There is a capital reduction when a company reduces the amount of its share capital. A company can reduce its share capital in different ways. The capital reduction can be effected by reducing the outstanding share, the par value of an outstanding share or the amount paid on the outstanding share. A company may wish to reduce its share capital for various reasons, including to create distributable reserves in order to pay a dividend or to buy back or redeem its own shares; reduce or eliminate accumulated realized losses so that distributions can be made in the future; to return excess capital to shareholders or to distribute non-cash assets to shareholders (usually as part of a spin-off).

In a recent case, a Coram consisting of Judge Venugopal, Judicial Member Kanthi Narhari, ruled that “reduction of capital” is a national matter of the company and that a court will generally not intervene because the decision of the shareholder majority will prevail. In the landmark common law case British and American Trustee and Finance Corporation Ltd and Reduced v. John Couper, the House of Lords was of the view that the capital reduction is a national business concern and because the legislative act itself does not specify the manner in which the reduction is to be effected, therefore proceeding from the intention that it was up to the majority shareholders to decide whether the reduction will be there and, if so, how to materialize it, the Supreme Court used this judgment as authority in the case of Ramesh B. Desai v. Bipin Vadilal Mehta. In this case, the company/appellant was aggrieved by NCLT’s decision to reject the petition filed for a capital reduction under section 66 of the Companies Act and to grant it freedom to file a new petition. . The appellant was seeking confirmation that the members of the company had passed the special resolution at the annual general meeting and that the company needed court approval to proceed with the reduction.

Initially, the capital reduction was covered by Articles 100 to 105, instead of Article 66 of the Companies Act which provides a protected mechanism for the capital reduction. As the reduction of shares in a company directly affects creditors, the mechanism is highly secure and requires a lot of disclosure by the company. For a valid reduction of shares, the procedure is given in this section as well as the NCLT rules, 2016 must be necessarily followed. Under Section 66, the company can reduce its share to any amount it deems appropriate, which means it can extinguish some shareholders’ share while leaving others untouched. This has led to the extensive use of this provision and created a situation in which the company’s controllers attempt to forcibly acquire the minority shares by To crush, a process which allows the majority shareholder to compulsorily acquire the capital shares of the minority shareholders of a company, by giving them a fair remuneration in return. Through this majority, the shareholders try to manifest their control over the minority to facilitate compliance requirements and have greater control. Although this practice of foreclosing has been around for a long time, it was categorically provided for by the 2013 law under section 236, which lists the cases in which minority shares can be acquired by the majority. To effect a squeeze Discount given under Section 66 is the most popular means as it has the least onerous procedural requirements compared to other methods. Unlike the case of compulsory acquisition, it only requires a special resolution, i.e. the majority of 75% of the shareholders, as opposed to the consent of 90% of the shareholders in the case of a compulsory acquisition and by a majority of 75% of each category of shareholders as in the plans of arrangement. . Another advantage of using Article 66 to organize a squeeze-out is that corporate funds can be used to pay shareholders and controllers do not have to incur financial costs, while they end up becoming the owners of the business.

Conditions to exclude

To effect the eviction of three main ingredients, the company must first fill the articles of association with a reduction provision, second, a special resolution must be passed by the majority of the shareholders for the reduction and finally, there must be have no objections from creditors to the proposed reduction and the company must obtain NCLT’s approval. Once the NCLT is approved, the company registrar issues a certificate of reduction which serves as conclusive evidence for the reduction, regardless of any procedural irregularities existing during the reduction.

In the Reckitt Benckiser (India)Ltd case, it was argued that the reduction is essentially a redemption, therefore, the requirements of Section 77 of the Companies Act must also be met and the reduction by the company must be done proportionally. The court basing its decision on Securities and Exchange Board of India v. Sterlite Industries took the view that redemption and curtailment operate in two entirely different areas, and under the wording of Section 77 which states “notwithstanding anything contained in this Act”, redemption under Section 77 and the reduction under section 100 are two separate, independent provisions. There is no requirement for a proportionate reduction and it may be a selective reduction given under Section 100. Unlike reduction, it is not necessary to obtain NCLT approval in redemption case. However, both invariably lead to a capital reduction and the distinction is therefore only procedural.

When we analyze the cases related to selective reduction by crowding out, we find that the courts have limited their intervention, if the shareholders obtain a fair price for the shares they hold at the time of the acquisition by the company. The courts have followed the policy of non-interference and refrained from invalidating the reduction in cases where there is support from the majority citing their non-expertise in commercial matters as well as the intention of the legislator to provide companies their internal affairs. Here, the approach seems to favor the majority because the burden of proof on the opposing shareholders, ie the minority, has been made onerous. In a country like ours, where many businesses are family owned, a situation may arise where the majority family sect will be able to take over the shares of the minority family sect.

In India, the most practical way to effect a squeeze is to reduce the capital granted under Section 66. The legal point of view is also quite well settled and the courts have limited their intervention as resolution is supported by the majority and that the shareholders have given a fair price. Judicial inclination as well as legislative intent favors the reduction being a national concern, but in the context of minority majority voting, there is still a gray area. In the recent past, where the courts have given due consideration to the public interest and the interest of the minority, it is unclear how the courts will act when the MoM refuses to support the reduction. Mr. Somasekhar Sundaresan, a corporate law and capital market enthusiast pointed out that the issue is not the payment of a fair amount to the shareholders but whether he can be forced to divest himself of his property which he is the rightful owner by the promoters. An important role for regulators should be played here and the courts are required to maintain a healthy balance between the interests of minority shareholders and to ensure minimal intervention by not encroaching on the domestic affairs of the company.

Views are personal.