Selective Capital Reduction Permissible 'In Any Manner' Under S.66 of Companies Act If Fair & Non-Prejudicial to Creditors: NCLT Mumbai - 2025-09-21

NCLT Mumbai Approves Upwards Fintech's Selective Share Capital Reduction, Citing Fairness and Shareholder Approval

Mumbai, India - The National Company Law Tribunal (NCLT), Mumbai Bench, comprising Judicial Member Mohan Prasad Tiwari and Technical Member Charanjeet Singh Gulati, has approved the petition of Upwards Fintech Services Private Limited for a selective reduction of its share capital. The Tribunal affirmed that a company could reduce its share capital "in any manner" under Section 66 of the Companies Act, 2013, provided the process is fair, equitable, and not prejudicial to the interests of creditors or the public.

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Background of the Case

Upwards Fintech Services Private Limited, a financial technology company, filed a petition under Section 66 read with Section 52 of the Companies Act, 2013. The company sought the Tribunal's confirmation for a Special Resolution passed by its members on January 10, 2025, to reduce its issued, subscribed, and paid-up share capital.

The rationale for the reduction stemmed from the company's sale of its tech business to LendingKart Technologies Private Limited. This "slump sale" resulted in surplus cash and investments on the company's books. The management proposed the capital reduction to optimally utilize these surplus funds, provide an exit to certain non-promoter shareholders, and make the company agile for new business ventures.

The proposed reduction involved cancelling specific equity and preference shares held by minority shareholders—India Quotient 2, IQ Alpha III, and Mayfield India II Ltd—while the holdings of the majority promoter shareholders remained untouched.

Arguments and Objections

The Regional Director (RD) of the Ministry of Corporate Affairs raised several key observations:

1. Selective Reduction: The RD questioned the fairness of a selective reduction that targeted only certain minority shareholders and sought justification that the scheme was equitable for all.
2. Use of Securities Premium: The RD questioned whether the securities premium account could be used to pay shareholders whose shares were being cancelled, suggesting it should correspond to the shares against which the premium was originally received.
3. Pending Charge: It was noted that the MCA database showed a pending charge against the company, despite the company's claim of having no creditors.

Upwards Fintech, in its reply, provided robust justifications:

• On Selective Reduction: The company's counsel argued that Section 66 of the Companies Act permits reduction "in any manner" and that selective reduction is a settled legal principle, treated as a "matter of domestic concern" for the company. They cited precedents from the Bombay High Court ( Wartsila India Limited ) and the NCLAT ( Bharti Telecom Limited ) to support their stance. They further argued the reduction was beneficial for the minority shareholders, offering them liquidity at a fair value determined by an independent valuer, as their shares were unlisted and illiquid.
• On Securities Premium: The company clarified that utilizing the Securities Premium Account for purposes not explicitly listed in Section 52(2) is permissible if treated as a capital reduction under Section 66, which they had complied with. They also confirmed that the shares being cancelled were originally issued at a premium.
• On Pending Charge: The company explained that the charge was related to the business already sold via slump sale and had been transferred. They provided a No-Objection Certificate from the charge holder and evidence of filing Form CHG-4 for satisfaction of the charge.

Tribunal's Observations and Ruling

The NCLT carefully considered the arguments and the report from the Regional Director. The bench was satisfied with the company's detailed explanations and undertakings.

The Tribunal noted that the Special Resolution for the reduction was passed unanimously by the shareholders, indicating their collective commercial wisdom. It accepted the legal position that selective capital reduction is permissible when it is fair and does not prejudice any stakeholder.

The judgment highlighted that the company had no secured or unsecured creditors, thereby eliminating any risk to creditor interests. The company also undertook to comply with all applicable provisions of the Income-tax Act, 1961, and FEMA/RBI guidelines concerning payments to shareholders.

The Tribunal observed, "...if the Securities Premium Account is utilised for any of the purpose(s) other than those mentioned in sub-section 2 of Section 52 of the Companies Act, then such utilisation would be treated as reduction of share capital... The Petitioner Company, in such a case, is required to follow the provisions of Section 66 of the Companies Act."

Concluding that the petition met all statutory requirements and that the Regional Director's concerns had been satisfactorily addressed, the NCLT allowed the petition.

Final Decision and Implications

The NCLT sanctioned the capital reduction scheme, reducing Upwards Fintech's paid-up share capital from ₹11,25,900 to ₹4,86,500. The order directs the company to file the approved minutes with the Registrar of Companies and publish notices in two newspapers.

This judgment reinforces the principle that courts and tribunals will generally not interfere in a company's internal commercial decisions, such as capital reduction, as long as the process is transparent, complies with statutory procedures, protects creditor interests, and is not unfair or inequitable to any class of shareholders.