NCLT Mumbai clears capital reduction under Section 66: Key findings from In re Sarjan Realities Private Limited

Introduction

The National Company Law Tribunal, Mumbai Bench, in In re Sarjan Realities Private Limited, has confirmed a comprehensive share capital reduction undertaken under Section 66 of the Companies Act, 2013. The order is significant because:

It permits a selective reduction involving both equity and preference share capital.
It clarifies the interplay between Section 55 and Section 66 in the context of preference shares when the company lacks distributable profits.
It reiterates that capital reduction under Section 66 is independent of buy-back provisions under Section 68.
It emphasizes creditor protection, statutory compliance, and leaves tax treatment to Income Tax Authorities.

The petition concerned cancellation of the entire preference share capital (Series P2, P3, P4 and P5) at a 15% premium and cancellation of a large block of equity shares held by a particular corporate shareholder at nil value, as part of a restructuring meant to simplify the capital base and realign ownership.

Background of the Petitioner Company

Sarjan Realities Private Limited is a private company incorporated on 05.09.1997 under the Companies Act, 1956. Its registered office is in Pune, bringing it within the territorial jurisdiction of the NCLT Mumbai Bench for the present petition.

Main business objects

The Memorandum of Association sets out wide-ranging objects, including:

Acquisition, holding, leasing, mortgaging, and dealing in movable and immovable property.
Activities relating to evacuation, transmission and distribution of power from conventional and non-conventional energy sources.
Development and construction projects on behalf of clients as well as on its own.
Activities across the energy sector, including generation and conversion from sources such as solar, wind, biomass, geothermal, hydel, tidal and wave energy.
Acquisition and development of agricultural lands, farms, orchards and farm houses, together with agriculture-linked business.
General power sector-related activities and infrastructure for water-related projects.
Trading, import, export and consultancy in a broad range of goods including pharmaceuticals, formulations, medicines and equipment.

Rationale for Capital Reduction

The company approached the Tribunal seeking confirmation of reduction of its equity and preference share capital under Section 66 and the National Company Law Tribunal (Procedure for Reduction of Share Capital of Company) Rules, 2016.

Objectives of the proposal

The Board and shareholders formulated the reduction proposal with the following aims:

Rationalising a complex capital structure that was creating governance, decision-making, and compliance challenges.
Offering an exit to particular shareholders and thereby realigning the ownership pattern in line with future business requirements.
Deploying available cash balances efficiently by paying off capital that was not required for business operations.
Improving key financial ratios and performance indicators, so that the financial statements better reflect the true economic position.
Ensuring that the restructuring does not impair the company’s future ability to raise equity or debt.

Specific elements of reduction

The proposal covered both preference and equity share capital:

Preference shares proposed to be cancelled

The entire preference share capital comprised:
- 96,75,000 6% Redeemable Non-cumulative Preference Shares of Rs. 100 each – “Series P2”
- 5,00,000 6% Redeemable Non-cumulative Preference Shares of Rs. 100 each – “Series P3”
- 40,00,000 6% Redeemable Non-cumulative Preference Shares of Rs. 100 each – “Series P4”
- 38,35,000 6% Redeemable Non-cumulative Preference Shares of Rs. 100 each – “Series P5”
(collectively, the “Preference Shares”).

These Preference Shares were to be redeemed and cancelled at a 15% premium on face value, in accordance with the terms of issue and as approved by the concerned Preference Shareholders.
Equity shares proposed to be cancelled
- 7,01,80,000 equity shares of Rs. 10 each held by Shubh Realty (South) Private Limited were proposed to be cancelled at nil consideration.
- This selective cancellation was part of the overall strategy to re-align the shareholding pattern.

Reason for using Section 66 instead of Section 55

The Board specifically recorded that the company did not have adequate distributable profits as required for redemption of preference shares under Section 55 of the Companies Act, 2013. Hence, a straight redemption under Section 55 was not possible.

The Board therefore opted for:

A capital reduction route under Section 66, utilising available cash balances (and not distributable profits) to pay the preference shareholders and cancel their shares.
Concurrent cancellation of the identified equity shares.

The company stressed that:

Section 55 (redemption of preference shares out of profits or proceeds of a fresh issue) and Section 66 (reduction of share capital in any manner) are distinct mechanisms.
A company is legally entitled to choose the procedure it considers appropriate, subject to compliance with the respective provisions.

Capital Structure: Before and After Reduction

Authorised capital (unchanged)

44,75,00,000 equity shares of Rs. 10 each – Rs. 4,47,50,00,000
2,30,00,000 preference shares of Rs. 100 each – Rs. 2,30,00,00,000
Total authorised capital: Rs. 6,77,50,00,000

Issued, subscribed and paid-up capital

Before reduction

Equity: 44,75,00,000 equity shares of Rs. 10 each – Rs. 4,47,50,00,000
Series P2: 96,75,000 preference shares of Rs. 100 – Rs. 96,75,00,000
Series P3: 5,00,000 preference shares of Rs. 100 – Rs. 5,00,00,000
Series P4: 40,00,000 preference shares of Rs. 100 – Rs. 40,00,00,000
Series P5: 38,35,000 preference shares of Rs. 100 – Rs. 38,35,00,000

Total pre-reduction capital: Rs. 6,27,60,00,000

After reduction