Case Law Details
In re Sai Service Private Limited (NCLT Mumbai)
The National Company Law Tribunal (NCLT) considered a petition filed by Sai Service Private Limited seeking confirmation of a special resolution approving reduction of its share capital under Section 66 of the Companies Act, 2013. The proposal contemplated cancellation of up to a maximum of 11 equity shares, representing approximately 0.67% of the company’s issued, subscribed and paid-up equity share capital, together with cancellation of fractional shares held in the Share Suspense Account. The reduction applied to eligible shareholders holding two or fewer equity shares and shares held in the Investor Education and Protection Fund (IEPF), at the option of the eligible shareholders. The consideration approved was ₹58,82,870 per equity share, with ₹12,09,518 payable towards fractional shares. The special resolution was approved by the requisite majority on 27 June 2022.
The petitioner explained that, as per its audited balance sheet as on 31 March 2021, it had a paid-up share capital of ₹4,07,30,140 divided into 1,629 equity shares of ₹25,000 each and fractional shares valued at ₹5,140 in the Share Suspense Account. The company had been delisted from the Bombay Stock Exchange during FY 2008-09, following which the promoters made an exit offer to public shareholders. Since many shareholders could not participate in that exit offer, the company reorganised its share capital during FY 2013-14 by consolidating shares and increasing the face value from ₹10 to ₹25,000 per share. The present proposal was intended to provide another exit opportunity to identified shareholders and cancel the fractional shares in the Share Suspense Account. The company stated that the reduction would rationalise its capital structure and would not adversely affect the interests of shareholders or creditors.
The Regional Director (Western Region), Ministry of Corporate Affairs, submitted a report containing observations. The Registrar of Companies, Pune, reported that no inspection, investigation, inquiry or prosecution was pending against the company. The report referred to comments from the IEPF Authority stating that it had no role in reduction proceedings under Section 66 but, if the scheme was approved, the company should deposit the amount due on behalf of investors in Form IEPF-7 before shares were debited from the IEPF account. The Regional Director also sought affidavits regarding protection of creditors and stakeholders, highlighted that tax implications would remain subject to the Income Tax Authorities, requested reasons for the selective reduction, and questioned whether the proposal should instead be treated as a buy-back under Section 68 of the Companies Act, 2013.
In reply, the petitioner undertook to deposit the amount due on behalf of investors in Form IEPF-7 before debiting shares from the IEPF account. It also affirmed that the interests of creditors, stakeholders and government revenue were protected and that statutory dues had been paid. The company undertook to comply with all applicable provisions of the Income-tax Act, 1961 concerning tax consequences arising from the capital reduction.
Addressing the selective reduction, the petitioner reiterated the background of its delisting, the earlier consolidation of shares, and the objective of providing another exit opportunity to identified shareholders. It also stated that an independent registered valuer had been appointed, who issued valuation reports dated 6 June 2022 valuing the shares at ₹58,82,870 per equity share as on 31 March 2022, and that the Board had adopted this valuation as the offer price. The petitioner further undertook that the interests of all creditors would remain protected.
With respect to the Regional Director’s observation regarding Section 68, the petitioner submitted that Sections 66 and 68 of the Companies Act prescribe separate and independent procedures. It contended that Section 66 expressly permits reduction of share capital and that a company may proceed under Section 66 without circumventing the provisions governing buy-back under Section 68. The petitioner relied upon decisions of the NCLT Mumbai Bench in Max India Limited and Supreme Petrochemical Limited in support of its position. It further submitted that the consideration payable to shareholders would be treated as deemed dividend under Section 2(22)(d) of the Income-tax Act, 1961, with taxes to be withheld or deducted in accordance with applicable law.
The Tribunal noted that the petitioner had filed an affidavit in rejoinder addressing the Regional Director’s observations. The representative of the Regional Director informed the Tribunal that the explanations and clarifications furnished by the petitioner were satisfactory and that there was no objection to the petition. After considering the clarifications and the judgments cited, the Tribunal allowed the company petition.
The Tribunal directed the company to publish notices regarding registration of the order and approved minutes in The Free Press Journal (English) and Navshakti (Marathi) within 30 days of registration. It also directed the company to file a certified copy of the order and the certified form of minutes with the Registrar of Companies within 30 days of receipt of the certified order. All concerned regulatory authorities were directed to act upon production of the certified copy of the order. The approved minutes recorded that the issued, subscribed and paid-up share capital of Sai Service Private Limited stood reduced from ₹4,07,30,140 divided into 1,629 equity shares of ₹25,000 each and fractional shares of ₹5,140 to ₹4,04,50,000 divided into 1,618 equity shares of ₹25,000 each, with 382 shares remaining unissued.
Cases Discussed
- Max India Limited (NCLT Mumbai), CP No. 344 of 2021.
- Supreme Petrochemical Limited (NCLT Mumbai), CP No. 330 of 2021.
FULL TEXT OF THE NCLT JUDGMENT/ORDER
1. The Court convened by video-conference today.
2. Heard Learned Counsel for the Petitioner Company and the representative from the Regional Director (WR). No objector has come before the Tribunal to oppose the Petition and nor has any party controverted any averments made in the Petition.
3. The learned counsel for the Petitioner Company submits that this Petition is for confirmation of special resolution passed by the members of the Petitioner Company for capital reduction for cancellation of up to a maximum of 11 (Eleven) equity shares e. approximately 0.67 % of the total issued, subscribed and paid-up equity share capital of the Petitioner Company of face value of INR 25,000/- each, for a consideration of INR 58,82,870/- (Rupees Fifty eight lakh eighty two thousand eight hundred and seventy only) per share, based on the equity shares to be offered by the Eligible Shareholders (i.e. the shareholders holding two or less than two equity shares each and shares in Investor Education & Protection Fund (IEPF)) to the Petitioner Company for cancellation, at their option Company and fractional share(s) (upon consolidation) of INR 5,140/- under Share Suspense account. The said special resolution was approved by requisite majority on 27 June 2022.
4. The Learned Counsel for the Petitioner Company states that the rational for reduction is as follows;
a) As per the last audited balance sheet as on 31 March 2021, the Petitioner Company has a paid-up share capital of Rs. 4,07,30,140 divided into 1,629 Equity shares of Rs. 25,000 each fully paid-up and fractional share(s) (upon consolidation) of INR 5,140/- under Share Suspense account.
b) In the FY 2008-09, in accordance to the Securities and Exchange Board of India (Delisting of Securities) Guidelines, 2003, the Petitioner Company was delisted from Bombay Stock Exchange (BSE). The promoters of the Petitioner Company had made an “Exit Offer” to all the public shareholders of the Petitioner Company. Many shareholders / members of the Petitioner Company could not participate in the Exit Offer. Hence in the interest of both the members and the Petitioner Company and to provide an Exit Opportunity to the members, the Petitioner Company had during the F.Y. 2013 – 2014, reorganized it’s share capital by way of consolidation of shares and the face value of the shares of the Petitioner Company was increased from INR 10/- per share to INR 25,000/-per share.
c) Now, to provide another exit opportunity to the identified shareholders of the Petitioner Company (i.e. the shareholders holding two or less than two equity shares each and shares in Investor Education & protection Fund (IEPF), hereinafter referred to as the “Identified Shareholders”) for the nominal number of unlisted shares held by them and to cancel the fractional share(s) (upon consolidation) in the share suspense account, it is proposed to reduce the share capital of the Petitioner Company.
d) Reduction of share capital will enable the Petitioner Company to have a rational capital structure & will provide fair exit opportunity to the identified shareholders. The reduction of share capital does not adversely affect or be prejudicial to the interests of the shareholders or the creditors of the Petitioner Company.
e) In view of the above, to offer an exit opportunity to the identified shareholders of the Petitioner Company and to cancel the fractional share(s) (upon consolidation) in the share suspense account, approval of the National Company Law Tribunal (‘NCLT’) is proposed for reduction of share capital of the Petitioner Company under section 66 of the Companies Act, 2013 (‘the Act’), and the rules made thereunder.
5. The Regional Director (Western Region), Ministry of Corporate Affairs, Mumbai, has filed a Report dated 15 May 2023 inter-alia making the following observations which are produced hereunder to which the Petitioner has filed responses by way of an Affidavit – In-Rejoinder dated 16 May 2023:
| Para | Observation by the Regional Director | Responses by the Petitioner |
| 6 | ROC, Pune in his Report No. ROCP/Sec66/22-23/Sai/175 dated 10.05.2023, inter-alia mentioned that there is no inspection, investigation, inquiry, prosecution pending against the company. Further the ROC, Pune has made his observation at para no. 23 of his report and stated that,
1. As per the records the IEPF Authority, Ministry of Corporate Affairs holding 3 Shares. The IEPF Authority vide its email dated 01.05.2023 submitted their comments as follows: The authority has no role in the matter of reduction of share capital under Section 66 of the Companies Act, 2013 and therefore, the Hon’ble Tribunal may consider the above submission of the Authority and pass necessary orders as deemed fit and proper. However, if the scheme under section 66 is approved by Hon’ble Tribunal, the company shall be required to deposit the amount due on behalf of Investors based on valuation approved by the Hon’ble Tribunal in form IEPF-7 before shares are debited from the account of IEPF Authority. 2. In view of the above, the petition may be decided on the merits considering the interest of minority shareholders and creditors. |
In so far as the observation made in Paragraph 6 of the said Report is concerned the Petitioner Company undertakes to deposit the amount due on behalf of Investors based on valuation approved by the Hon’ble Tribunal in form IEPF-7 before the shares are debited from the account of IEPF Authority. |
| 7 (a) | Applicant to submit an Affidavit to the effect that the interest of the creditors and all stakeholders and Government Revenue are protected as well as Statutory dues are paid off. | In so far as the observation made in Paragraph 7 (a) of the said Report is concerned, the Petitioner Company hereby submits that the said reduction of capital is fair and in the interest of the creditors and all the stakeholders and Government Revenue are protected as well as statutory dues are paid off of the Petitioner Company. |
| 7 (b) | The tax implications if any arising out of the proposal for reduction is subject to final decision of the Income Tax Authorities. The approval of the Company Petition by this Hon’ble Court may not deter the Income Tax Authority to scrutinize the tax return filed by the Company after giving effect to the proposed reduc- tion. The decision of the Income Tax Authority is binding on the petitioner Company.Further the payment made to the shareholders shall be subject to payment of Income Tax or Capital Gain Tax, as the case may be in the hands of recipients Shareholders. |
In so far as the observation made in Paragraph 7 (b) of the said Report, the Petitioner Company undertakes to comply with all the applicable provisions including proceedings of the Income Tax Act, 1961(the “Income Tax Act”) and all tax issues arising out of the Petition of Capital Reduction will be met and answered in accordance with the law. |
| 7 (c) | Present scheme proposes the reduction of 11 shares and fraction of shares having value of Rs. 5,140/- i.e. the shareholders holding two or less than two equity shares each and shares in IEPF.
Therefore, petitioner company may be directed to place on record the complete reason for selective reduction of shares. Further, petitioner company may be directed to undertake that present scheme of reduction shall not be against the interest of the creditors as in the present scheme is going to reduce the shares hold by minor/public shareholder therefore, it is necessary to protect their interest. |
In so far as observations made in paragraphs 7 (c) of the RD Report, the Petitioner Company hereby submits that detailed background, reasons/rationale, commercial justification of the reduction of share capital by the Petitioner Company was provided in the paragraph 10 to 12 of our Petition, which is reproduced below:
“10. As per the last audited balance sheet as on 31 March 2021, the Petitioner Company has a paid-up share capital of Rs. 4,07,30,140 divided into 1,629 Equity shares of Rs. 25,000 each fully paid-up and fractional share(s) (upon consolidation) of INR 5,140/- under Share Suspense account. In the FY 2008-09, in accordance to the Securities and Exchange Board of India (Delisting of Securities) Guidelines, 2003, the Petitioner Company was delisted from Bombay Stock Exchange (BSE). The promoters of the Petitioner Company had made an “Exit Offer” to all the public shareholders of the Petitioner Company. Many shareholders/ members of the Petitioner Company could not participate in the Exit Offer. Hence in the interest of both the members and the Petitioner Company and to provide an Exit Opportunity to the members, the Petitioner Company had during the F.Y. 2013 – 2014, reorganised it’s share capital by way of consolidation of shares and the face value of the shares of the Petitioner Company was increased from INR 10/- per share to INR 25,000/- per share. Now, to provide another exit opportunity to the identified shareholders of the Petitioner Company (i.e. the shareholders holding two or less than two equity shares each and shares in Investor Education & protection Fund (IEPF), hereinafter referred to as the “Identified Shareholders”) for the nominal number of unlisted shares held by them and to cancel the fractional share(s) (upon consolidation) in the share suspense account, it is proposed to reduce the share capital of the Petitioner Company. Reduction of share capital will enable the Petitioner Company to have a rational capital structure & will provide fair exit opportunity to the identified shareholders. The reduction of share capital does not adversely affect or be prejudicial to the interests of the shareholders or the creditors of the Petitioner Company. In view of the above, to offer an exit opportunity to the identified shareholders of the Petitioner Company and to cancel the fractional share(s) (upon consolidation) in the share suspense account, approval of the National Company Law Tribunal (‘NCLT’) is proposed for reduction of share capital of the Petitioner Company under section 66 of the Companies Act, 2013 (‘the Act’), and the rules made thereunder. 11. To maintain fairness and transparency, the Petitioner Company has appointed Mr. Bhavesh M Rathod (Regd. No: IBBI/RV/ 06/2019/10708) as an independent registered valuer to undertake a separate valuation of the shares of the Petitioner Company for the purpose of the proposed selective capital reduction and obtained the valuation reports dated 6 June 2022 in this regard (“the Valuation Reports”). 12. Based on the Valuation Report dated 6 June 2022, the shares of the Petitioner Company have been valued at INR 58,82,870/- per equity share as on 31 March 2022. Accordingly, the Board decided that a price of INR 58,82,870/- (Rupees fifty-eight lakh eighty-two thousand eight hundred and seventy only) per equity share (the “Offer Price”) should be paid to the identified Shareholders as consideration for the proposed selective capital reduction.” Further, the Petitioner Company undertakes that the interest of all creditors is protected. |
| 7 (d) | It is respectfully submitted that, the petitioner Company is proposing to reduce share capital from INR 4,07,30, 140 divided into 1,629 Equity shares of Rs. 25,000 each, fully paid-up and fractional shares of INR 5,140/-, to INR 4,04,50,000 /- divided into 1,618 Equity shares of INR 25,000 each at Rs. 58,82,870/- per equity share for each equity share of par value of Rs. 25,000/- and Rs. 12,09,518 shall be paid towards fraction of shares. In this regard, it is submitted that in the proposed scheme the applicant proposes to pay off to the shareholders on very huge valuation of Rs. 58,82,870/- per share against a share having par value of Rs. 25,000/-, which is in the nature of buy back and not falling strictly under Section 66 of the Companies Act, 2013 as the petitioner company should proceed as per provisions of the Section 68 for buy back of shares.
Further any amount paid to Subject to the Observation made in para 6 & 7(a), (b), (c), (d) & (e) above. Hon’ble NCIT may pass appropriate order/ orders as deem fit and proper on merits. |
In so far as observations made in paragraphs 7(d) of the RD Report, the Petitioner Company submits as under:
i. As per the provisions of the Companies Act, 2013 (“the Act”), a company having a share capital by passing a special resolution and subject to confirmation by the Tribunal is entitled to reduce it’s share capital in any manner as it so desires. ii. The provisions of the Act have prescribed separate procedures and regulations for Buy-Back, which being independent provisions are not inter-dependent to each other. The provision under Section 66(6) of the Act explicitly provides for exclusion of section 66 of the Act for the purposes of buyback of it’s own securities by any Company. It is open for the Petitioner company to follow the procedure under Section 66 of the Act for share capital reduction or procedure under Section 68 of the Act of the Act for Buy-Back of its own securities and both the provisions/ procedures stand independent. iii. Section 66 of the Act provides for a detailed procedure to reduce the share capital of the Company in any manner inter alia paying off any paid-up capital which is in excess wants of the Company. The contentions of the Regional Director are contrary to the prevailing legal position. iv. In this regard reliance is placed on the following rulings where similar observations were raised by the Regional Director and the Hon’ble High Court/NCLT were pleased to allow reduction of share capital as a procedure under Section 66 of the Act: a. Decision of NCLT Mumbai Bench in CP No. 344 of 2021 Max India Limited. b. Decision of NCLT Mumbai v. In view of the above the Petitioner Further, the Petitioner Company hereby submits that he consideration payable to the shareholders would be considered as deemed divided within the provisions of Section 2(22)(d) of the Income-tax Act, 1961 as provided in the paragraph 13 of our Petition, which is reproduced below: “The consideration payable to the shareholders would be considered as deemed divided within the provisions of Section 2(22)(d) of the |
6. In response to the Report of the Regional Director the Petitioner Company has filed affidavit in rejoinder and have given necessary clarifications to the observations made by the Regional Director.
7. The Representative of the RD has submitted that the explanations and clarifications given by the petitioner companies are found satisfactory and that they have no objection.
8. In view of the clarifications given by the Petitioner Company and the judgement cited on the issue the Company Petition is allowed.
9. The Petitioner Company to publish notices about registration of order and minutes by the concerned Registrar of Companies, Pune, Maharashtra in two newspapers namely “The Free Press Journal” in English language and translation thereof in “Navshakti” in Marathi language both having circulation in the State of Maharashtra within 30 days of registration.
10. The Petitioner Company undertakes to file the certified copy of the order and form of minutes duly certified by the Designated Registrar of this Tribunal with the Registrar of Companies within 30 days from the date of receipt of the certified Order from the Registry of this Tribunal.
11. All concerned regulatory authorities to act on production of certified copy of the order to be issued on demand by the Designated Registrar of this Tribunal.
12. The minutes set forth hereto be and is hereby approved.
Form of Minutes
“The issued, subscribed and paid up share capital of Sai Service Private Limited, is henceforth INR 4,04,50,000/- divided into 1618 equity shares of INR 25,000 each, reduced from 4,07,30,140 divided into 1,629 equity shares of INR 25,000 each and Share Suspense account having fractional share(s) (upon consolidation) of INR 5,140/-. At the date of the registration of this minute 1618 shares have been issued and are deemed to be fully paid (and the remaining 382 shares are unissued)”
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