Reduction of Share Capital is reduction of issued, subscribed and paid-up
share capital of the company. Capital reduction is a mechanism of decreasing a company’s share capital (both equity and preference share capital) through share cancellations and share repurchases. The reduction of capital is done by companies for many reasons, including increasing shareholder’s value and producing more efficient capital structure. After capital reduction, the number of shares in company will decrease by the reduction amount. The Tribunal has absolute power to confirm or reject scheme of reduction of share capital.
Section 66 of the Companies Act, 2013 was enacted with the intention to permit companies to reduce their share capital in a fair and equitable manner and in such way that reduction does not affect business operations of the company and interest of creditors also remain protected.
Section 66(1) of the Companies Act, 2013 does not provide a comprehensive list of means by which share capital can be reduced. It is an inclusive list as indicated by words “in any manner and in, particular” which gives freedom to company to adopt any mode of reducing capital. The words “in any manner” gives a broader meaning and there is no limit on the modes in which share capital of the company may be reduced.
A company can reduce its Share Capital on following grounds;
- To eliminate losses,
- To return surplus capital to shareholders,
- To assist a buyback,
- To assist redemption of shares,
- To distribute assets to shareholders,
- To discharge liability to pay-up unpaid share capital,
In most cases eliminating loss is the prime reason to reduce share capital of company. Buyback of shares and redemption of Preference Shares are also a reduction of Share Capital however, they are governed by the different provisions prescribed under the Companies Act 2013.
Reduction of capital shall not be made when Company is in arrears of repayment of any deposits accepted by it and when Company is in arrears in payment of interest on deposits accepted by it, either before or after commencement of the Companies Act, 2013 either before or after commencement of the Companies Act, 2013.
Procedure for reduction of share capital pursuant to Section 66 read with National Company Law Tribunal (procedure for reduction of share capital) Rules, 2016.
In view of the aforementioned rules and provisions of the Companies Act, 2013. A Company proposing to reduce its share capital shall take following mentioned steps.
Check whether Articles of Association (AOA) of the company, contain powers to reduce the share capital of the company. If Articles does not have provision then first alter the Articles as per the provision of Section 14 of the Companies Act, 2013.
Formulate a draft scheme of reduction of share capital as per provisions of the Companies Act, 2013 and rules framed thereunder.
At first valuation of business/shares needs to be done by Independent Registered Valuer(s).
An Audit Committee Meeting shall be required to approve valuation and reduction of Capital of the company and provide its recommendation to the Board of Directors on reduction of share capital and financial implications thereof.
Call and Convene a Board Meeting to approve draft scheme of reduction of the share capital, fix a date and time for holding General Meeting of the company for shareholders’ approval for making application to Hon’ble National Company Law Tribunal (NCLT) for the said matter.
Notices shall be required to be issued to all shareholders concerned as on Record Date to be fixed by the Company keeping in mind the provisions of the Companies Act, 2013 and Rules made thereunder. Simultaneously, a Public Notice is also required to be given by the company pursuant to the provisions of Section 108 of the Companies Act in national language and vernacular language at the place where the registered office of company is situated.
In case the company is required to provide e-voting facility to its shareholders, proper remote evoting facility shall be required to be given to the shareholders and adequate disclosures to be made in the notice of the General Meeting in this regard.
Hold general meeting and pass the Special Resolution in the General Meeting.
Company shall File Form MGT-14 with Registrar of Companies (ROC) within 30 days of passing of the special resolution.
Apply to NCLT with scheme of reduction of share capital by filing application in Form RSC-1 along with fees of Rs. 5,000/-
The application shall be accompanied by (A) List of Creditor / Creditors, and (B) Certificate from the Auditor to the effect that the list of creditors is correct as per the records of the company verified by the auditor;( As per section 133 of Companies Act, 2013) (C) A certificate by the auditor and 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; (D) Certificate of auditor that accounting treatment proposed by company for reduction of capital is in conformity with the Accounting standards. (E) Any other relevant documents.
The NCLT shall within 15 days of submission of the application give notice to the ROC, SEBI (in case of listed entities), and Central Government in Form RSC-2 and every creditor in Form RSC-3 seeking their representations and objections, if any, to the capital reduction.
The NCLT shall give direction to company for the publication of notice in Form RSC- 4 and the same shall be published within 7 days in a leading English and vernacular language newspaper, both having wide circulation in State in which registered office of the Company is situated, or such newspapers as may be directed by the Tribunal and for uploading on the website of company (if any) seeking objections from creditors and intimating about the date of hearing. The notice shall state the amount of proposed reduction of share capital, and places, where the aforesaid list of creditors may be inspected, and time as decided by Tribunal within which creditors of Company may send their objections.
The company shall file an Affidavit in Form RSC-5 confirming dispatch and publication of notice within seven days from date of issue of such notice.
Representation by ROC, SEBI (in case of listed entities) and creditors shall be sent to NCLT within 3 months of receipt of notice and copy of which shall be also sent to the Company. If no such representation is received by NCLT within 3 months, it shall be presumed that they have no objection to capital reduction.
If the company receives any objections it should file along with a reply of the said objection to the NCLT within 7 days. NCLT may conduct an inquiry on objection of any creditor of the company on capital reduction.
The order confirming reduction of capital and approving of minutes shall be in Form RSC-6. The order of confirmation of the reduction of capital by Tribunal shall be published by Company in such manner as Tribunal may direct.
The Company shall deliver the certified copy of order of NCLT along with minutes as approved by NCLT to Registrar of Companies and file Form INC-28, within 30 days of the receipt of order of NCLT.
ROC shall issue a certificate under sub-section (5) of section 66 in Form RSC – 7.
C. Regulation 37 of SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015.
In the case of listed companies, the company proposing capital reduction shall file all documents related to the scheme to respective Stock exchanges and SEBI. After receiving approval from Stock exchange and SEBI scheme for reduction of share capital can be filed with NCLT thereafter.
All the provisions of regulation 37 of SEBI ((LODR) regulations 2015) should be followed.
D. Reduction of the Share Capital under Section 242 of the Companies Act, 2013.
We have highlighted above, the reduction of share capital under section 66 of Companies Act, 2013. However, there is alternative circumstance under Section 242 of Companies Act, 2013, where share capital of the company can be reduced.
Under Section 242 of the Companies Act, 2013 NCLT has power to reduce the share capital of the company in the case of oppression and mismanagement in the company.
Judicial Pronouncements:
1) Indian National Press (Indore) Ltd. – The need for reducing capital may arise in various ways, for instance, trading losses, heavy capital expenses or assets of reduced or doubtful value. Consequently, the original capital may either become lost or the company may find that it has more resources than it can profitably employ. In either case, need may arise to adjust the relation between capital and assets.
2) Sandvik Asia Ltd. v. Bharat Kumar Padamsi: Here the Court held that once it is established that non-promoter shareholders are being paid fair value of their shares, and an overwhelming majority of them have voted in favour of the resolution for reduction of share capital, the Court will not be justified in withholding the sanction to the resolution.
4) Elpro International Ltd.: The Bombay High Court while dealing with a special resolution passed in favour of reduction of capital, held that a company can reduce the share capital of any shareholder in any way so long as the procedure is fair and company gets approval of majority shareholders.
5) Josco Jewellers Private Limited: The Petitioner Company had filed a petition under Section 66 of the Companies Act, 2013 against the Registrar of Companies, Kerela seeking reduction of its share capital from Rs. 120 crores to Rs. 1 crore. After a review of capital structure, Board of Directors of Petitioner Company observed that Company’s paid up capital was more than required amount for existing business of Company and that it would be beneficial for company to remit back its excess capital by way of reduction of share capital. The NCLT (Kochi) Bench held that since all requisite statutory procedures have been fulfilled and no objections has been received from any of the shareholders, the Company petition filed for reduction of its share capital is allowed.
ABOUT AUTHOR
Mr. Neeraj Khanna is a member of the ICSI and a law graduate. He can be reached at email neeraj@abinitioindia.com.
Disclaimer: The whole contents of this document have been prepared on basis of relevant provisions and as per the information present at the time of its preparation. Though care has been taken to ensure accuracy and reliability of information provided. Users of this information are expected to refer to the relevant existing provisions of applicable Laws as on a particular date. I assume no responsibility for the consequences of use of the contents of this Article.
