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Judgment
Subrata Kumar Dash, Member (Technical)
The instant petition has been filed under Section 66 of the Companies Act 2013 (hereinafter referred to as the “Act”), read with Section 52 of the Act, and read with Rule 2 of the National Company Law Tribunal (Procedure of Reduction of Share Capital of the Company) Rules, 2016 (hereinafter referred to as (“NCLT Capital Reduction Rules”) for obtaining confirmation from this Tribunal for the proposed reduction of the issued, subscribed and paid up equity share capital of the company. The Petitioner Company- “Dugar Hydro Power Limited” (the Company) was incorporated on 21.04.2011, having Certificate of Incorporation Number U40101HP2011PLC031626, under the provisions of the Companies Act,1956, as a public limited company limited by shares. The registered office of the company is situated at Grover Cottage, Second FLOOR, above HDFC Home Loan, Chota Shimla, Kasumpti Road, Shimla HP. Further, the petitioner was incorporated as an unlisted public limited company without getting its shares listed on any stock exchanges and as per Section 2 of the Companies Act, 2013, a public company can be a listed company and can also be an unlisted company. Also, the petitioner is neither having individual public shareholding nor its shares listed on any stock exchange.
The main object of the petitioner Company is to construct, lay down, establish, set up, promote, erect, build, install, commission, operate, carry out and run hydropower generation and transmission plants, hydro transmission lines, and distribution and supply of hydroelectricity to industrial, commercial, domestic, agricultural and other consumers including public utilities, state electricity boards, other boards, power companies and also to provide regular services for repairing and maintenance of all distribution and supply lines of hydropower in India or abroad. A certified true copy of the Memorandum of Association and Articles of Association is attached with the main petition as Annexure- “A-1”.
The Petitioner Company submitted the following reasons for the reduction of share capital:
i. Dugar Hydro Power Limited (DHPL) is a Special Purpose Vehicle (SPV) jointly owned and controlled by “The Tata Power Company Limited & Statkraft Holding Singapore Pte Ltd (formerly known as SN Power Holding Singapore Pte Limited)”, which has been incorporated with an objective to develop 449 MW Hydro Electric project.
ii. In the financial year 2016-17, during the appraisal process, based on approved cost, schedule & tariff from CEA, the Applicant examined and found that the Project is not techno-economically viable, considering the prevailing market scenario at that time and future projections and abandon the project. Also, the Applicant decided that the preparation of accounts with the fundamental accounting assumption of ‘Going Concern’ is no longer appropriate and, accordingly, not prepared its financial statement on a going concern basis since the financial year 2016-17.
iii. Further, as a part of the feasibility phase of the Project, a Detailed Project Report (DPR) was prepared by the Applicant, and since the Applicant has to abandon the project, NHPC, being the new developer of the Project, approached the Applicant for buying the said DPR, the Applicant then decided to sell it off to recover the expenditure incurred during feasibility phase, studies and surveys etc. for preparing the DPR, for a consideration agreed between the Applicant and NHPC.
iv. Therefore, the Company, by way of reduction of share capital and paying off its paid-up share capital which is in excess of the wants of the company to the shareholders.
The present share capital of the Applicant Company is as follows:
Particulars
Amount (in Rs.)
Number of Equity Shares of Rs. 10/- each fully paid up.
Authorized Share Capital
Rs 90,00,00,000/-
9,00,00,000
Issued, Subscribed and Paid-up Share Capital
Rs 86,85,00,020/-
8,68,50,002
The Petitioner Company further submitted that Article 8 of the Articles of Association of the petitioner company authorizes the petitioner company to reduce its capital in any way authorized by the applicable law. Article 8 is extracted as below, and the Article of Association is attached as Annexure-A-1
“The Company may (subject to the provisions of Sections 78, 80, 100 to 105 inclusive, of the Act) from time to time by Special Resolution, reduce its Capital in any manner for the time being authorised by law and in particular Capital may be paid off on the footing that it may be called up again or otherwise. This Article is not to derogate from any power the Company would have if it were omitted.”
It has been submitted that Mr. Sameer Verma having Registration No. IBBI/RV/05/2019/11107, Registered Valuer vide his valuation report dated 21.05.2021, has recommended inter alia that the fair value of equity shares of the company, for the purpose under the Companies Act, 2013 in relation to capital reduction is ₹ 7.30/- per equity share. The copy of the Report on Valuation of Equity Shares obtained from Mr. Sameer Verma is attached with the main petition and marked as Annexure-A-8. The Board of Directors of the Applicant Company considered and unanimously accepted the aforesaid Report on Valuation of Equity Shares.
The petitioner company submitted that the applicant company does not have any secured or unsecured creditors. In this regard, the declaration of the Directors of the petitioner company to the effect that the petitioner company does not have any creditors, along with a certificate of statutory auditor, is attached as Annexure A-6.
The Petitioner Company submits that in terms of the provisions of Section 66 of the Companies Act, 2013, Shareholders of the Company in the Ordinary Annual General Meeting held on 21.05.2021 through Video Conference with the facility of e-voting, approved the proposed Capital Reduction. The following Special Resolution was passed by the Shareholders of the Company:
“RESOLVED THAT pursuant to Section 66 of the Companies Act, 2013 and The National Company Law Tribunal (Procedure for reduction of share capital of Company) Rules, 2016 and other applicable provisions, if any, of the Companies Act, 2013, and/or any modification (s) or re-enactment thereof, if any and as provided under Article 8 as adopted by the Company in the Articles of Association of the Company and subject to sanction of the Hon’ble National Company Law Tribunal, Chandigarh Bench (“NCLT”) and any other statutory authorities, as the case may be, the consent of the members be and is hereby accorded to reduce upto a maximum of 19,863,020 (One Crore Ninety Eight Lakh Sixty Three Thousand Twenty Only) Equity Share of INR 10/-each (Indian Rupee Ten Only) at a price of INR 7.30/- (Indian Rupee Seven and Thirty Paise Only) per share, out of the total existing paid up capital of INR 868,500,020/- (Indian Rupees Eighty Six Crores Eighty Five Lakh Twenty Rupees Only) divided into 86,850,002 (Eight Crore Sixty Eight Lakh Fifty Thousand Two Only) Equity Shares if INR 10/- (Indian Rupees Ten Only) each fully paid up and that such reduction is effected by returning capital to The TATA Power Company Limited & Statkraft Holding Singapore Pte Limited (formerly known as SN Power Holding Singapore Pte Limited) of an aggregate amount not exceeding INR 145,000,046/- (Indian Rupees Fourteen Crore Fifty Lakh Forty Six Only) in equal ratio and difference between the face value of the equity share so cancelled and the amount paid to shareholders, on reduction of the share capital of the Company shall be transferred to Capital Reserve Account in the financial statements of the Company.
RESOLVED FURTHER THAT for the purpose of giving effect to the above resolution, the Board of Directors and Company Secretary of the Company be and are hereby severally authorized to do all such acts, deeds, matters and things as may be necessary or desirable or expedient on behalf of the Company and/or make such adjustments in the books of account as are considered necessary to give effect to above resolution or to carry out such modifications/ directions as may be ordered by the NCLT to implement the aforesaid resolution.
RESOLVED FURTHER THAT for giving effect to this resolution Board of Directors or Company Secretary of the Company or any other person of the Company may be nominated by the Board of Directors of the Company, be and are hereby severally hereby authorized to take all necessary steps for:
(a) Obtaining approval from the members of the Company in General Meeting as may be required under the requisite provisions of the Companies Act, 2013;
(b) Signing and submitting the requisite applications, petitions, affidavit, representations or other documents as may be required for seeking sanction/approval for Reduction of share capital, from NCLT and/or any other regulatory authorities for obtaining its approval;
(c) Engaging advocates, counsels and any other consultants, declaring, executing and filing all necessary documents including but not limited to affidavits, pleadings, statements, reports and sign and issue public advertisements and notices;
(d) Obtaining, seeking and/or submitting necessary deeds/ documents/ papers/ approval/ clarifications with statutory authorities including but not limited to Regional Director, Registrar of Companies and other authorities under Ministry of Corporate Affairs for cancellation and hence reduction of the share capital of the Company.
(e) Making any alterations/ changes in the applications/ petition as may be expedient or necessary and which does not materially change the substance of the reduction;
(f) Passing such accounting entries and/or making such other adjustments in the books of accounts as are considered necessary to give effect to above resolution; and
(g) Doing all such acts, deeds, matters and things as may be deemed necessary, expedient, usual or proper and to settle any question or difficulty that may arise.
RESOLVED FURTHER THAT any Director or Company Secretary of the Company be and are hereby severally authorized to sign a copy of the above resolutions as a certified true copy thereof and furnish the same to whomsoever concerned.”
The Copies of Special Resolution dated 21.05.2021, passed by the members of the Applicant Company and Minutes of the aforesaid Annual General Meeting are attached with the main petition and marked as Annexure-A-3.
The Petitioner Company submits that the AGM of the Members of the Petitioner Company was convened on 21.05.2021, through video conferencing with the facility of e-voting. The result of the meeting is as under:
S. No
Particulars
Number
Shareholding (No. of Shares)
1
Total number of Shareholders/members
7
8,68,50,002
2
Total number of Members Present
6
8,68,50,001
3
Number of members who voted in Favour of the resolution
6
8,68,50,001
4
Number of members who voted against the resolution
0
0
The petitioner company submits that the issued, subscribed, and paid-up share capital of the petitioner company pre and post-the reduction of capital shall be;
Pre and Post reduction Capital Structure
Pre and Post Reduction, the Capital structure of the Applicant Company will be as under:
Capital Structure of Dugar Hydro Power Limited (Applicant Company)
Pre-Reduction share capital
Shares proposed to be Cancelled by reduction
Post Reduction share capital
No. of Shares
Face Value
Total value
No. of Shares
Fa ce Value
Total value
No. of Shares
Face Value
Total value
8,68,50,002
10
86,85,00,020
1,98,63,020
10
19,86,30,200
6,69,86,982
10
66,98,69,820
It is submitted that the Resolution for Reduction of Capital was passed with the requisite majority by the Shareholders/Members and Directors of the Petitioner Company. The certified true copy of the list of Shareholders/Members and Directors of the applicant company as of 21.05.2021 is attached as Annexure A-4.
The Petitioner Company is availing the option of cancellation and extinguishment of paid-up equity share capital in consonance with Section 66 of the Companies Act, 2013. Following are the provisions:-
"66. Reduction of Share Capital:
(1) Subject to confirmation by the Tribunal on an application by the Company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital in any manner and in particular, may-
(a) extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up; or
(b) either with or without extinguishing or reducing liability on any of its shares,-
(i) cancel any paid-up share capital which is lost or is unrepresented by available assets; or
(ii) pay off any paid-up share capital which is in excess of the wants of the company, alter its memorandum by reducing the amount of its share capital and of its shares accordingly:
Provided that no such reduction shall be made if the company is in arrears in the repayment of any deposits accepted by it, either before or after the commencement of this Act, or the interest payable thereon."
It is submitted that the Petitioner Company does not have any deposits as covered under the provisions of Sections 73 to 76 of the Companies Act, 2013 and the Rules made thereunder. Hence the Petitioner Company has no arrears in the repayment of any deposits, either before or after the commencement of the Companies Act, 2013, or the interest payable thereon, as on the date of filing of this Petition before this Hon'ble Tribunal. The certificate issued by the Statutory Auditor of the Petitioner Company further confirms that there are no deposits accepted by the Company attached as Annexure- A-7.
As per the Certificate issued by the Statutory Auditors of the Petitioner Company, the accounting treatment proposed by the Petitioner Company for the Reduction of Share Capital is in conformity with the Accounting Standards specified in Section 133 or any other applicable provisions of the Companies Act, 2013 and is attached with the main petition and marked as Annexure- A-5.
It has been submitted by the Petitioner Company in compliance affidavit filed vide Diary no. 00762/1 dated 10.02.2022 that on 28.01.2022, notice has been dispatched upon Statutory Authorities. It is further stated that the company does not have any secured and unsecured creditors as already declared in the main petition; therefore, Form RSC-3 is not applicable in the present case. It is further submitted that the Notice of proposed Reduction of Capital has been published in “Times of India” (English, Chandigarh Edition) and “Dainik Savera Times’’ (Hindi, Shimla Edition) on 28.01.2022, and the original cuttings of the same are attached with the compliance affidavit as Annexure-C of the affidavit.
It is averred in the compliance affidavit that in pursuance to the order of this Tribunal, the notice and complete Company Petition has been served on the Registrar of Companies, Himachal Pradesh, and the Regional Director (Northern Region), New Delhi, on 31.01.2022. Acknowledgement of the same is attached as Annexure-B of the said affidavit.
The RD Report has been submitted vide Diary No. 00762/4 dated 28.07.2022, along with the Report of the ROC. As per the report of ROC, Chandigarh, the Petitioner Company has filed its annual return and balance sheet up to 31.03.2021. No prosecution has been filed against the Petitioner Company, no complaints are pending, and no inspection or investigation has been conducted in respect of the applicant company.
It is further observed by RD in its report that the company has proposed to distribute the revenue generated by transferring the DPR among shareholders of the company. The petition is silent about the future viability of the company. Therefore, instead of paying off to the existing shareholder, the company may be directed by this Tribunal to file the petition for winding up, if so desired by them. Further, the differential amount between the face value of the share and pay off the value of the shares shall be transferred to the capital reserve account in the financial statement of the company, with disclosure of its nature and purpose in the notes. The RD, in his report, has stated that the said statement in the petition is not correct since the loss in net worth of the share is not a gain to the company; therefore, it can not be treated as Capital Reserve.
The petitioner has filed the rejoinder to the report of the Regional Director vide Diary No. 00762/5 dated 17.10.2022 wherein it is stated that the Petitioner has invoked the arbitration clause under the Implementation Agreement the in February 2018 against the decision of the Government of Himachal Pradesh (State) to terminate the Pre-implementation Agreement between the petitioner company and the State and forfeit the license fee paid by the petitioner company as a security deposit to the State. This matter has been still pending with the High Court. Therefore, the petitioner company is going for the reduction of share capital rather than winding up. The same has been reiterated by the Hon'ble Bombay High Court in the case of Elpro International Limited (Company Petition No.288 of 2007) order dated 22.06.2007 reported in [2009]149CompCas646(Bom), had expressed that the question of Reduction of share capital is the matter of domestic concern. As far as the Capital Reserve is concerned, the petitioner has clarified that the shareholders will receive considerably lesser than the investment made by them, and hence it will be treated as a capital loss in the hands of the shareholders, and consequently, it is a gain for the petitioner Company on the other hand. This gain is not in the ordinary course of business for the petitioner Company, and hence it is a "capital profit', therefore, capital reserves will be created due to such capital profits.
Respondent No. 4, i.e., Income Tax Department, has filed a short reply vide Diary No. 00762/2 dated 04.05.2022, stating that the petitioner company has been regularly filing its ITR since incorporation and the amount distributed by the company on capital reduction to the extent of its accumulated profits (whether such accumulated profits have been capitalized or not) will be considered as deemed dividend under Section 2(22)(d) of the Income Tax Act, 1961 and the Company will have to pay dividend distribution tax on the same as per the provision contained under Section 115-O of the Income Tax Act, 1961. The distribution over and above the accumulated profits would be chargeable to capital gains tax in the hands of the shareholders.
The petitioner has filed the rejoinder to the reply filed by the Income Tax Department vide Diary No. 00762/3 dated 19.05.2022, wherein it is stated that there are no accumulated profits in the company, therefore section 2(22)(d) will not be applicable. Further, the provisions of Section 115-O have been repealed, and it was applicable only until March 2020. As this transaction would be done post-March 2020, section 115-0 is not applicable. Further, Section 2 (22)(d) of the Income-tax Act, 1961 does not come under the purview of capital reduction at the same time, does not affect the legal proceedings for capital reduction under section 66 of the Companies Act 2013 and its rules made there under. The petitioner further undertakes to contest the proceedings, if any, arising under Income Tax Act, 1961, pertaining to any demand at the appropriate forums in accordance with the law.
The present position of law, while dealing with the provisions of Section 66, is that if none of the shareholders are objecting to the proposed reduction, then after considering the merits of the case as also connected facts and circumstances, such petition normally deserves to be admitted. In the case of Elpro International Limited (Company Petition No.288 of 2007) order dated 22.06.2007 reported in MANU/MH/1414/2007: [2009] 149 Comp Cas 646 (Bom), Hon'ble Bombay High Court has expressed that the question of reduction of share capital is the matter of domestic concern of the company. Further observed that decision for reduction is based on commercial consideration undertaken by the businessmen who are in the best position to know of the necessities and interests of the company concerned, in the absence of serious allegations as regards the bona fides of the proposed Scheme, the Courts are of the view that no interference in such decisions is acquired. It has also been observed that considering the commercial aspect of the decision, it is not permissible for the Court to come to the conclusion that the exit opportunity offered is inequitable and unjust. Likewise, in the case of Reckitt Benckiser (India) Ltd. (Company Petition No.206 of 2004) Order dated 31.05.2005 reported in 2005 SCC Online Del 674, after due consideration of the pre and post-reduction, admittedly selective one, it was held that if majority by a special resolution decides to reduce the share capital of the company, it has also right to decide as to how this reduction should be carried into effect. In view of the above, no adverse conclusion is inferred on the basis of the report of the Regional Director. As regards the response of the Income Tax Department, we observe that the department is free to initiate proceedings as per the provisions of the Income Tax Act with regard to the issues raised in its report.
It is noted that in view of the pendency of the arbitration-related appeal before the Hon’ble High Court, the petitioner has taken recourse to the reduction of share capital instead of going in for winding up. Further, as apparent from the records, there will be a capital loss in the hands of the shareholders resulting in capital profit in the hands of the petitioner. This is duly supported by the statutory auditor’s report.
In the light of the discussion above, it is ordered to confirm the Reduction of Share Capital of Petitioner Company by approving the minutes of the AGM dated 21.05.2021, wherein the members of the Petitioner Company resolved for the Reduction of Share Capital of the Company, as prescribed under Section 66 of the Companies Act, 2013, to reduce upto a maximum of 19,863,020 (One Crore Ninety Eight Lakh Sixty Three Thousand Twenty Only) Equity Share of INR 10/-each (Indian Rupee Ten Only) at a price of INR 7.30/- (Indian Rupee Seven and Thirty Paise Only) per share, out of the total existing paid up capital of INR 868,500,020/- (Indian Rupees Eighty-Six Crores Eighty-Five Lakh Twenty Rupees Only) divided into 86,850,002 (Eight Crore Sixty Eight Lakh Fifty Thousand Two Only) Equity Shares if INR 10/- (Indian Rupees Ten Only) each fully paid up and that such reduction is effected by returning capital to The TATA Power Company Limited & Statkraft Holding Singapore Pte Limited (formerly known as SN Power Holding Singapore Pte Limited) of an aggregate amount not exceeding INR 145,000,046/- (Indian Rupees Fourteen Crore Fifty Lakh Forty-Six Only) in equal ratio and the difference between the face value of the equity share so cancelled and the amount paid to shareholders, on reduction of the share capital of the Company shall be transferred to Capital Reserve Account in the financial statements of the Company.
Pursuant to the provisions of Section 66(4) of the Companies Act, 2013, the Petitioner Company is directed to publish this order approving a reduction in share capital in a leading English and vernacular newspaper within 30 days of receipt of the copy of this order.
In terms of the above, the minutes approved along with the order shall be delivered to the RoC by filing the e-form INC-28 within 30 days of the receipt of the copy of the Order. Accordingly, the Registry shall prepare an Order in FORM No. RSC-6 as per the National Company Law Tribunal (Procedure for Reduction of Share Capital of Company) Rules, 2016, and issue to the Petitioner.
Ordered accordingly. To be consigned to the Records.
Form of Minutes
“The capital of Dugar Hydro Power Limited is henceforth INR 86,85,00,020/- (Indian Rupees Eighty-Six Crores Eighty-Five Lakh Twenty Rupees Only) consisting of 8,68,50,002 (Eight Crore Sixty Eight Lakh Fifty Thousand Two Only) Equity Shares of INR 10/- (Indian Rupees Ten Only) each, reduced from INR 19,86,30,200/-(Indian Rupees Nineteen Crores Eighty-Six Lakh Thirty Thousand Two Hundred Rupees Only)consisting of 1,98,63,020 (One Crore Ninety-Eight Lakh Sixty Three Thousand Twenty Only) Equity Share of INR 10/-(Indian Rupee Ten Only) each. At the date of the registration of this minute, 6,69,86,982 (Six Crore Sixty-Nine Lakh Eighty-Six Thousand Nine Hundred Eighty-Two Only) equity shares of Face Value Rs.10/- (Rupees Three) each, have been issued and are deemed to be fully paid.”