2005 (2) TMI 546 - HC - Companies Law

Summary

Issues Involved:
1. Reduction of share capital.
2. Issuance of preference shares.
3. Dispensation of creditor procedures under Section 102(2) and (3).
4. Objections by GIIC.
5. Compliance with Sections 106, 107, and 192A of the Companies Act, 1956.

Detailed Analysis:

1. Reduction of Share Capital:
The petitioner, Essar Steel Limited, sought confirmation from the court to reduce its share capital by cancelling 20,47,33,113 equity shares of Rs. 10 each and issuing preference shares in lieu thereof, as resolved in its 27th Annual General Meeting on July 19, 2003. The company cited financial difficulties due to global and domestic market conditions, necessitating significant debt restructuring. The restructuring package included converting part of the debt into equity and reducing the equity share capital to stabilize the company's financial health.

2. Issuance of Preference Shares:
The restructuring package proposed that for every ten equity shares held, four would be cancelled and replaced with four non-cumulative redeemable preference shares of Rs. 10 each, with a coupon of 0.01%, redeemable in four equal yearly installments starting from October 1, 2017. The remaining six equity shares would continue as fully paid equity shares. This conversion was aimed at maintaining the share capital while addressing debt obligations.

3. Dispensation of Creditor Procedures under Section 102(2) and (3):
The petitioner requested the court to dispense with the procedures laid down under Section 102(2) and (3) regarding creditors, arguing that the reduction did not involve any diminution of liability in respect of unpaid share capital or payment to any shareholder of any paid-up share capital. The court agreed, noting that creditors' interests were not affected as the share capital was maintained and further equity capital would be infused by converting part of the debt into equity.

4. Objections by GIIC:
GIIC, a government enterprise holding 30,26,200 equity shares, objected to the scheme, arguing that it would suffer a significant financial loss due to the cancellation of 40% of its shares. GIIC contended that the scheme favored lenders and promoters over shareholders, particularly criticizing the issuance of preference shares with a negligible coupon rate and the conversion of unsecured loans into equity at a favorable rate for promoters. The court found these objections unsubstantial, noting that the scheme had been approved by the requisite majority of shareholders and that GIIC had not attended the meeting.

5. Compliance with Sections 106, 107, and 192A of the Companies Act, 1956:
GIIC argued that the reduction of share capital involved a variation of shareholders' rights, violating Sections 106 and 107, and that the resolution should have been passed by postal ballot as per Section 192A. The court disagreed, stating that the reduction did not constitute a variation of rights as it did not curtail any shareholder rights. The provisions of Sections 106 and 107 were not applicable as they pertained to the variation of rights attached to shares, not the cancellation or reduction of share capital. The court also noted that the necessary procedural requirements had been followed.

Conclusion:
The court confirmed the reduction of share capital and approved the issuance of preference shares as proposed. The procedure under Section 102(2) and (3) was dispensed with, and the petitioner was permitted to dispense with the use of the words "and reduced." The court directed the petitioner to publish the notice of confirmation in specified newspapers within 14 days of registering the order with the Registrar of Companies. The petition was disposed of with no order as to costs.