2007 (6) TMI 292 - HC - Companies Law

Reduction of Share capital - manufacture of lightening arresters - Company seeks to reduce its share capital, constituting 25 per cent of its issued and paid up share capital - HELD THAT - In the present case, there are two aspects to the resolution proposed by the Company which are as follows ( i ) An affirmative or negative vote in respect of the resolution proposing reduction and ( ii ) An objection to giving up one s shares in the proposed reduction thereby dealing with the mechanism of the reduction. In the present case, both these facets are covered by the same resolution. 3723 shareholders who did not object to the scheme by casting their votes are not counted towards the votes required to approve the decision to reduce per se. In other words, the assumption made on account of abstention in respect of the persons who did not vote is only in respect of the mechanism of reduction. This is, therefore, not a case where the Company has assumed that such persons who abstained from voting were in favour of the resolution that was resolved per se. Consequently, the question as to whether such abstention can be assumed to be in favour of the resolution will not arise in the facts of this case. Having considered the petition of the Stock Exchange, it is not possible for the Court to come to the conclusion that the exit opportunity that was offered was inequitable or unjust. The material placed on the record provides data of the share price movements. The price of Rs. 183 per share was well above the price at which the shares of the Company were traded on the date on which a resolution was passed by the Board of Directors. In fact, as the Company has pointed out to the Court, the price per share as offered was higher than the price prevalent on the date on which the result of the postal ballot was declared as well as on the date on which a draft petition was filed before the Stock Exchange for its approval. The speculative variation in the price of the shares of the Company will not operate, as suggested, to invalidate a resolution which has been validly passed. None of the shareholders have objected to the proposed reduction. Thus, there is no reason why the prayer for reduction should not be allowed. However, before proceeding to do so, it would be appropriate for the Court to clarify that the orders passed in this petition, shall not preclude the Bombay Stock Exchange and the Pune Stock Exchange from taking recourse to their rights on the question as to whether there has been any violation of the listing agreement either with reference to the provision of clause 24( f ) or otherwise. The Stock Exchanges would be at liberty to take recourse to such powers as are conferred upon them in accordance with law. Subject to the aforesaid, the Company Petition is made absolute in terms of prayer clauses ( a ) to ( d ).

Issues Involved:
1. Reduction of Share Capital
2. Validity of Selective Reduction
3. Compliance with Legal Procedures
4. Objections by Stock Exchange
5. Fairness and Equity of the Scheme

Issue-Wise Detailed Analysis:

1. Reduction of Share Capital:
The petition was instituted under section 101 of the Companies Act, 1956, seeking an order for the reduction of the capital of the Petitioner, a public limited company incorporated on 27-7-1962. The Petitioner proposed to reduce its share capital by Rs. 88,91,690, constituting 25% of its issued and paid-up share capital. The reduction involved extinguishing and canceling 8,89,169 shares held by shareholders and returning capital at Rs. 183 per equity share of Rs. 10 each.

2. Validity of Selective Reduction:
The principal reasons for the reduction included the sale of the isolator division, generating surplus funds, and the need to readjust the relation between capital and assets. The Board of Directors passed a resolution for the reduction on 27-1-2006. The scheme proposed that the reduction would apply to shareholders who either vote in favor or do not object to the resolution. The law permits selective reduction, as highlighted by the House of Lords in British and American Trustee and Finance Corporation Ltd. v. John Couper, and affirmed by Indian courts in cases like Ramesh B. Desai v. Bipin Vadilal Mehta.

3. Compliance with Legal Procedures:
The reduction was approved by a special resolution passed by the requisite majority through a postal ballot. The result showed 99.5% of the voted shares in favor. The scheme was approved by 95.76% in number and 99.62% in value of the creditors. The company provided an exit opportunity to shareholders, with the price per share determined by external valuers and set at a premium over the market price.

4. Objections by Stock Exchange:
The Bombay Stock Exchange (BSE) objected, suggesting the scheme should apply to all shareholders or only those who positively assented. BSE's objections included a substantial increase in share price and potential benefits to promoters. The company responded that selective reduction is permissible and provided an undertaking to maintain non-promoter shareholding as required by regulations.

5. Fairness and Equity of the Scheme:
The court emphasized that selective reduction is legally permissible and must be fair and equitable. The exit price of Rs. 183 per share was higher than the market price on relevant dates. The court found no unfair or inequitable transaction and noted that no shareholders objected to the reduction. The speculative increase in share price did not invalidate the resolution.

Conclusion:
The court allowed the reduction of share capital, clarifying that the Stock Exchanges could still exercise their rights regarding any potential violations of the listing agreement. The Company Petition was made absolute in terms of the requested reliefs.

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