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Jatin Yadav and Kartik Mehta are fourth-year law students at HNLU, Raipur
Introduction
Capital reduction is a well-established financial restructuring tool used by companies to optimize their capital structure, reduce accumulated losses, or provide liquidity to shareholders. One key objective of capital reduction, particularly in unlisted companies, is to facilitate an exit for minority or dissenting shareholders. It can also improve administrative efficiency by simplifying the shareholder base. Selective capital reduction, wherein only a particular class of shareholders (usually minority shareholders) is affected, has traditionally been seen as a viable method to achieve these goals.
However, the recent ruling by the National Company Law Tribunal (NCLT), Kolkata Bench, in the case of Philips India Limited has raised important questions about the applicability of Section 66 of the Companies Act, 2013 (The Act) to schemes involving a minority squeeze-out. In this ruling, the NCLT rejected Philips India’s application for a selective capital reduction scheme aimed at buying out the nearly 4% minority shareholders. The Tribunal’s decision has important implications for how Indian law interprets the scope of Section 66 and the use of capital reduction schemes for minority exit strategies.
This article explores the key issues raised by the NCLT’s decision, critiques its findings, and suggests alternative legal mechanisms for achieving a minority squeeze-out, particularly through the use of Scheme of Arrangement under Sections 230-232 of the CA, 13.
Background: The Philips India Case
Philips India’s shareholding structure was heavily dominated by its Dutch parent, Koninklijke Philips N.V. (KPNV), which held 96.13% of the company’s equity. The remaining shares (3.87%) were held by approximately 25,000 public shareholders. Following Philips India’s delisting in 2004, the company faced persistent challenges in providing liquidity to its public shareholders, who were unable to trade their shares on the open market. In response to these challenges, Philips India attempted to execute a minority buyout on three separate occasions, including in 2007 and 2018, though previous efforts had been thwarted due to opposition from non-promoter shareholders.
| S.No. | Name of Shareholders | Percentage of Shareholding |
| 1 | Koninklijke Philips N.V. and Philips Radio B.V | 96.13% |
| 2 | Public Shareholders | 3.16% |
| 3 | Investor Education Protection Fund (IEPF) | 0.71% |
In 2024, Philips India filed a petition with the NCLT, seeking approval for a selective capital reduction to buy back the shares held by the minority shareholders. The company argued that this would offer an exit to minority shareholders while simultaneously reducing administrative costs associated with managing a large number of small shareholders. The company appointed KPMG Valuation Services LLP to determine the fair value of shares, which was set at INR 740 per share, with a 24% premium over the fair value. The proposal was approved by 99.58% of the shareholders, with only a small minority opposing the scheme.
However, the NCLT rejected the petition on the grounds that the objectives of the proposed capital reduction did not align with the permissible scenarios under Section 66 of the Companies Act, 2013. Specifically, the NCLT held that Section 66 could only be invoked in cases where the reduction of capital sought to either extinguish unpaid shares (Section 66(1)(a)) or cancel paid-up capital that was unrepresented by assets (Section 66(1)(b)). Since Philips India’s objective was primarily to buy back shares from minority shareholders, the NCLT considered this a disguised buy-back, which fell outside the scope of Section 66[V1] .
Legal Analysis: The NCLT’s Restrictive Interpretation of Section 66
The NCLT’s decision in Philips India stands in stark contrast to settled judicial precedents and legal principles surrounding capital reduction in India. Selective capital reductions, especially in the context of minority shareholder exit, have been routinely sanctioned by the courts in India, provided that proper procedural requirements are met.
Settled Jurisprudence on Selective Capital Reduction[V2]
The Bombay High Court (BHC) in “Elpro International Ltd.,. In re” held that selective capital reduction is permissible under Indian law, emphasizing that such schemes are valid as long as they do not contravene the provisions of the relevant statutes. Similarly, the BHC in “Sandvik Asia Ltd. v. Bharat Kumar Padamsi” affirmed that a capital reduction scheme aimed at acquiring minority shares by the promoter group was lawful, provided the scheme complied with the procedural requirements under the Companies Act.
Furthermore, in the “Reliance Retail”, the NCLT sanctioned capital reduction schemes that involved the acquisition of minority shares by the promoters, even when some minority shareholders raised concerns over the fairness of the valuation. These rulings underscore the long-standing judicial acceptance of selective capital reduction as a valid corporate restructuring tool.
The NCLT’s Narrow Interpretation of Section 66
The NCLT’s interpretation of Section 66 in the Philips India case appears overly restrictive. Section 66(1) provides that a company may reduce its capital “in any manner,” subject to certain procedural safeguards. This language suggests that Section 66 is not limited to the scenarios outlined in Section 66(1)(a) and (b), but rather provides a broad framework for capital reduction, including selective reductions aimed at facilitating minority shareholder exits.
The Delhi High Court (DHC) in “Reckitt Benckiser India Ltd. v. Union of India” reaffirmed that capital reduction is fundamentally a commercial decision that rests with the majority shareholders, provided it is done in a manner that complies with the statutory requirements. The Court ruled that the list of circumstances outlined in Section 66(1)(a) and (b) is merely illustrative and not exhaustive. In this context, the NCLT’s reliance on these provisions to dismiss the Philips India petition is inconsistent with judicial interpretation of the law.
Section 66(6) and the Misapplication to Buybacks
The NCLT also referred to Section 66(6) of the CA, 2013, which excludes buy-back transactions from the purview of Section 66. However, this provision merely clarifies that companies engaging in a buy-back under Section 68 do not require NCLT approval for capital reduction. The NCLT’s interpretation of Section 66(6) as a prohibition against using capital reduction for a buy-back of shares from minority shareholders is misplaced. The provision does not preclude capital reduction for minority squeeze-outs; it simply distinguishes the procedures for capital reduction and buy-backs under different sections of the Companies Act.
Alternative Routes for Minority Squeeze-Out: Section 230-232 Scheme of Arrangement
Given the NCLT’s restrictive approach to Section 66 in the Philips India case, one might consider Sections 230-232 of the Companies Act 2013, which deal with the Scheme of Arrangement. These provisions have been increasingly used to facilitate minority squeeze-outs, particularly in situations where a secondary acquisition of shares is desired.
Secondary Acquisition of Shares via Scheme of Arrangement
Section 230(11) of the Companies Act permits a majority shareholder to propose a scheme of arrangement that includes a takeover offer to minority shareholders. Under such a scheme, the promoter group can acquire the remaining shares held by the public shareholders at a price determined by a registered valuer. This mechanism has been successfully used in various cases, including the “India Forge & Drop Stampings Ltd.” matter, where the NCLT Chennai approved a scheme of arrangement for the acquisition of minority shares at an independent valuation.
Challenges with Section 230-232 for Minority Squeeze-Outs
However, Section 230-232 is primarily used in the context of debt restructuring and corporate reorganization. As noted in “the Aviat Networks (India) Pvt. Ltd.” case, where the NCLT prohibited a company from using Section 230-232 for capital reduction absent a compromise or arrangement with creditors or members, it is unclear whether this route can be used purely for a minority squeeze-out without accompanying debt restructuring or corporate reorganization.
Therefore, while Sections 230-232 might provide an alternative for minority buyouts in some circumstances, they are not as flexible or directly applicable as Section 66, particularly for companies like Philips India that are not undergoing debt restructuring.
Conclusion
The NCLT’s order in Philips India presents a restrictive view of Section 66 that conflicts with established judicial precedents recognizing the validity of selective capital reductions. The decision also misinterprets the provision’s scope, limiting its application to only the specific scenarios outlined in Section 66(1)(a) and (b), and erroneously applying Section 66(6) as a blanket prohibition against using capital reduction for minority buyouts.
Given the importance of selective capital reduction as a tool for corporate restructuring and minority shareholder exit strategies, it is crucial that this order be reconsidered on appeal to restore clarity in the legal framework. In the absence of such clarity, companies seeking to effect minority squeeze-outs will have to explore alternative, and potentially more complicated, routes such as those under Section 230-232, which may not be as readily applicable to their needs.
Ultimately, the ruling in Philips India underscores the need for a more flexible, pragmatic approach to capital reduction in India, one that aligns with commercial realities while maintaining shareholder protection standards.
