2014 (4) TMI 721 - HC - Companies Law

Court approves share capital reduction under Companies Act, 1956.

In Re : RS Livemedia Pvt. Ltd.

In Re : RS Livemedia Pvt. Ltd. - TMI Issues Involved:1. Approval of reduction of share capital under Sections 100-104 of the Companies Act, 1956.2. Distribution of profits under the guise of capital reduction.3. Treatment of convertible preference shares as debt capital.4. Proportionate reduction of share capital among shareholders.5. Payment exceeding the face value of shares.Issue-wise Detailed Analysis:1. Approval of reduction of share capital under Sections 100-104 of the Companies Act, 1956:The petitioner company sought approval for the reduction of its subscribed and paid-up equity and preference share capital. The reduction involved canceling a specified number of shares held by certain shareholders, with the amounts payable to them determined by an independent valuer. The reduction was approved by the company's shareholders at an Extraordinary General Meeting on 08.07.2013. The court noted that the procedure adopted by the petitioner complied with the legal requirements, including obtaining the requisite consents from creditors and shareholders.2. Distribution of profits under the guise of capital reduction:The Regional Director observed that the petitioner company, being profitable, might be using the reduction of capital to distribute profits. The court, however, found this observation erroneous, noting that Section 100(1)(c) of the Act permits reduction of share capital if it is in excess of the company's requirements. The court emphasized that the reduction was not proportionate, indicating that the primary objective was not the distribution of profits but rather providing a partial exit to investor shareholders.3. Treatment of convertible preference shares as debt capital:The Regional Director suggested that reducing convertible preference shares without conversion would treat them as redeemable preference shares, thus requiring compliance with External Commercial Borrowing norms. The court disagreed, citing RBI guidelines that fully convertible preference shares are treated as share capital. The court clarified that the reduction of such shares should follow equity capital reduction norms and does not equate to debt repayment.4. Proportionate reduction of share capital among shareholders:The Regional Director pointed out that the reduction was not proportionate, affecting only foreign shareholders. The court held that selective reduction is permissible if it is fair and equitable. It cited precedents indicating that companies can reduce share capital selectively, provided the procedure is lawful and the reduction is not unfair or inequitable. The court found no unfairness, as the shareholders had unanimously approved the reduction, and the varying rates per share were based on the duration of investment.5. Payment exceeding the face value of shares:The Regional Director contended that the payment proposed exceeded the face value of the shares, which should not be allowed under Section 100(1)(c). The court clarified that Section 100(1)(c) allows paying off excess capital, and the payment in excess of face value would be treated as 'deemed dividend' under the Income Tax Act, with the petitioner company bearing the dividend distribution tax liability.Conclusion:The court approved the reduction of share capital, finding no legal or procedural infirmities. It emphasized that the reduction was a domestic matter decided by the shareholders, who are best positioned to determine the company's needs. The court directed the petitioner to file the approved minutes with the Registrar of Companies and publish the notice of the order in specified newspapers. The requirement to add the words 'AND REDUCED' was dispensed with.