[Mokshi is a student at Maharashtra National Law University, Mumbai.]
The National Company Law Tribunal Kolkata's (Tribunal) recent decision to reject Philips India Limited's (Philips) application under Section 66 of the Companies Act 2013 (2013 Act), calls for reconsideration, since it limits corporate flexibility and deter companies from pursuing legitimate shareholder-endorsed exit strategies.
After the delisting, Philips sought to offer an exit option to the remaining 3.16% of the public non-promoter shareholders, through capital reduction, which led to an application to the Tribunal, under Section 66 of the 2013 Act. This provision provides companies with a framework to reduce their share capital, by approval of National Company Law Tribunal (NCLT).
The Tribunal rejected the application on the grounds that, first, Section 66 allows for reduction only in three specific cases, which are not applicable in the present case, and second, it viewed Philips’ move as a buyback of its own shares, not as a capital reduction, thus rendering Section 66 inapplicable due to Section 66(6) which excludes buyback.
The author begins by highlighting the Tribunal’s narrow interpretation of Section 66, and how it diverges from principles established in multiple precedents. The author, further contends, that this case should be classified as capital reduction, not as a buyback of equity shares.
Part I: Restrictive Approach taken by the Tribunal
The Tribunal rejected the application, asserting that Section 66 cannot facilitate exit opportunities for minority shareholders, but can be invoked solely in 3 specific circumstances: (1.) cancellation of paid up share capital, which is not paid, (2.) cancellation of lost or unrepresented paid-up capital, and (3.) repayment of excess capital, which are not applicable in the present case.
To counter the above reasoning, closer examination of the language of Section 66(1) of the 2013 Act is required. The statute clearly states that a company may reduce the share capital ‘in any manner’, a point upheld by NCLT in the matter of Tamanna Hotels Private Limited (2019) and by National Company Law Appellate Tribunal (NCLAT) in the matter of Devinder Parkash Kalra and Others v. Syngenta India Limited (2021) in their recent decisions, thereby confirming the expansive scope of the provision. In RBIL 2 (infra), the Delhi High Court—and more recently, in Brillio Technologies v. Registrar of Companies, Karnataka (2021)—the NCLAT expressly stated that Sections 66(1)(a) and 66(1)(b) are mere illustrations, indicating that they are not exhaustive in nature. This highlights the Tribunal’s overly restrictive reading of Section 66(1) in this instance.
Additionally, one potential counter-argument, that the Tribunal had the authority to examine the motive of the promoter group of shareholders, arises from the Delhi High Court judgment in Reckitt Benckiser India Limited v. Unknown (2005), which states that to assess whether a reduction of capital is unfair or discriminatory, 2 factors shall be considered: (1.) motive of the company, and (2.) fairness of the valuation of the shares.
To counter that, it is crucial to note that motive reflects the judicial authority’s duty to balance the interests of minority shareholders. In this context, Philips cites 2 reasons for pursuing capital reduction: (1.) exit option to minority shareholders post-delisting; and (2.) reduction of costs associated with maintaining minority shareholders.
In that case, the Tribunal conflates the company’s motives with the reasons or circumstances for the capital reduction. To accurately assess the underlying motive behind Philips’ actions, the Tribunal should evaluate the intent behind the stated reasons. While it could have considered the impact on minority shareholders, but the fact that 99.58% of non-promoter shareholders voted in favor underscores compliance with the principle of ‘majority of minority approval’ (MoM approval), warrants fairness, as demonstrated in Sandvik Asia Limited v. Bharat Kumar Padamsi (2009) (Sandvik) and Organon (India) Limited v. Tulzapurkar (2010) (Organon). The emphasis on MoM approval reflects judicial recognition of ‘shareholder democracy’ i.e., the informed will of the majority of non-promoter shareholders should be respected as a representative of a fair commercial judgement, as upheld in the Bombay High Court case of Re. Cadbury India Limited v. High Court of Bombay (2014). By failing to adequately consider the expressed will of the shareholders and the broader implications of its ruling, the Tribunal risks establishing a precedent that may stifle legitimate avenues for companies seeking capital reduction for bona fide purposes.
Part II: Reduction of Capital v/s Buy Back of Shares?
The Tribunal’s second ground for rejection of application was that the Philips is fulfilling its main objective of buy back, and reduction of share capital is merely incidental to it. It highlighted that erstwhile Section 100 of the Companies Act 1956, dealing with capital reduction, was wide. In its view, Section 66(6) of the 2013 Act provides for specific bar, indicating Section 66 will not be applicable in a case of buy back of securities.
The author, however, contends that the Tribunal misunderstands the legislative intent behind Section 66(6). The provision simply allows companies to pursue a buy back process without court approval, and not a restriction on the use of capital reduction for shareholder buyouts under Section 66. Additionally, the Tribunal did not define what it meant by Section 100 was “wide”.
Building on, in Reckitt Benckiser India Limited (RBIL 2), the Bombay High Court relying on SEBI v. Sterlite Industries held that buybacks and capital reduction are intended to be applied in different fields. For instance, in buyback of shares under Section 68 of the 2013 Act, the company receives the shares from the shareholders who wish to tender the shares in the buyback and then the company cancels the shares. However, in case of capital reduction under section 66 of the 2013 Act, the shares are automatically cancelled upon sanction by the Tribunal, highlighting a procedural and functional difference.
The difference lies in Philips’ goal—achieving an exit opportunity for public shareholders and cost reduction—not merely in the mechanism. Capital reduction serves as the main objective, with the buyback mechanism acting as a causa sine qua non (necessary means) rather than an end in itself. It is a well-established principle that the companies are free to choose between buyback of its shares and share capital reduction. Given this, Philips’ move to reduce share capital through Section 66 should be viewed as a capital reduction rather than a buyback. As such, it does not bypass the provisions of Section 68.
The Bombay High Court, in Sandvik, addressed the question whether capital reduction should be proportionate to all shareholders. The court relied upon the House of Lords judgment in the case of British & American Trustee and Finance Corporation Limited v. John Couper, which was recognized by Indian courts in case of Ramesh B Desai v. Bipon Vadilal Mehta and held that it is company’s prerogative alone to decide if only a particular class of shareholders, such as non-promoter members, shall be targeted for capital reduction, making it a purely domestic concern. Relying on Sandvik, the court accepted the capital reduction for only the class of non-promoter shareholders under Section 100 in Organon as well as RBIL 2. Further, there has been no jurisprudence in India on whether there could be selective buy back of shares.
The Tribunal, in the present matter, fails to take into account the above jurisprudence while rejecting the application of Philips. Therefore, the author’s contention that this is a case of capital reduction and not buyback of equity shares stands.
Conclusion
The Tribunal’s stance to reject Philips’ application for capital reduction reflects a restrictive and arguably flawed interpretation of the law, one that risks undermining the fundamental principles of corporate autonomy and shareholder democracy. Consequently, this case calls for a more nuanced judicial stance that recognizes capital reduction as a versatile corporate tool, enabling companies to respond to commercial realities while protecting shareholder interests.
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