The National Company Law Tribunal (‘NCLT’), Mumbai Bench in a recent ruling dated September 20, 2021, has sanctioned a scheme of arrangement allowing an unlisted company to reorganize its share capital by permitting conversion of class A equity shares into non-cumulative optionally convertible redeemable preference shares. The scheme amongst Protrans Supply Chain Management Private Limited (‘Protrans’), AG-Vet Genetics Private Limited (‘AG-Vet’), Baramati Agro Limited (‘BAL’) and their respective shareholders provided for merger of Protrans and AG-Vet into BAL and reorganization of the share capital of BAL thereby allowing some shareholders to receive dividends and exit by way of redemption according to the terms of the preference shares. The Registrar of Companies, Pune (‘ROC Pune’), objected to the reorganization under the scheme stating inter alia that such issuance of preference shares in lieu of existing equity shares is not permissible as the rights, value and terms of the preference shares are different from the equity shares. Additionally, the ROC Pune also referred to a letter dated July 27, 2020, from the MCA, which stated that there is ongoing litigation where such type of reclassification was previously rejected by Registrar of Companies, Delhi (‘MCA Letter’).

However, the NCLT upheld the arguments advanced by the merging companies where reliance was placed on: (i) the explanation of the expression ‘arrangement’ given under Section 230 of the Companies Act which expressly allows reorganization of share capital of a company; and (ii) several judicial precedents which held that the contents of administrative letters/circulars (such as the MCA Letter) cannot be binding unless they are a part of substantive law or delegated legislation.