Capital reduction under Section 66 of the Companies Act is conventionally understood as a tool for writing off losses or returning surplus cash. That understanding is incomplete. In this piece, as published on Taxsutra, I examine three transaction structures where capital reduction serves a fundamentally different purpose: converting share capital into financial liabilities such as interest-bearing loans, perpetual debentures, and unsecured debt.
The three case studies address distinct commercial problems. The first uses an equity-to-loan conversion to replicate the economics of periodic capital return without the regulatory constraints of buyback. The second explores the divergence between fair market value and face value to crystallise capital losses while preserving the issuer’s repayment capacity on its balance sheet. The third dissolves the mirror-image impediment in tax-neutral demergers by converting preference shares into debt as a sequenced step within a composite scheme of arrangement.
The article also traces the income-tax and accounting implications of these structures, particularly the interplay between Section 48, Section 50CA, and the Ind AS 113 fair value framework read with Appendix D to Ind AS 109, which together supply the analytical bridge between accounting classification and tax computation.
The corporate law position is fairly settled following the NCLAT’s affirmation of the “in any manner” language in Section 66. The income-tax framework, however, has not yet addressed how consideration is to be valued when it takes the form of a financial instrument rather than cash.