A recent order of the NCLT (Mumbai Bench) in Bangalore Elevated Tollway Pvt Ltd has taken the view that where capital reduction is the primary objective, the transaction ought to proceed under Section 66 rather than Section 230.
That approach suggests a narrower reading of Section 230 than what has been reflected in the judicial line and in practice.
In an article published on Taxsutra, we have examined this question the reasons as to why section 230 can prevail.
The analysis proceeds on three elements:
– The Explanation to Section 230(1) includes reorganisation of share capital within the scope of “arrangement”, without distinguishing between stand-alone and composite transactions;
– The decision of the NCLAT in R. Systems International Limited v. NCLT recognises that capital reduction may be effected under Section 230, with Section 66 not applying where the scheme route is adopted; and
– The statutory framework indicates a structural choice between two mutually exclusive routes, rather than a mandatory routing of stand-alone reductions through Section 66
On this reading, a stand-alone capital reduction can be undertaken under Section 230, in our view.
The choice of route has direct consequences on:
– the timing of effectiveness, including the ability to fix an appointed date
tax year positioning for shareholders; and
– structuring flexibility in exits, reserve reorganisations, and balance sheet actions.
The full analysis is set out in the article annexed below.