Primary Contentions of the Regional Director in relation to impermissibility of the Conversion Exercise:

• That the value, terms, and rights of the existing equity shares are different from the proposed redeemable preference shares, which cannot be termed as exchange of same kind of shares in ratio for consideration;
• That there is no provision in law permitting the Conversion Exercise.

Primary Contentions advanced by the Petitioner Companies with respect to the Conversion Exercise.

• That the conversion from equity shares to preference shares is not barred by any provision of law;
• That the term ‘arrangement’ as per the Explanation to section 230 of the 2013 Act has a very wide import and “includes a reorganisation of the company’s share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes, or by both of those methods”.
• That the Conversion Exercise is permissible under section 61 of the 2013 Act;
• That the term ‘share capital’ as defined under section 43 of the 2013 Act includes both preference and equity shares and both are mentioned under share capital in the balance sheet of a company. Thus, conversion of one type of shares into another is therefore, only a change in the nomenclature of the share capital (when the paid up capital does not undergo any change).

Findings of NCLT

The Hon’ble NCLT accepted the contentions of the Petitioner Companies and sanctioned the Scheme including the Conversion Exercise.

Analysis of the Order

The Hon’ble NCLT accepted the contention that the word ‘arrangement’ in section 230 of the 2013 Act has to be interpreted in the widest possible manner and a compromise or arrangement under section 230 of the 2013 Act can include a re-organization of share capital. This reiterated the long held position that the term ‘arrangement’ as used under section 391 of the Companies Act, 1956 is of wide import and though not defined specifically, yet has an extensive range and ambit.^[1] As held by the Hon’ble High Court of Bombay in Re Investment Corporation of India Ltd, the term ‘arrangement’ has been given an inclusive definition which is not restricted to only re-organisation of share capital but also contemplates other acts.

Having accepted the petitioner companies’ contention that conversion of equity shares into preference share is just a change in nomenclature of shares, the Hon’ble NCLT has implied that the conversion of equity shares into preference shares as part of a scheme of arrangement would not entail compliance with the provisions governing reduction of share capital. This is relevant in light of the fact that while the overall share capital has not undergone any change, there has been a reduction / cancellation of equity share capital. This would effectively mean that such conversion (and consequent reduction / cancellation of the converted shares) would only be governed as an arrangement, i.e., ‘reorganisation of share capital’ under Section 230 of the Companies Act, 2013, especially in light of the Explanation to section 230(12).

In Smartplay Tachnologies vs. NIL^[2], the Hon’ble High Court of Karnataka had approved the conversion of equity shares into redeemable preference shares as part of a scheme of reduction of share capital governed by section 100 of Companies Act, 1956 due to the fact that the equity shares had to be cancelled. Similarly, the Hon’ble High Court of Gujarat in Re Essar Steel Limited in a section 100 petition under the Companies Act, 1956, approved a scheme of reduction where the special resolution approving the reduction provided for issuance of preference shares in lieu of the cancelled equity shares. Further, the Hon’ble NCLT, Delhi Bench has also allowed conversion of equity shares into preference shares as part of a scheme of arrangement.^[3]

Impact of the Protrans Judgment: Way Ahead

The simplistic approach adopted by the Hon’ble NCLT while approving the Scheme is a welcome step. It envisages the NCLT sanction under Chapter XV of Companies Act, 2013 as a single window clearance for implementation of all acts (which are not barred under the 2013 Act and may otherwise be embodied in a separate provision) as long as the entities comply with the substantive and procedural provisions governing the arrangement.

Footnote

[1] Hindusthan Commercial Bank Limited vs. Hindusthan General Electrical Corporation; In re Larsen & Toubro Limited.

[2] Company Petition No 174 of 2013.

[3] In Re: Integral Biosciences Private Limited.

This article was originally published in Law Street India on 3 November 2021 Co-written by: Anirudh Das, Partner; Anoop Rawat, Partner. Click here for original article

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