NCLT Ahmedabad Allows Electrotherm To Reissue Preference Shares Due To Lack Of Redemption Profits

The Ahmedabad Bench of the National Company Law Tribunal (NCLT) on 21 July allowed Electrotherm (India) Limited to issue fresh redeemable preference shares in place of existing unredeemed preference shares, holding that accounting profits alone do not permit redemption unless such profits are legally available for declaration of dividend.

A Bench comprising Judicial Member Shammi Khan and Technical Member Sanjeev Sharma passed the order while allowing the petition filed by Shailesh Bhandari, Executive Vice Chairman and authorised signatory of Electrotherm. It held:

“The Tribunal is unable to accept the contention of the authorities that the mere existence of accounting profits automatically enables redemption of preference shares. The statutory requirement under Section 55 read with Section 123 is not merely the existence of profits, but the existence of profits legally available for declaration of dividend. The distinction is fundamental and has been satisfactorily explained by the Petitioner.”

Electrotherm, incorporated in 1986 and listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), had issued Non-Cumulative Redeemable Preference Shares (NCRPS) worth Rs. 12 crore in 2005 to six shareholders, including corporate entities.

The shares were initially redeemable after 10 years. However, the terms were modified in 2006 with shareholder approval to permit redemption not earlier than two years and not later than twenty years. The extended period expired in 2025, requiring the company to redeem the shares.

Although Electrotherm reported operational profits of Rs. 319.43 crore in the financial year 2023-24 and Rs. 428.60 crore in the financial year 2024-25, it had accumulated losses of Rs. 1,424.06 crore and Rs. 994.98 crore respectively. Its reserves and surplus stood at a negative Rs. 893.37 crore.

Under Section 55(2) of the Companies Act, 2013 (which governs redemption of preference shares), such shares can be redeemed only out of profits available for dividend or proceeds of a fresh issue of shares. Section 123(1) (which regulates declaration of dividends) prohibits declaration of dividend until accumulated losses are set off.

Electrotherm contended that its profits were not legally available for redemption due to accumulated losses and therefore sought approval under Section 55(3), which permits issuance of fresh preference shares for the purpose of redeeming existing preference shares.

Five out of six preference shareholders, holding 91.25% of the preference share capital, provided consent through affidavits certified by a Practising Company Secretary. Ahmedabad Aviation and Aeronautics Limited, which held the remaining shares, did not consent. Electrotherm undertook to redeem the 10.5 lakh shares held by Ahmedabad Aviation and Aeronautics Limited at par, in accordance with the proviso to Section 55(3).

The Registrar of Companies (RoC) and Regional Director (RD) raised objections citing pending inspections, investigations, and prosecutions against the company. Electrotherm submitted that those proceedings were unrelated to the Section 55(3) petition and also placed on record interim stay orders passed by the Gujarat High Court in relation to certain prosecutions.

The Tribunal held that redemption under Section 55(2) was not possible as the company did not have profits legally available for redemption despite having accounting profits. It accepted Electrotherm's explanation and held that Section 55(3) provided a valid mechanism to replace unredeemed preference shares with fresh preference shares. It observed:

“As the company does not have profits available for distribution of dividends, such issued non-convertible preference shares that has become due for redemption can only be redeemed out of the proceeds of a fresh issue of shares made for the purpose of such redemption (second proviso to section 55 (2) of the Companies Act, 2013).”

Further, the Bench noted that five shareholders had consented to the arrangement and that Electrotherm had undertaken to redeem the holding of the non-consenting shareholder. It further observed that issuance of fresh NCRPS under Section 55(3) would not amount to an increase or reduction of share capital and would not prejudice equity shareholders or creditors, as it merely substituted one redeemable preference share with another while preserving stakeholder rights.

Accordingly, the NCLT allowed the petition and directed Electrotherm to issue and allot 1,09,50,000 NCRPS of Rs. 10 each to the five consenting shareholders. The shares would be redeemable not earlier than two years and not later than twenty years. It also directed redemption of 10,50,000 NCRPS held by Ahmedabad Aviation and Aeronautics Limited.

For Applicants: Advocates Jaimin Dave and Hirva Dave