2015 (4) TMI 1069 - HC - Companies Law

Court approves Scheme of Arrangement for Equity Shareholders, clarifies buyback legality

In Re : Capgemini India Private Limited

The court sanctioned the Scheme of Arrangement with Equity Shareholders under Sections 391 and 100-103 of the Companies Act, 1956, allowing the purchase ... Entitlement to buy back of own shares by means of a scheme - whether buyback of shares must be effected only under Section 77A of the Companies Act, 1956/Section 68 of the Companies Act, 2013? - Held that:- In the present case since it is legally permissible for the company to buy back its shares by following the procedure under Section 391 read with Sections 100 to 104 of the 1956 Act, the fact that the same may not attract income tax will not amount to it being a device to evade tax. The Petitioner has placed on record RBI’s Circular No.49 dated 4th May 2010 which provides that shares of an unlisted Indian company can be transferred by a nonresident to a resident under the general permission of the RBI if the transfer price does not exceed the fair market value as determined by a Chartered Accountant or a SEBI registered Merchant Banker as per the DCF method. In the present case the transfer price has been arrived at in accordance with the aforesaid circular of the RBI. The Regional Director has not disputed the fair market value of the shares so determined. In these circumstances it is clear that the buyback of shares under the Scheme is in accordance with the RBI Guidelines and that being so, there is no question of there being any draining away of foreign exchange. In view of the above and particularly the fact that in law the Petitioner is entitled to buy back its own shares by means of a scheme under Section 391 read with Sections 100 – 104 of the 1956 Act, the scheme cannot be said to be a colourable device to evade income tax. It is a legally permissible procedure which the Petitioner is entitled to follow to buy back its shares. In any event the Petitioner has stated that the issues relating to income tax that may arise out of the Scheme may be left open to be dealt with and decided by the Income Tax Authorities in accordance with the law. The statement is accepted. Consequently nothing survives in the objections of the Regional Director. (a) The Scheme of Arrangement as proposed is sanctioned with a clarification that the issues relating to Incometax that may arise out of the Scheme are left open to be dealt with and decided by the Incometax Authorities in accordance with law. (b) The Petitioner to pay costs of ₹ 10,000/to the Regional Director within a period of four weeks from the date of this order. (c ) Filing and issuance of the drawn up order is dispensed with. (d) All authorities concerned to act on a copy of this order along with Scheme attached thereto, duly authenticated by the Company Registrar, High Court (O.S.), Bombay. Issues involved:1. Sanction of Scheme of Arrangement with Equity Shareholders under Sections 391 and 100-103 of the Companies Act, 1956.2. Objections raised by the Regional Director regarding the buyback of shares under different sections of the Companies Act.3. Legal permissibility of following either Section 77A/68 or Section 391 for buyback of shares.4. Impact of Section 230 of the 2013 Act on the legal position established in previous judgments.5. Allegations of tax evasion and foreign exchange outflow in the sanctioned Scheme.6. Consideration of RBI guidelines for transfer of shares and compliance with fair market value determination.Detailed Analysis:1. The Petitioner sought sanction for a Scheme of Arrangement with Equity Shareholders under Sections 391 and 100-103 of the Companies Act, 1956, proposing to purchase 30% of the issued share capital. The procedure for exercising the option by shareholders was outlined in the Scheme.2. The Regional Director raised objections, contending that buyback under Section 77A/68 would avoid tax liabilities. The Petitioner argued that the Regional Director had the authority to raise such objections, even if Income Tax Authorities did not object.3. The Petitioner asserted the option to follow either Section 77A/68 or Section 391 for buyback, citing the Sterilite Industries case supporting this flexibility beyond mandatory provisions.4. The judgment highlighted the impact of Section 230 of the 2013 Act on the legal position established in previous judgments, clarifying that the prevailing law under Sterilite Industries would apply until Section 230 came into force.5. The Regional Director alleged tax evasion and foreign exchange outflow due to the sanctioned Scheme. However, the court emphasized the legality of the chosen procedure and the Petitioner's right to manage tax implications lawfully.6. The compliance with RBI guidelines for share transfer and determination of fair market value was crucial in assessing the legitimacy of the Scheme, ensuring no drainage of foreign exchange without legal basis.In conclusion, the court sanctioned the Scheme with a provision for Income Tax Authorities to address tax-related issues separately. The judgment emphasized the legality and permissibility of the chosen procedure under Section 391, dismissing allegations of tax evasion and foreign exchange outflow without legal grounds.