2014 (4) TMI 721 - HC - Companies Law

Sanction to the proposed reduction of the Subscribed and Paid-up Equity and Preference Share Capital of the petitioner Company - Held that - The first observation made by the Regional Director expresses the apprehension that the proposed reduction of capital is in substance a ruse to distribute profits. The rationale for reduction of capital, that is provided by the petitioner, is that the current capital of the company is in excess of its requirements. It has also been stated that the object of the proposed reduction of share capital is to provide a partial exit to the investor shareholders (i.e. foreign investors). Apparently, the company does not envisage that the current quantum of share capital would be required for its future needs. Present capital of the company is in excess of its requirements and there is no material on record which would indicate to the contrary. The observation made by the Regional Director is solely premised on the fact that the petitioner company is a profitable one. There is no principle of law which prohibits a profitable company from reducing its share capital and thus the fact that the petitioner company is a profitable one cannot possibly, in absence of any other material fact, lead to the conclusion that the reduction of capital is for a collateral purpose. The fact that the petitioner is a profitable company would only indicate that the company has in addition to its capital also generated further funds and the same would not negate the reason that the petitioner has capital in excess of its requirements. It is also relevant to note that the reduction of capital is not on proportionate basis. Therefore, the ratio of the entitlement of the shareholders to future profits by way of dividends would also stand altered by reason of reduction in capital as proposed. Approval of reduction in the share capital cannot be withheld on the basis of the above mentioned observation made by the Regional Director - there is no infirmity in the procedure adopted by the petitioner for reduction of capital. The resolution for the same has been passed by the Board of Directors of the Company. The shareholders of the company have also unanimously passed the resolution for reduction of capital as proposed. The petition has been duly advertised - The procedure prescribed for sanction of a scheme under Section 391-394 of the Act, in substance, is similar to the procedure for approval of reduction in share capital. And, I see no reason why approval to the reduction not be granted, in given facts where the shareholders have unanimously consented to a reduction of capital in a particular manner - proposed reduction in the paid-up share capital of the Company is duly authorized by Article 3.1 of its Articles of Association. The Special Resolution has been unanimously approved and adopted by the shareholders of the Company at the EOGM held on 08.07.2013. None of the creditors have opposed the reduction of capital - Decided in favour of petitioner.

Issues Involved:
1. Approval of reduction of share capital under Sections 100-104 of the Companies Act, 1956.
2. Distribution of profits under the guise of capital reduction.
3. Treatment of convertible preference shares as debt capital.
4. Proportionate reduction of share capital among shareholders.
5. Payment exceeding the face value of shares.

Issue-wise Detailed Analysis:

1. Approval of reduction of share capital under Sections 100-104 of the Companies Act, 1956:
The petitioner company sought approval for the reduction of its subscribed and paid-up equity and preference share capital. The reduction involved canceling a specified number of shares held by certain shareholders, with the amounts payable to them determined by an independent valuer. The reduction was approved by the company's shareholders at an Extraordinary General Meeting on 08.07.2013. The court noted that the procedure adopted by the petitioner complied with the legal requirements, including obtaining the requisite consents from creditors and shareholders.

2. Distribution of profits under the guise of capital reduction:
The Regional Director observed that the petitioner company, being profitable, might be using the reduction of capital to distribute profits. The court, however, found this observation erroneous, noting that Section 100(1)(c) of the Act permits reduction of share capital if it is in excess of the company's requirements. The court emphasized that the reduction was not proportionate, indicating that the primary objective was not the distribution of profits but rather providing a partial exit to investor shareholders.

3. Treatment of convertible preference shares as debt capital:
The Regional Director suggested that reducing convertible preference shares without conversion would treat them as redeemable preference shares, thus requiring compliance with External Commercial Borrowing norms. The court disagreed, citing RBI guidelines that fully convertible preference shares are treated as share capital. The court clarified that the reduction of such shares should follow equity capital reduction norms and does not equate to debt repayment.

4. Proportionate reduction of share capital among shareholders:
The Regional Director pointed out that the reduction was not proportionate, affecting only foreign shareholders. The court held that selective reduction is permissible if it is fair and equitable. It cited precedents indicating that companies can reduce share capital selectively, provided the procedure is lawful and the reduction is not unfair or inequitable. The court found no unfairness, as the shareholders had unanimously approved the reduction, and the varying rates per share were based on the duration of investment.

5. Payment exceeding the face value of shares:
The Regional Director contended that the payment proposed exceeded the face value of the shares, which should not be allowed under Section 100(1)(c). The court clarified that Section 100(1)(c) allows paying off excess capital, and the payment in excess of face value would be treated as "deemed dividend" under the Income Tax Act, with the petitioner company bearing the dividend distribution tax liability.

Conclusion:
The court approved the reduction of share capital, finding no legal or procedural infirmities. It emphasized that the reduction was a domestic matter decided by the shareholders, who are best positioned to determine the company's needs. The court directed the petitioner to file the approved minutes with the Registrar of Companies and publish the notice of the order in specified newspapers. The requirement to add the words "AND REDUCED" was dispensed with.

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