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New Companies Act, 2013 - Insight Series Vol II

30 August 2013

Vol-II: Reduction of Capital, Buy-back of shares and Buying out of minority

shareholding (collectively referred to as Capital structuring)
Executive Summary
Reduction of Capital

Notice to creditors made mandatory even in case not involving any repayment of capital.

Not allowed in case of companies not remedying default in repayment of deposits.

Buy-back

Multiple Buy-back in the same year not possible.

Provisions relating to Buy-back limit in case of equity shares is not clear.

Company defaulting on repayment of deposits, etc. can not undertake Buy-back for 3 years post remedying the
default.

Buy out of minority shareholding

Shareholders holding >90 percent equity capital of the company can buy out remaining minority shareholding.

Once offer is made by the majority shareholder, purchase of shares is automatic.

2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(KPMG International), a Swiss entity. All rights reserved.

Background
In this bulletin, we have dealt with the new concepts
introduced and the changes made to existing provisions
relating to Reduction of Capital, Buy-back of shares and
Buy out of minority shareholding (collectively referred to as
Capital structuring). We have also discussed certain other
provisions included in the New Act, but only to the extent
that they impact the Capital structuring.

Overview
We have dealt with certain general issues in detail in
Volume-I which may also impact the discussion under this
Bulletin, therefore, the issues and impacts thereof are listed
below for ready reference (For details please refer to
Volume I) :
The discussion in this Bulletin is subject to the Rules to
be issued by the Ministry of Corporate Affairs (MCA).
In absence of Transitional provisions and in view of
Repeal and Savings provisions not providing sufficient
clarity, there is uncertainty about the applicable
provisions and mechanism to deal with non-conformity
arising from application of old provisions as compared
with the new provisions.
The Companies Act, 2013 (New Act) provides that all
Restructuring in progress, at the time when the National
Company Law Tribunal (NCLT) becomes operational,
shall be transferred from the High Court to NCLT,
however, the New Act has not specified that NCLT will
complete the process under the provisions of the New
Act. Therefore, two issues raised in 2 above will apply
even in relation of transfer of cases to NCLT. This issue
is relevant in relation to Reduction of Capital discussed
in this Bulletin.
According to the New Act the term free reserves should
not include any change in carrying amount of an asset or
of a liability recognised in equity. Therefore, it may not
include the reserve arising on recording of assets and
liabilities, pursuant to amalgamation, under purchase
method of accounting. Consequently, such reserve may
not be available for buyback of shares, for computing
limit of investment, etc.

The following are the key changes in the provisions:

The New Act prohibits a company from undertaking
Reduction of capital if the company is in arrears in
the repayment of any deposits accepted by it or the
interest payable thereon. (new)
NCLT to give notice of application for Reduction of
capital received to the Central Government
(CG)(new), Registrar (new), Securities and
Exchange Board of India (SEBI) (in case of listed
companies) (new) and to the creditors of the
company.
CG and others may make representations within
three months from the date of receipt of the notice
and If no representation has been received within
the said period, it will be presumed that they have
no objection to the Reduction of Capital. (new)
Under the existing Act, notice to creditors was
required only in case involving reduction in liability
in respect of unpaid share or reduction involving
payment to shareholders. In other cases the High
Court had the discretion to direct issue of such
notice. Under the New Act, Notice to the creditors
is made mandatory in all cases.
The company needs to file a certificate from its
auditor to the effect that the accounting treatment
for such reduction is in conformity with the
prescribed accounting standards. (new)
The provisions relating to Reduction of capital
should not be applicable to Scheme of
Compromise / Arrangement involving reduction of
capital and to Buy-back of shares. (new)
Under the existing Act minutes confirming
Reduction of capital were deemed to be
amendment to Memorandum of Association
(MOA). No such provision in the New Act and
therefore separate process of amending MOA may
be required to be followed.

Subject to the above, we have dealt with specific issues

relating to provisions dealing with Capital structuring at
relevant places.

Power of company to purchase its own

securities (Buy-back)

Reduction of Capital

The restriction on companies, limited by shares or

guarantee and having share capital, either to
purchase its own shares or to provide financial
assistance for that purpose continues to be the same
under the New Act, except that in relation to financial
assistance to purchase shares for the benefit of
employees is allowed only if the Scheme relating to
that is approved by the company through a special
resolution.

Reduction of capital continues to be defined inclusively

under the New Act as it was under the provisions of the
Companies Act, 1956 (the existing Act). Therefore, the
Reduction of capital need not be confined to the three
modes specifically enumerated in the section but cover
other modes also.

2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(KPMG International), a Swiss entity. All rights reserved.

The following are key changes in the provisions dealing

with Buy-back:

Buy-back continues to be of two types :

Buy-back upto 10 percent of the total paid-up
capital + free reserves approved by board of
directors (Board approved Buy-back). or
Buy-back approved by shareholders in general
meeting (General body approved Buy-back).

General body approved Buy-back allowed upto 25

percent of total paid-up capital + free reserves.
However, in case of Buy-back of equity shares, the
limit is replaced by 25 percent of total paid-up equity
capital.
Under the existing Act, Buy-back of equity shares was
allowed upto 25 percent of total paid-up capital + free
reserves subject to a second limit that Buy-back of
equity shares in a financial year shall not exceed 25
percent of total paid-up equity capital in that financial
year.
Thus, plain reading of the provisions under the New
Act, suggests that in case of Buy-back of equity
shares, entire formula, i.e. 25 percent of total paid-up
capital + reserves is to be replaced by 25 percent of
paid-up equity capital. The exclusion of free reserves
would reduce the quantum of consideration
substantially and make Buy-back of equity shares
almost impractical in most cases.
However, a harmonious reading with provisions for
Board approved Buy-back suggest that the only total
paid-up capital is required to be substituted by paidup equity capital. That means in case of Buy-back of
equity shares the applicable limit should be 25
percent of paid-up equity capital + free reserves. This
seems to be a better view.
The New Act prescribes minimum gap of one year
between two Buy-backs.
Under the existing Act, this provision was
applicable only in relation to Board approved Buyback.
Under the New Act it is applicable even to General
body approved Buy-back. Therefore, multiple Buyback in a year should not be possible under the
New Act.

The existing Act provided for transfer to the extent

of nominal value shares to the Capital Redemption
Reserve (CRR) referred to in realation to
redemption of preference share. Both the Acts
provide that provision relating to reduction of
capital apply to such CRR. However, the New Act
provides for creation of CRR without reference to
CRR in relation to redemption of preference
shares and therefore prima facie it seems, though
may be unintended, the provisions relating to
reduction of capital may not be applicable to CRR
in relation to Buy-back.
The New Act specifies utilisation of capital
redemption reserve created in relation to Buy-back
for issuing bonus shares. (new)

The existing Act provided Buy-back of odd lots, as

one of the mode of Buy-back, which is dropped
under the New Act.

The existing Act did not allow a company to Buyback, if the company had defaulted in repayment
of deposits, redemption of debentures etc. till the
time default persisted. Under the New Act a
company which has defaulted as above is not
allowed to Buy-back for a further period of 3 years
after the default is remedied.

The New Act has added compliance with

provisions relating to declaration of dividend as an
eligibility condition for Buy-back. (new)

Buy-back of shares as a part of a Scheme of

Arrangement also needs to be in accordance with
the Buy-back provisions.(new)

Buyout of minority shareholding

The New Act has introduced new provisions relating to
Buy-back out of minority shareholding under certain
circumstances. This will provide greater flexibility to
the promoters/ acquirer in realigning the control and
management of company as unnecessary interference
from minority shareholders is removed.
The key provisions are:

Any person or group of persons holding 90

percent or more of the issued equity capital of a
company by virtue of an amalgamation, share
exchange, conversion of securities or for any other
reason, can purchase the remaining equity shares
of the company from minority shareholders at a
price determined by a registered valuer in
accordance with prescribed rules.

2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(KPMG International), a Swiss entity. All rights reserved.

The Majority shareholders to notify the company and

make an offer to the minority shareholders.

In relation to shares under transmission, offer should

be valid for a period of three years.

Provisions are applicable to acquirer and persons

acting in concert as defined under the SEBI
(Substantial Acquisition of Shares and Takeovers)
Regulations, 1997.

Thus, this provision seems to act as an alternative to

delisting guideline. Being a statutory provision it may
override the delisting guideline. However, whether it is
intended to be an alternative or not is a moot point to
be considered.

The minority shareholders of the company may also

offer to the majority shareholders to purchase the
minority equity shareholding of the company at a
price determined by a registered valuer in accordance
with prescribed rules.

The transferor company to act as a transfer agent for

receiving / paying the price and to take / give delivery
of shares.

The majority shareholders need to deposit the value

of shares to be acquired by them in a separate bank
account.

Disbursement to minority shareholders within sixty

days.

The account need to continue at least for one year in

case certain disbursement to the minority
shareholders were not encashed or for such other
reasons.

It is provided that in case physical delivery of shares

is not received, the shares should be deemed
cancelled and new shares to be issued and transfer
should be completed in favour of majority
shareholders and payment should be made to
minority shareholders.

Above provisions suggests that once the offer is

made by the majority shareholders, purchase of
shares thereafter is automatic and no acceptance of
offer by the minority shareholders is necessary.

There is no clarity as to whether and/or how the

provisions will operate in case of shares in
dematerialised form.

It is provided that in case the majority shareholders

acquiring > 75 percent of the minority shareholding
had agreed to sell their shareholding at a price
higher than the price offered to the minority
shareholders then such majority shareholders need
to share the additional compensation received by
them with such minority shareholders on a pro rata
basis. In view of the peculiar drafting, the real
impact of the provision is unclear.

It is provided that the above provisions would

continue to apply to the residual minority equity
shareholders, even though the shares of the
company had been delisted and period of one year
or the period specified by SEBI, had elapsed.

This provision seems to be enabling provision to

cover cases of listed company following delisting
guideline and not succeeding to acquire entire
minority shareholding.

This provision does not seem to be impacting

automatic purchase discussed above.

2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(KPMG International), a Swiss entity. All rights reserved.

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(KPMG International), a Swiss entity. All rights reserved.
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2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(KPMG International), a Swiss entity. All rights reserved.