NCLT dismisses selective capital reduction
 

In a recent decision¹, the National Company Law Tribunal (NCLT), Kolkata Bench, against the established precedents, dismissed the selective capital reduction proposed by Philips India Limited (Philips). A capital reduction was proposed by Philips in terms of Section 66 of the Companies Act, 2013 (the Act) to squeeze out the minority shareholders.

The facts of the case are as follows:

• The non-promoter public shareholders held 3.16% in the paid-up share capital of Philips.
• The equity shares of Philips were delisted from the stock exchanges in the year 2004.
• Consequent to delisting, the public shareholders holding 3.16% of the total shareholding do not have avenue to monetize their shareholding. Therefore, Philips proposed selective capital reduction to give exit to said non-promoter public shareholders.
• The non-promoter shareholders of Philips mainly contested on the valuation of shares and methodology adopted for the same as follows:
  • The independent registered valuer report obtained by non-promoter shareholders indicate that using discounted cash flow method, the valuation of shares is way higher - in the range of INR 4,605 to INR 6,119 per equity share, as against INR 740 per equity share, indicated by the valuers appointed by Philips, plus a premium of INR 175 per equity share as determined by the Board of Philips.
  • Another valuation report obtained by non-promoter shareholders indicates the value at INR 4,463 per share using comparable company method.

NCLT Ruling

After considering the arguments of both sides the NCLT passed following ruling:

• NCLT analysed that the proposal to selective capital reduction as sought by Philips does not fall under the any of the scenario listed in clause (a) and (b) of Section 66(1) of the Act.
• It further analysed that under the facts and circumstances, the petitioner company is resorting to buy-back of its own equity shares from the minority shareholders/public shareholders and incidentally reducing the share capital. In NCLT's view sub-section (6) of 66 of the Act provides specific bar and states that nothing therein in shall apply to buy-back of its own securities by a company under Section 68 of the Act.
• On the valuation front, while the NCLT inclined to agree with the submissions made by Philips, it noted a huge difference between the values determined by Philip's valuer and the valuer appointed by non-promoter shareholders, even though both of them adopted same method, i.e. the discounted cash flow method.
• However, given it is dismissing the petition of Philips on the ground that cannot be invoked for selective capital reduction, NCLT desists itself from further going into the valuation to reconcile vastly different prices determined by two registered valuers.