The NCLT Kolkata Bench, dealt with a petition[1] for capital reduction and variation of terms of redeemable preference shares.
Summary of the case:
- The Petitioner Company filed the Capital Reduction Petition following an earlier NCLT scheme where it had issued 1,41,34,192 Redeemable Preference Shares of Rs 10 each in March 2019.
- The company proposed revising the redemption value of preference shares from Rs 10 to Rs 120 based on fair valuation and sought to transfer amounts from the Securities Premium Reserve to Retained Earnings for redemption payouts.
- The Regional Director and Registrar of Companies objected, pointing out that under Sections 48, 52, 55, and 66 of the Companies Act, 2013:
- The Securities Premium Account is a capital account and cannot be reclassified or used as Retained Earnings.
- The transfer of amounts from Securities Premium to Retained Earnings violates the Act.
- The proposed capital reduction and variation in terms of preference shares did not comply with statutory provisions and accounting norms.
- The Tribunal analyzed the legal provisions, relying on the doctrine of ejusdem generis and accounting principles distinguishing Securities Premium (a capital account) from Retained Earnings (a revenue account).
- It emphasised that the uses of the Securities Premium Account are limited to specific capital-related purposes listed in the Act and cannot be expansively interpreted.
- Securities Premium is a capital receipt, representing the amount received in excess of the nominal share value, and is legally and accounting-wise distinct from Retained Earnings.
- Retained Earnings represent profits accumulated from business operations, post-tax, and available for dividend distribution.
- Using Securities Premium to meet Premium on Redemption (which should come from Retained Earnings) can misrepresent the financial health and breach Generally Accepted Accounting Principles (GAAP).
- The Tribunal concluded that allowing reclassification or such transfer would be contrary to the Companies Act, GAAP, and fair accounting, risking misleading financial statements.
- It was further stated that the Articles of Association cannot override or contradict the Companies Act
- It was held that the Securities Premium Account cannot be reclassified as Retained Earnings, as these are fundamentally different in nature and subject to distinct legal provisions.
- The proviso to Section 66(3) demands that the accounting treatment for capital reduction must conform with applicable accounting standards and be certified by the company’s auditor. The ROC pointed out potential professional misconduct by the auditor for certifying the transfer without proper adherence to the law.
- The Tribunal referred to Supreme Court and other case law to underline strict adherence to statutory language and accounting principles.
- Consequently, the application for capital reduction and variation of preference shares was dismissed.
The Tribunal dismissed the application for capital reduction and variation of preference shares terms, holding the proposal as non-compliant with the Companies Act, 2013, and GAAP. The order emphasized legal, accounting, and procedural correctness in handling securities premium and retained earnings accounts in capital reduction matters.
For detailed discussion, please feel free to contact devadhaantu@devadhaantu.in
__________________________________________________________________
[1] C.P. No. 238/KB/2024 (Modern Hi-Rise Pvt. Ltd.)
