Can Shareholder Autonomy Redefine Capital Reduction?

Posted On - 5 February, 2025 • By - Prithiviraj Senthil Nathan

On January 6, 2025, the NCLAT Principal Bench in Ulundurpet Expressways Pvt. Ltd. (UEPL) vs. Regional Director[1] provided clarity on the regulation of “share capital reduction.” The decision highlights how companies can use shareholder approval to restructure their finances.

Background

UEPL, a highway operator under the Build-Operate-Transfer (BOT) toll model, has managed a four-lane highway operational since 2009. Initially, the company faced lower-than-expected traffic volumes, resulting in losses. However, with toll revisions and increasing traffic, UEPL eventually generated surplus cash flows. To optimize the use of these cash surpluses, the company proposed to:

  1. Cancel 16,76,96,382 equity shares valued at INR 10 each;
  2. Compensate shareholders at INR 11.33 per share, aggregating to INR 1,900 crore;
  3. Restructure the payout as an unsecured loan, repayable over 5 years, subject to specific terms.

The rationale was to utilize surplus cash effectively, given the limited growth potential of single-project Special Purpose Vehicles (SPVs) like UEPL, which primarily operate toll roads.

NCLT’s Decision

Despite shareholders unanimously approving the capital reduction in a special resolution on November 29, 2022, and no objections from creditors, the National Company Law Tribunal (NCLT) rejected the petition on December 19, 2023.

The NCLT gave two main reasons for its decision:

  1. The proposed reduction relied on projected future cash flows rather than the current surplus, which did not comply with Section 66(1)(b)(ii) of the Companies Act, 2013.
  2. Converting reduced capital into unsecured loans would breach the provisions under the Foreign Exchange Management Act (FEMA) and External Commercial Borrowings (ECB) regulations.

UEPL argued that the NCLT’s decision was breaching the principle of stare decisis as it ingored past rulings where similar capital reduction schemes were approved, such as in the cases of Dewas Bhopal Corridor Pvt. Ltd. and Godhra Expressways Pvt. Ltd.[2] These cases allowed capital reductions with deferred repayment plans.

They also emphasized that Section 66 of the Companies Act, 2013, gives companies the flexibility to reduce capital “in any manner” with shareholder approval, as long as creditors and stakeholders are not negatively impacted.

NCLAT’s Findings

After reviewing the submissions, the NCLAT overturned the NCLT’s decision, citing the following points:

  • The shareholders’ unanimous approval and lack of objections from creditors, the Regional Director, and the Registrar of Companies confirmed stakeholder agreement.
  • Established legal principles, such as those in Indian National Press (Indore) Ltd.[3] and Reckitt Benckiser (India) Ltd.,[4] affirm that capital reduction is a domestic matter for companies, subject to the creditor and stakeholder protection.
  • The proposed reduction complied with Section 66 of the Companies Act, which allows companies to cancel excess capital as long as liabilities are met.

Conclusion

The NCLAT’s decision confirms that companies, especially SPVs, can adjust their financial structures through share reductions under Section 66 of the Companies Act, 2013. It also clarifies the application of Section 66. By allowing UEPL to move forward with its capital reduction plan, the NCLAT has set an important example for future cases.

[1] Company Appeal (AT) No. 53/2024.

[2] CP No.254 of 2022.

[3] Indian National Press (Indore) Ltd (1989) 66 Comp Cas 387 (MP).

[4] Reckitt Berickiser (India) Ltd (2005) 122 DLT 612.

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