In a recent decision1, the National Company Law Tribunal (NCLT), Kolkata Bench, against the established precedents, dismissed the selective capital reduction proposed by Philips India Limited (Philips). A capital reduction was proposed by Philips in terms of Section 66 of the Companies Act, 2013 (the Act) to squeeze out the minority shareholders.
The facts of the case are as follows:
- The non-promoter public shareholders held 3.16% in the paid-up share capital of Philips.
- The equity shares of Philips were delisted from the stock exchanges in the year 2004.
- Consequent to delisting, the public shareholders holding 3.16% of the total shareholding do not have avenue to monetize their shareholding. Therefore, Philips proposed selective capital reduction to give exit to said non-promoter public shareholders.
- The non-promoter shareholders of Philips mainly contested on
the valuation of shares and methodology adopted for the same as
follows:
- The independent registered valuer report obtained by non-promoter shareholders indicate that using discounted cash flow method, the valuation of shares is way higher - in the range of INR 4,605 to INR 6,119 per equity share, as against INR 740 per equity share, indicated by the valuers appointed by Philips, plus a premium of INR 175 per equity share as determined by the Board of Philips.
- Another valuation report obtained by non-promoter shareholders indicates the value at INR 4,463 per share using comparable company method.
NCLT Ruling
After considering the arguments of both sides the NCLT passed following ruling:
- NCLT analysed that the proposal to selective capital reduction as sought by Philips does not fall under the any of the scenario listed in clause (a) and (b) of Section 66(1) of the Act.
- It further analysed that under the facts and circumstances, the petitioner company is resorting to buy-back of its own equity shares from the minority shareholders/public shareholders and incidentally reducing the share capital. In NCLT's view sub-section (6) of 66 of the Act provides specific bar and states that nothing therein in shall apply to buy-back of its own securities by a company under Section 68 of the Act.
- On the valuation front, while the NCLT inclined to agree with the submissions made by Philips, it noted a huge difference between the values determined by Philip's valuer and the valuer appointed by non-promoter shareholders, even though both of them adopted same method, i.e. the discounted cash flow method.
- However, given it is dismissing the petition of Philips on the ground that cannot be invoked for selective capital reduction, NCLT desists itself from further going into the valuation to reconcile vastly different prices determined by two registered valuers.
Our Comments
The NCLT ruling comes as a big surprise in the view of statutory
provisions and jurisprudence on the subject matter. The NCLT did
not take into account that sub-section (1) of Section 66 of the Act
expressly provides that a company may reduce its share capital
'in any manner'. Whereas clause (a) and (b) of sub-section
(1) of the of the Act certain particular instances by which the
reduction of capital can be effected. The words 'in any
manner' are wide enough to clarify that there is no limit on
the modes in which capital may be reduced. It is well settled that
the language of Section 66(1) of the Act gives wide powers to
companies for the reduction of capital and the ways specified in
clause (a) and (b) of Section 66(1) of the Act are only
illustrative.
The ruling also misinterpreted the sub-section (6) of 66 which
provides that nothing in Section 66 shall apply to buy-back of own
securities by a company under Section 68 of the Act. The said
provision actually means that provisions of Section 66 (which
applies to reduction of share capital) when a company buy-back its
own securities (which results in cancellation of share capital
bought back from the shareholders) in accordance with provisions of
Section 68 of the Act.
The NCLT ruling is not in consonance with the settled
precedents2 on the subject matter that upheld selective
capital reduction. It is interesting to see whether Philips appeals
against the ruling and how the Appellate Tribunal deals with the
appeal.
Footnotes
1. In the matter of Philips India Limited CP/312(KB)/2023 dated 19.09.2024
2. Sandvik Asia Ltd v Bharat Kumar Padamsi, [2009] 151 Comp Cas 251 (bom); Reckitt Benckiser (India) Ltd, [2011] 167 Comp Cas 541; Atla Copco (India) Ltd, [2020] 221 Comp cas 72 (NCLT-Mumbai), Jayashree Damani v Atlas Copco (India) Ltd, [2020] 221 Comp Cas 82 (NCLAT); In the matter of Syngenta India Ltd, CA No 1809 of 2021 (SC); Brillio Technologies Pvt. Ltd., CA (AT) No. 293 of 2019 (NCLAT)
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