CAN A COMPANY RE-CLASSIFY AMOUNTS STANDING IN THE “SECURITIES PREMIUM ACCOUNT” INTO RETAINED EARNINGS OR RESERVES AS PART OF ITS CAPITAL REDUCTION?

 CAN A COMPANY RE-CLASSIFY AMOUNTS STANDING IN THE “SECURITIES PREMIUM ACCOUNT” INTO RETAINED EARNINGS OR RESERVES AS PART OF ITS CAPITAL REDUCTION? 

NCLT KOLKATA REJECTS CAPITAL REDUCTION LINKED TO SECURITIES PREMIUM RECLASSIFICATION IN MODERN HI-RISE PVT. LTD 

Facts 

• Modern Hi-Rise Private Limited (“MHPL”) had filed a petition under Section 66 of the Companies Act, 2013 for reduction of its share capital.  

• The reduction was proposed in the context of a prior scheme of arrangement (the company had issued non-cumulative redeemable preference shares on 28 March 2019 as part of the amalgamation scheme) and the company proposed to re-classify amounts standing in the “securities premium account” into retained earnings or reserves as part of the reduction.  

• The petition sought to approve the reduction of capital (including reclassification of securities premium) by the NCLT under Section 66 and Section 52 of the Companies Act. 

KEY LEGAL PRINCIPLES 

• Under Section 52 of the Companies Act, 2013, the “securities premium account” must be used only for specific purposes (such as issuing fully paid-up bonus shares, writing off preliminary expenses, etc.). The Act does not permit arbitrarily transferring the securities premium to retained earnings. 

PERMITTED PURPOSES OF CAPITAL REDUCTION  

• The permitted purposes for capital reduction under Section 66 of the Companies Act include extinguishing or reducing liability on partly paid-up shares, cancelling paid-up capital that is lost or unrepresented by assets, and returning excess capital to shareholders.   

Company sought to transfer securities premium to retained earnings, arguing excess reserves and shareholder value creation. 

ROC AND RD (ER) OBJECTON 

• However , RoC and RD (ER) objected, stating: 
  Such reclassification is not permitted under Sections 52, 55, and 66. 
   

• NCLT lacks jurisdiction to approve reclassification of capital reserves. 

 

• Auditor’s certificate failed to flag the accounting inconsistency. 

                   JUDICIAL INSIGHT: 
 
“Securities premium is a capital receipt, not revenue in nature. Its use is restricted to specific purposes under Section 52. Reclassifying it as retained earnings violates GAAP and statutory intent.” – NCLT Kolkata,   

OUTCOME: 

• Petition dismissed by NCLT KOLKATA. 
   

• .Matter flagged for potential professional misconduct under ICAI norms against Auditor of the company 

R V SECKAR , FCS, LLB 79047 19295