section 100 of the Companies Act, 1956, which dealt with capital reduction, provisions were wide enough and there was no specific bar for “buy back of shares” from minority shareholders for the purpose of Capital Reduction.
• However, Section 66(6) of the Companies Act, 2013, in our view provides specific bar and states that nothing in this Section shall apply to buy-back of its own securities by a Company under Section 68 of the Companies Act, 2013.
• With current facts and circumstances, the Petitioner Company is resorting to buy-back of its own equity shares from the minority shareholders/public shareholders and incidentally reducing the share capital. In other words, share capital reduction is only incidental to the main objective of buy back of shares, even as per their own pleadings.
• On valuation, NCLT said that both reports as presented by the Petitioner & Minority Shareholders seem to be in order however, as they are dismissing the petition on other grounds, it does not require any further investigations.

Thus, Hon’ble NCLT dismissed this petition on the ground that Section 66 of the Companies Act cannot be invoked under the facts and circumstances of the case.

Conclusion

In an interesting development, Hon’ble NCLT closed one of the widely used doors by promoters of many erstwhile listed companies which now looking for 100% control over the company particularly MNC’s by giving exit to public shareholders out of the funds of an Indian subsidiary. Without prejudice, in our humble opinion, it is not well reasoned decision and not referring to which are the laws and provisions not complied with. For more transparent process, Companies may opt for a scheme under Sec 230(11) of the Companies Act, 2013.

Maybe in some other case or the same matter goes to the Hon’ble National Company Law Appellate Tribunal, it may get argued based on law and not on facts. In past, many companies opted similar route including under the new Companies Act however with this decision things will not be easy.

The valuation will always be disputed issue between promoters and minority shareholders however, promoters shall try to offer a premium over fair value as they will get complete control over the company that too using the company’s funds only.

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