TaxTMI 
TaxTMI 
2014 (4) TMI 721
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....013. 3. Briefly stated, the relevant facts are as under:- 3.1 The petitioner company was incorporated in the year 2006 and is engaged in the business of providing high quality digital signage and advertising and contents through its network of television screens placed in public places. 3.2 During the year 2007 and 2008, DFJ Mauritius Inc., Bay Partners XI, Mauritius (Bay Partners) and SVIC No. 11, New Technology Business Investment (Samsung) became shareholders of the petitioner company. The said entities are hereinafter collectively referred to as 'investor shareholders'. DFJ Mauritius Inc. acquired 1,58,01,640 equity shares and 91,60,310 preference shares, Bay Partners acquired 1,16,02,569 equity shares and Samsung acquired 42,63,937 equity shares. 3.3 The petitioner company has an authorized share capital of Rs.7,50,00,000/- divided into 6,50,00,000 equity shares of Rs.1/- each and 1,00,00,000 preference shares of Rs.1/- each. The subscribed, issued and paid-up share capital of the company is Rs.5,08,28,456 divided into Rs.4,16,68,146 equity shares of Rs.1/- each and 91,60,310 8% non-cumulative convertible preference shares of Rs.1/- each. 3.4 The current shareholdi....
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....hare Consideration DFJ Mauritius Inc. - Equity shares 14,834,077 10.78 252,631,579 (for both Equity and Preference Shares) DFJ Mauritius Inc. - converted Preference shares 8,599,408 Bay Partners - Equity shares 10,892,123 23.19 252,631,579 Samsung - Equity shares 4,002,848 23.66 94,736,842 Total 38,328,456 600,000,000 5. It is stated in the petition that the proposed reduction of share capital does not involve any diminution of liability in respect of the unpaid share capital or any call being waived by the petitioner company. It was further stated that the company had no secured creditor. The petitioner company has 20 unsecured creditors of a total value of Rs.8,08,040/- out of which 15 unsecured creditors representing more than 90% of the unsecured debt had given their no objection/consent to the proposed reduction of share capital and the letters of consent from the individual creditors were placed on record. 6. This court, by an order dated 06.11.2013, issued notice in the petition to the Registrar of Companies and the Regional Director, Northern Region, Ministry of Corporate Affairs. This court also directed that the notice of the petition b....
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....licable to External Commercial Borrowing. 11. Thirdly, it is observed that proposed reduction of capital is not proportionate amongst all shareholders and only shares held by foreign shareholders were being reduced/cancelled. 12. Fourthly, it is contended that Section 100(1)(c) of the Act provides for payment of face value of shares and in the present case the payment proposed to be made was in excess of the aggregate face value of the shares sought to be reduced/cancelled. Response of the Petitioner 13. The learned counsel for the petitioner has submitted that the observation of the Regional Director that the proposed reduction of capital appears to be a method of distribution of profits and the same does not fall under any of the categories mentioned in section 100 of the Act, is erroneous. It is submitted that section 100(1)(c) of the Act provides that the company limited by shares may reduce its share capital in any way and pay off any paid-up share capital which is in excess of the requirement of the company. It is contended that the methods enumerated in section 100 of the Act, in which the share capital of the company may reduced, are only illustrative and not exhau....
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....c Route: Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the Reserve Bank or Government of India for the investment. Government Route: Under the Government Route, the foreign investor or the Indian company should obtain prior approval of the Government of India(Foreign Investment Promotion Board (FIPB), Department of Economic Affairs (DEA), Ministry of Finance or Department of Industrial Policy & Promotion, as the case may be) for the investment." The Master Circular also defined the term 'Shares' and the same is quoted below:- ""Shares" mentioned in this Master Circular means equity shares, "preference shares" means fully and mandatorily convertible preference shares and "convertible debentures" means fully and mandatorily convertible debentures [cf. A. P. (DIR Series) Circular Nos. 73 & 74 dated June 8, 2007]" The relevant extract of the A.P. (DIR Series) Circular no.73 dated 08.06.2007 relied upon by the petitioner is quoted below:- "(a) Foreign investment coming as fully convertible preference shares would be treated as part of share capital. This would be included in calculating foreign equity for purposes of....
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....educing its share capital and thus the fact that the petitioner company is a profitable one cannot possibly, in absence of any other material fact, lead to the conclusion that the reduction of capital is for a collateral purpose. The fact that the petitioner is a profitable company would only indicate that the company has in addition to its capital also generated further funds and the same would not negate the reason that the petitioner has capital in excess of its requirements. It is also relevant to note that the reduction of capital is not on proportionate basis. Therefore, the ratio of the entitlement of the shareholders to future profits by way of dividends would also stand altered by reason of reduction in capital as proposed. This would not be a feature where the sole intention of proposing reduction of capital was distribution of profits amongst shareholders. It stands to reason that if the company wanted to distribute dividend to its shareholders, the same would have been done proportionately. In this view it does not appear that the sole object of the company is to distribute dividends and not reduce the share capital. 20. The minutes for reduction of capital also indi....
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....e petitioner from complying with the provisions of FEMA or any other statute, rule, regulation or guidelines framed by the Reserve Bank of India or any other authority. The question whether the payment to the foreign shareholders falls foul of any guidelines issued by RBI would be determined by the concerned authority. In this view, the observation made by the Regional Director stands completely addressed. 24. The third observation made by the Regional Director is regarding the disproportionate reduction in share capital. It has been pointed out by the Regional Director that only share capital held by foreign shareholders is being reduced. Although, no observation has been made by the Regional Director in this regard, the perusal of the petition also indicates that the reduction of share capital is not only disproportionate amongst the shareholders of the company but the amounts proposed to be paid to each investor shareholder is also calculated at a different rate per share. Thus, the payouts in respect of shares, which otherwise carry similar rights, are proposed to be different. In the given circumstances, the questions that need to be addressed are: (a) Whether it is perm....
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....oted below:- "100. Special resolution for reduction of share capital.- (1) Subject to confirmation by the Tribunal, a company limited by shares or a company limited by guarantee and having a share capital, may, if so authorized by its articles, by special resolution, reduce its share capital in any way; and in particular and without prejudice to the generality of the foregoing power, may - (a) extinguish or reduce the liability on any of its shares in respect of share capital not paid up; (b) either with or without extinguishing or reducing liability on any of its shares cancel any paid-up share capital which is lost, or unrepresented by available assets; or (c) either with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share capital which is in excess of the wants of the company; and may, if and so far as is necessary, alter its memorandum by reducing the amount of its share capital and of its shares accordingly. (2) A special resolution under this section is in this Act referred to as "a resolution for reducing share capital."" 28. A plain reading of section 100 of the Act indicates that clauses (a) to (c) of secti....
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....dealing in the same manner with all other shares of the same class. There may be no inequality in the treatment of a class of shareholders, although they are not all paid in the same coin, or in coin of the same denomination." A similar view expressed by Lord Herschelle in his concurring opinion, reads as under: "If all the shareholders of a company were of opinion that its capital should be reduced, and that this reduction would best be effected by paying off one shareholder and canceling the shares held by him, I cannot see anything in the Acts of 1867 and 1877 which would render it incumbent on the Court to refuse to confirm such a resolution, or which shows that it would be ultra vires to do so. ... There can be no doubt that any scheme which does not provide for uniform treatment of shareholders whose rights are similar, would be most narrowly scrutinized by the Court, and that no such scheme ought to be confirmed unless the Court has satisfied that it will not work unjustly or inequitably. But that is quite a different thing from saying that the Court has no power to sanction it." 30. The decision in Thomas de La Rue & Co. and Reduced (supra) also supports the view t....
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....by special resolution decides to reduce share capital of the company, it has also the right to decide as to how this reduction should be carried into effect; (iii) While reducing the share capital the company can decide to extinguish some of its shares without dealing in the same manner as with all other shares of the same class. Consequently, it is purely a domestic matter and is to be decided as to whether each member shall have his share proportionately reduced, or whether some members shall retain their shares unreduced, the shares of others being extinguished totally, receiving a just equivalent (iv) The company limited by shares is permitted to reduce its share capital in any manner, meaning thereby a selective reduction is permissible within the framework of law. (v) When the matter comes to the Court, before confirming the proposed reduction the Court has to be satisfied that (i) there is no unfair or inequitable transaction and (ii) all the creditors entitled to object to the reduction have either consented or been paid or secured." 36. The value of Rs.23.78 per share is stated to have been determined by an independent valuer, as a fair value, on the basis of t....