In an interesting application for sanctioning a scheme of amalgamation, which involved conversion of equity shares into preference shares, the National Company Law Tribunal (‘NCLT’) has held that such reclassification is permissible and could not be deemed to be impermissible.
Brief facts:
- The shareholders of one of the Petitioner companies had requested for regular dividends/ redemption of their investment as they were not interested in management of the company. The Petitioner company stated that it was not in a position to provide dividends and consequently proposed to convert the equity shares into 9 per cent non-cumulative optionally convertible redeemable preference shares. The Petitioners applied to the NCLT for sanctioning the Scheme of Arrangement and amalgamation of the Petitioner companies under Sections 230 to 232 of the Companies Act, 2013. Through the said Scheme of Arrangement, it was decided to convert certain class of Equity Shares into 9 per cent non-cumulative optionally convertible Redeemable Preference shares of INR 10 each.
- The Petitioner companies approved the scheme of Arrangement and amalgamation through a Board Resolution on 25 February 2019 and the same was jointly filed before the NCLT Mumbai Bench along with an order dated 22 June 2020 passed by the NCLT Mumbai and the Petitioners undertook to comply with all the statutory requirements of the Companies Act, 2013 (‘Companies Act’). The Registrar of Companies (ROC), Pune objected to the said scheme of amalgamation, terming the conversion of shares as impermissible.
Submissions:
- The Petitioners argued that the Companies Act does not bar the conversion of one kind of shares to another, for example conversion of equity shares to preference shares. Under Section 43 of the Companies Act, both equity and preference shares fall under the category of share capital and therefore a change in the type of the shares will just be a nomenclature change. Such a conversion only amounts to reorganisation of share capital which is permitted under Section 61 of said Act. A scheme of arrangement or compromise can involve consolidation, reduction, subdivision, or increase in the share capital, therefore the scheme cannot be deemed to be impermissible.
- The ROC, Pune argued that the Petitioners cannot convert equity shares into preference shares. It is not permissible for the Petitioner to issue redeemable preference shares since the value terms and rights of the equity shares are different from preference share and therefore the same cannot be treated at par with exchange of the same type of shares in a ratio of consideration.
Decision:
The NCLT in the case involving Protrans Supply Chain Management Private Limited & Ors. [Judgment dated 20 September 2021] accepted the explanation given by the Petitioner Companies, concluding that when shares of one class are converted to another, the value of paid up share capital does not undergo any change. Such reclassification only has the effect of changing the nomenclature of the shares without having any impact on the subscribed and paid up share capital of the company. Further, it approved the Scheme of Arrangement and Amalgamation and found the scheme to be fair and reasonable and ordered the dissolution of the transferor companies.