Section 66 of the Companies Act has long been understood as a mechanism for writing off accumulated losses or returning surplus capital. The words “in any manner” carry more weight than that reading suggests.
A recent line of NCLT and NCLAT decisions has confirmed that the consideration for capital reduction need not be cash. It can take the form of property, a financial instrument, or the creation of a liability.
The carousel below sets out three illustrative use cases of capital reduction:
1. Equity cancelled against an interest-bearing loan as an alternative to buyback for domestic shareholding patterns;
2. Preference shares cancelled against perpetual debentures with fair value driving the tax computation and face value preserving repayment capacity; and 3. Pre-demerger preference cancellation to resolve the mirror-image requirement for a demerger within a composite scheme of arrangement.