Reassessing Capital Reduction Jurisprudence in India: Lessons from the Philips India Case

Introduction: Corporate Strategy Meets Judicial Restraint

In a closely watched decision that has stirred both legal circles and corporate boardrooms, the Kolkata Bench of the National Company Law Tribunal (NCLT) dismissed Philips India Limited’s petition for selective capital reduction. The move was intended to extinguish the equity held by minority public shareholders accounting for just under 4% of the total shareholding, following the company’s delisting from the Bombay Stock Exchange back in 2004. Although Philips offered a significant premium over the fair value of shares in its attempt to facilitate an exit route for these shareholders, the tribunal concluded that the proposed action fell outside the permitted scope of Section 66 of the Companies Act, 2013.

This ruling not only curtailed Philips’ attempt to simplify its shareholding structure but also reignited debate about the judiciary’s role in overseeing corporate decision-making, particularly where statutory interpretation appears rigid. By taking a narrow view of Section 66, the NCLT has, according to many commentators, disrupted the trajectory of legal precedents which previously endorsed flexible, commercially driven interpretations of capital reduction.

The Tribunal’s Reasoning: Textualism Over Commercial Reality

The heart of the tribunal’s rejection lay in its reading of Section 66(1) of the Companies Act. The section provides three express instances where capital reduction is permissible extinguishing unpaid share capital, writing off capital not backed by assets, and paying off excess capital. The tribunal reasoned that Philips’ proposal, which cited providing liquidity and administrative cost savings as objectives, did not fall within any of these enumerated grounds.

Moreover, the NCLT concluded that Philips’ approach was functionally akin to a buyback, which is regulated under Section 68 of the Act. Since Section 66(6) bars the application of Section 66 to buyback transactions, the tribunal held that Philips was attempting to circumvent the law by disguising a buyback as capital reduction. This technical characterization served as the tribunal’s decisive rationale for dismissal, without examining the fairness of the proposed share price or the overwhelming shareholder approval the scheme had received.

Critics argue this interpretation ignores the legislative intent behind the phrase “in any manner” embedded in Section 66(1). Historically, courts have held that these words broaden the scope of permissible reductions beyond the illustrative clauses (a), (b), and (c), provided procedural safeguards are observed and shareholder interests are protected.

Judicial Trends and the Place of Selective Capital Reduction

Contrary to the NCLT’s narrow lens, a body of jurisprudence has steadily evolved to support the notion that capital reduction is primarily a domestic matter one falling within the realm of commercial discretion, unless demonstrably unjust. The case of Sandvik Asia Ltd. v. Bharat Kumar Padamsi emphasised that once a majority of shareholders approve a scheme, especially where fairness and due process are evident, tribunals should refrain from intervening unless fraud or prejudice is established.

Selective capital reductions, particularly those aimed at facilitating a minority exit, have been judicially recognized as valid mechanisms for corporate restructuring. These are not considered inherently discriminatory as long as the minority is paid a fair price and the transaction has procedural legitimacy. The Bombay High Court and multiple benches of the NCLT have previously upheld such schemes under Section 66, without recharacterizing them as buybacks.

The tribunal’s suggestion that capital reduction is equivalent to a buyback overlooks crucial procedural distinctions. Under Section 68, shareholders voluntarily tender their shares in response to a buyback offer, typically in a proportionate manner. In contrast, Section 66 allows for court-sanctioned, selective cancellation of shares without needing shareholder consent at the individual level an especially useful tool for resolving deadlocks or streamlining ownership in unlisted entities.

Revisiting Section 66: Literalism vs. Legislative Purpose

The phrase “in any manner” in Section 66(1) is meant to be read expansively. Past rulings including those by High Courts and even other benches of the NCLT, have acknowledged this language as indicative of legislative flexibility, not constraint. In IL&FS Engineering and Construction Co. v. Wardha Power, the Andhra Pradesh High Court expressly noted that the Act does not prescribe a rigid form for reduction, granting companies autonomy subject to basic safeguards.

In dismissing Philips’ petition, the tribunal’s failure to grapple with these precedents has raised serious concerns. By anchoring its decision solely in the illustrative sub-clauses of Section 66 and disregarding the overarching statutory language and past jurisprudence, the NCLT arguably adopted a formalist approach over a purposive one.

Alternative Legal Pathways and Their Limitations

With Section 66 now in a state of uncertainty, companies seeking to implement minority squeeze-outs must explore other statutory avenues. Section 236 of the Companies Act, 2013, provides a route whereby majority shareholders holding 90% or more of the equity can offer to acquire the remaining shares. However, its effectiveness is constrained by the fact that minority shareholders are not compelled to sell, leaving companies without guaranteed resolution.

Another alternative lies in resorting to a Scheme of Arrangement under Sections 230-232. These provisions, while offering flexibility in corporate reorganization, are better suited to complex restructurings involving creditors or amalgamations. The use of these provisions purely for acquiring minority shares may attract objections on procedural or jurisdictional grounds. Furthermore, this route imposes a higher compliance burden, potentially discouraging companies from pursuing it for targeted capital reduction purposes.

Thus, while technically viable, these alternatives are far less efficient and predictable than the mechanism provided under Section 66, as traditionally interpreted.

Conclusion: A Need for Doctrinal Clarity and Commercial Sensibility

The Philips India ruling has set a precedent that could significantly hinder the utility of selective capital reduction as a legitimate corporate tool. While courts must indeed safeguard against misuse and protect minority interests, a blanket exclusion of minority exits from the purview of Section 66 risks undermining shareholder democracy and corporate autonomy. Particularly in cases where an overwhelming majority including most non-promoter shareholders endorse a scheme, the tribunal’s role should be to ensure procedural and valuation fairness, not to substitute commercial judgment with rigid statutory exegesis.

The inconsistency between the Philips ruling and earlier judicial pronouncements calls for appellate clarification. Unless revisited, this decision could chill well-intentioned restructuring efforts, add legal uncertainty to capital reduction strategies, and compel companies to adopt convoluted alternatives. A more coherent and purposive interpretation of Section 66—one that aligns with both the legislative intent and commercial realities—must eventually prevail if Indian corporate law is to remain dynamic, responsive, and business-friendly.