Knovalt
  • Contact Us
    +91 9871555311
  • Our Address
    310, 3rd floor, Bhanot Corner, Pamposh Enclave, Greater Kailash 1, New Delhi - 110048

New to site?


Login

Lost password? (X)

Already have an account?


Signup

(X)
Farooq

Reduction of share capital

HomeCompany lawReduction of share capital
  • Reduction of share capital
14
Feb
Reduction of share capital
  • Author
    Rajat Khaneja
  • Comments
    0 Comments
  • Category

Reduction of share capital is a process to lower down/reducing the share capital of a company. It means reducing the issued, subscribed and paid-up share capital of the company. Separate provisions and procedure for have been envisaged under the Companies Act, 2013 and rules made thereunder for reduction of share capital.

Section 66 of the Companies Act, 2013 deals with the reduction of share capital of a company. It came into effect on 07th December, 2016.

There are other ways also to reduce the share capital of a company such as redemption of preference share and buyback of shares. These are governed by other provisions of the Companies Act, 2013 and should not be confused with provisions related with reduction of share capital.

Reduction of share capital may be required by the company in various situations. A few of them are mentioned below:

  • Cancelling the uncalled capital
  • Returning of surplus to shareholders;
  • Eliminating losses, which may be preventing the payment of dividends;
  • As part of a scheme of compromise or arrangements;
  • To rationalise and simplify the capital structure of a company;

Reduction of Share capital can be affected in any of the following manners

Scenario Condition Example
1 In respect of share capital not paid-up, extinguishing or reducing the liability on any of its shares or If the shares are of face value of INR 100 each of which INR 80 has been paid, the company may reduce them to INR 80 fully paid-up shares and thus relieve the shareholders from liability on the uncalled capital of INR 20 per share.
2 Cancel any paid-up share capital, which is lost, or is not represented by available assets. If the shares of the face value of INR 100 each fully paid-up is represented by INR 75 worth of assets. In such a case, reduction of the share capital may be effected by cancelling INR 25 per share and writing off a similar amount of assets.
3 Pay off the paid-up share capital, which is in excess of the needs of the company.  
This may be achieved either with or without extinguishing or reducing liability on any of its shares
Shares of the face value of INR 100 each fully paid-up can be reduced to face value of INR 80 each by paying back INR 20 per share.

Apart from the above scenarios, share capital reduction can be done as per the requirements of a company. After “Capital Reduction” the number of shares in the company will decrease by the reduction amount.

Essential points to note

  • As per section 66 of the Companies Act, 213, a company constituted with limited liability by shares or guarantee and having share capital is alone entitled to reduce its liability of members.
  • It should have the power under its Articles of Association to do so. If the articles do not contain any provision for the reduction of capital, the articles must first be altered so as to give such power.
  • Reduction of share capital is regarded as the internal restructuring of a company, therefore, the decision of the majority of members shall prevail by way of a special resolution.
  • The reduction effected by such resolution must be confirmed by the National Company Law Tribunal (‘Tribunal’)
  • Previously, the reduction of the share capital was governed by section 100 to 104 of the Companies Act, 1956. As per the old act, it was subjected to the confirmation of court, under the new act, the said powers of the court have been transferred to Tribunal (NCLT).
  • No capital reduction can be undertaken if the company is in arrears in the repayment of any deposits (including interest payable thereon) accepted by it.
  • Reduction takes effect on the registration of the documents with the Registrar of Companies which are required to be submitted with 30 days of obtaining an order from the Tribunal
  • The reduction is different from diminution of shares which is regarded as cancellation of unsubscribed share capital.
  • Nothing in section 66 shall apply to buyback of its own securities u/s 68 of the Companies Act, 2013
  • Offenses under this section are compoundable under section 441 of the Companies Act, 2013.

Applicable provisions (as per the case)

  • Section 66 of the Companies Act, 2013; Reduction by way of cancellation of shares
  • Rule 2 to 6 of the National Company Law Tribunal (Procedure for Reduction of Share Capital of Company) Rules, 2016
  • Section 61 of the Companies Act, 2013; Alteration of share capital involves a reduction in authorised share capital by cancellation of share.
  • Section 230 of the Companies Act, 2013; where tribunal passes order under a scheme of compromise or arrangement.
  • Section 242 of the Companies Act, 2013; In the case of oppression and mismanagement
  • In the case of a listed company; SEBI (LODR) Regulations, 2015.

Procedure for Reduction of share capital

  • Convening a Board meeting and passing Board Resolution
  • Calling EGM and passing special resolution subject to confirmation of NCLT
  • Filing application for reduction of share capital with NCLT
  • Obtaining orders for reduction of share capital from NCLT
  • Register the  with ROC
  • Reduction of share capital completed

Procedure for applying and obtaining from NCLT

  1. Application for reduction of share capital shall be made to NCLT in Form RSC-1. Following documents shall be annexed with the application:
  2. List of creditors, indicating their names, address and amount owed to them, class-wise; duly certified by Managing Director of Company or by 2 directors in his absence, made on a date not earlier than 15 days prior to the date of filing the application.
  3. Certificates by Auditor certifying:
    1. the list of creditors referred above is correct as per the records of the company verified;
    2.  the company is not, as on the date of filing of the application, in arrears in the repayment of the deposits or the interest thereon
    3. the accounting treatment proposed by the company for the reduction of share capital is in conformity with the accounting standards specified in section 133 or any other provisions of Act.
  4. Declaration by a director of the company that the company is not, as on the date of filing of the application, in arrears in the repayment of the deposits or the interest thereon;
  • NCLT shall within 15 days from the date of submission of the application give notice to ROC and SEBI (if listed) in Form RSC-2 and to every creditor in Form RSC-3.
    • Notice to creditors in Form RSC-3 shall be sent within 7 days seeking their representations and objections.
    • Representations and objections, if any to be made within 3 months from the date of receipt of notice and copy of such representation shall simultaneously be sent to the company
  • Newspaper Advertisement: Form RSC-4 within 7 days of direction by NCLT in leading English and vernacular language newspaper, for seeking their representations and objections. The same is required to be uploaded on the company’s website simultaneously.
  • Company to file an affidavit in Form RSC-5 confirming the despatch and publication of the notice within 7 days from the date of issue of such notice.
  • Company shall send the representations and objections, if any received along with responses of the company within 7 days of the expiry of period up to which objections were sought.
  • NCLT may hold any enquiry or adjudication or claims or for hearing the objection give such directions as may deem proper with reference to securing the debts or claims of creditors who do not consent to the proposed reduction.
  • The order confirming the reduction of share capital and approving the minute shall be in Form No. RSC – 6 on such terms and conditions as may be deemed fit.
  • Order copy of NCLT to be filed with ROC in e-form INC 28 within 30 days of passing order.
  • ROC shall issue a certificate in Form RSC-7 to that effect.

Case Laws

  • AAPC India Hotel management – LSI 1578-NCLT-2017 (New Delhi):

In this case there was a Capital Reduction by repayment of excess capital to the shareholders for which resolution was approved by NCLT:

The petitioner company is intending to follow an asset-light strategy which will help it to focus solely on the operation and management of hotels. Therefore, the board of the petitioner company is contemplating to dispose of its investments as appearing in its books of accounts in certain other companies. Pursuant to sale/disposal of the investments by the petitioner company, the share capital of the petitioner Company will be significantly in excess of the Petitioner company’s business requirements which the petitioner cannot profitably utilize in its business.

In view of the aforesaid facts, the board is of the view that the reduction of equity of share capital of the company is the only practical and economically efficient method available to the company for achieving the desired objective and thus, the funds so realized on sale/disposal of the investments will be utilized for payment to be made to the equity shareholders of the petitioner company upon the reduction of equity share capital is made effective.

  • Thomson Reuters International Services Pvt Ltd -LSI 1908 -NCLT-2107 (Mumbai)

Here too, the company passed a special resolution for reduction of Capital refunding a sum of Rs 324 Crores to the shareholders of the company by reducing the share capital and share premium respectively. The NCLT examined the question as to whether this needs to be stamped under the Maharashtra Stamp Act and concluded that:

Since Maharashtra Stamp Act, 1958, is a fiscal statute for generating revenue to the State, unless a Special provision is made in the articles enunciated in the said Act, a party cannot be fastened the stamp duty without being explicitly mentioned in the Articles of the Said Act. Here, there being no explicit Article to put the reduction of share capital to stamp duty, this bench is of the view that by seeing a definition for “instrument” in the said Stamp Act, it cannot be said that reduction of shares is leviable to stamp duty.

  • Ansa Decoglass Pvt Ltd, CP 79 of 2018 (Mumbai)- Order dated 4 February 2019

Selective Capital reduction – refused:

Here, there was a proposal to reduce the share capital From Rs 20 Lakhs to Rs 5 Lakhs by the cancellation of the share capital of an amount equivalent to Rs 14,99,990 and the aggregate of share capital that was reduced was to be credited to Capital Reserve. The NCLT noticed that the entire shareholding is held by 2 groups viz; Group A & Group B and the group A which was owning 75% of the shareholding has agreed that they will not be paid on account of cancellation but the same should be credited to capital reserve. The NCLT further found that the Reserves & Surplus as on 31 March was Rs 11.66 cr, EPS was Rs 413/- per share and the book value per share is Rs 583/-.

NCLT found that this was a strange situation where the majority of the company was not being paid any amount even though the company’s financials are very strong and this is a case of selective capital reduction.

NCLT rejected the proposal and held that these type of Schemes are not envisaged under section 66 of the Companies Act.

For more information, feel free to contact us.

Our knowledge partner: Mr.tax | W: www.mrtax.in


Related Posts
Leave A Comment

Leave A Comment