The Scheme of capital reduction is one of the effective ways to provide exit to the shareholders and / or for repatriation of profits to the shareholders. As the procedural aspects with regards to the capital reduction is comparatively faster, it is considered as the effective restructuring option. Recently, in the case of GNQ Copper Private Limited[1] (‘the Petitioner Company’), National Company Law Tribunal, Ahmedabad bench (‘NCLT, Ahmedabad bench’) has dealt with the case of capital reduction whereby capital reduction envisages consideration to be payable to non-resident shareholders. The objection raised by the Regional Director, Ahmedabad (‘RD’) mainly comprised the requirement of adherence to various laws, to which, the Petitioner Company has replied. So, lets understand the case in detail with interpretation under the respective laws.
The Petitioner Company proposed to reduce its paid-up share capital through a Scheme of Capital Reduction filed u/s 66 of the Companies Act, 2013 read with the National Company Law Tribunal (Procedure for Reduction of Share Capital) Rules, 2016. The Capital Reduction is proposed to reduce paid up capital from INR 12,00,000/- to INR 6,00,000/-. The reduction shall be carried out by payment of INR 167/- per share (including face value and premium per share). Further, the above reduction is given effect to by utilising balance in securities premium account of the Petitioner Company. It is also to be noted that shareholders of the Petitioner Company are foreign corporate bodies and NRIs.
As the above arrangement is in respect of capital reduction, for the reason that the shareholders receiving the consideration upon the exit are non-resident in India, effect under the tax and regulatory provisions is given effect to similar like buy back provisions. Accordingly, effect under tax and regulatory provisions is as under:
Tax payment:
RD raised an objection to comply with the provisions of the Income Tax Act, 1961 (‘the ITA’)
- The Petitioner Company undertook to comply with the provisions of the ITA, accordingly, it stated that it undertakes to pay tax at the rate of 20% on the consideration payable to shareholders u/s 115 QA of the ITA;
- Under the provisions of ITA, tax effect on the capital reduction transaction is given effect as under:
- To the extent of accumulated profit of the Company: Dividend u/s 2(22) of the ITA at the rate of 30% on the amount of consideration;
- Amount over and above accumulated profits of the Company: Capital Gains in the hands of shareholder u/s 48 of the ITA, depending upon the period of holding of shares (at the rate of 30%, if short term capital gains & 20%, if long term capital gains).
The above obligation to pay the tax liabilities shifts in the hands of the Company by way of withholding tax, if recipient is a non-resident in India.
Here, instead of complying with the transaction under section 2(22), section 48 read with section 195 of the ITA requires any company to deduct tax under the respective sections before disbursing the consideration. However, the company has undertaken to comply with the provisions of section 115QA of the ITA. Even if there is no change in rates of taxes, wrong mention of the section, while filling actual compliance, could pose risk of tax litigation in case of Company.
Regulatory Compliance:
- As per section 66(6) of the Companies Act, 2013, provisions of capital reduction shall not apply to the buyback of shares by the company. Accordingly, for any buyback of shares, no application needs to be made to the NCLT, Ahmedabad bench. Further, there is no restriction on the quantum of capital reduction versus as under buy back of shares by the company.
- Further, under the FEMA provisions, no special approvals are required for shareholders for carrying out capital reduction, subject to adherence with the procedural compliances. Further, pricing of capital reduction shall also be in sync with the RBI pricing guidance.
- As RD had raised objection in its report to comply with the provisions FEMA and RBI. Company in reply has submitted as under:
- The transaction of capital reduction is similar like buy-back of shares;
- The transaction would fall under the automatic route and is considered as a transfer of share from non-resident to resident and requires the filling of form FC-TRS as per FEMA provisions;
- The business of the Petitioner company is not into banking, insurance or NBFC, where buyback of shares, as above is not allowed;
- Thus, prior permission of the FEMA authority and RBI authority is not required.
Based on the above replies, the Scheme of capital reduction was approved by the NCLT, Ahmedabad bench. From the above, it is to be noted that even though the RD raised objection in relation to compliance with various laws, the mere undertaking by the Company to comply with the respective laws was proof enough for NCLT, Ahmedabad bench to approve the Scheme. However, mere approval from NCLT does not bar proceedings under respective laws, in case, there is difference of interpretation(s) by respective judicial authorities under respective laws.
For detailed discussion on the above subject, please feel free to connect at contact@devadhaantu.in
________________________________________________________________________________________________________________________
[1] CP No 17 of 2020 dated 14.09.2021
