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What is The Reduction of Share Capital under Companies Act, 2013?

calendar13 Apr, 2023
timeReading Time: 4 Minutes
What is The Reduction of Share Capital under Companies Act, 2013?

The reduction of share capital in India is governed by the Companies Act, 2013, and the rules made thereunder. The process involves obtaining the approval of the company’s shareholders, as well as the approval of the National Company Law Tribunal (NCLT)[1]. The company must also publish a notice of the proposed reduction of share capital in a newspaper, and provide an opportunity for any interested person to object to the proposal.

The reduction of share capital can be undertaken by a company for various reasons, such as to eliminate accumulated losses, to return capital to shareholders, or to adjust the capital structure of the company. However, it must be noted that the reduction of share capital cannot be used as a tool for reducing liabilities, nor can it be done to evade statutory obligations or defraud creditors.

Once the NCLT approves the reduction of share capital, the company must file the order with the Registrar of Companies (ROC), and the reduction becomes effective on the date specified in the order. The company must also file an application for the necessary changes to be made to the company’s memorandum and articles of association.

It is a useful tool for companies to manage their capital structure, but it must be done in a transparent and legal manner, with the interests of all stakeholders being taken into account.

What Is The Need For Reduction Of Share Capital In A Company?

The reduction of share capital is a process that involves decreasing the total amount of a company’s authorized share capital. This can be done for a variety of reasons, including:

  • Financial Reasons:

If a company has more authorized share capital than it needs, it may choose to reduce its share capital to improve its financial position. This can be done by returning capital to shareholders or by canceling unissued shares.

  • Simplification Of Capital Structure:

Companies may choose to reduce their share capital to simplify their capital structure. This can be done by canceling shares that are not needed or by consolidating shares.

  • Compliance With Regulatory Requirements:

In some cases, companies may be required by law to reduce their share capital. For example, if a company’s assets have fallen below its liabilities, it may need to reduce its share capital to avoid being insolvent.

  • Share Buybacks:

Companies may also reduce their share capital through share buybacks. This involves buying back some of the company’s shares from shareholders, which reduces the total number of shares outstanding and therefore the total share capital.

Modes of Reduction of Share Capital

As per the Companies Act, 2013, a company can reduce its share capital through the following modes:

  • By extinguishing/reducing the liability on any of its shares concerning the share capital not paid up;
  • By cancelling any paid-up share capital that is lost or unrepresented by available assets;
  • By paying off any unpaid share capital that is in excess of the company’s needs;
  • By returning the paid-up share capital that is in excess of the company’s requirements to its shareholders;
  • By consolidating and dividing all or any of its share capital into shares of larger amounts than the existing shares;
  • By converting all or any of its fully paid-up shares into stock, and re-converting that stock into fully paid-up shares of any denomination;
  • By reducing its share capital in any other manner that is prescribed by the Companies Act, 2013.

It is important to note that reduction of share capital cannot be done if the company is in default of repayment of deposits or interest thereon, or if it has defaulted in payment of any statutory dues, such as income tax or goods and services tax, or if there are any pending legal proceedings against the company. The reduction of share capital also requires the approval of the National Company Law Tribunal (NCLT).

Steps Included For the Reduction of Share Capital

Reduction of share capital refers to the process by which a company reduces the amount of its share capital by cancelling or extinguishing any part of it that is not required by the company. The reduction of share capital can be carried out under the provisions of the Companies Act, 2013 in India.

The following are the vital steps involved in the reduction of share capital in a company in India:

  • Check the Articles of Association (AoA) of the company: The AoA of the company must contain provisions for the reduction of share capital. If the AoA does not contain such provisions, the company will have to change its AoA before proceeding with the reduction of share capital.
  • Call for a Board meeting: The Board of Directors of the company should convene a meeting and pass a resolution to reduce the share capital of the company.
    The resolution should specify the following details:
    • The amount of reduction in share capital
    • The reasons for the reduction
    • The source from which the reduction will be made (e.g., cancellation of shares or redemption of shares)
    • Any other terms and conditions related to the reduction
  • Obtain approval from shareholders: The shareholders of the company must approve the resolution passed by the Board of Directors. The company must send a notice of the general meeting to all the shareholders of the company at least 21 days before the date of the meeting. The notice should contain the details of the proposed reduction and the reasons for the reduction. The shareholders should vote on the resolution in the meeting, and it should be passed by a special resolution (i.e., a resolution passed by at least 75% of the shareholders).
  • File an application with the National Company Law Tribunal (NCLT): The Company must file an application with the NCLT for approval of the reduction of share capital. The application should include the following documents:
    • A copy of the Board resolution
    • A copy of the shareholders’ resolution
    • A statement of the company’s assets and liabilities as on the date of the resolution
    • A report by the company’s auditor stating that the proposed reduction will not have an adverse effect on the company’s creditors
  • Obtain approval from the NCLT: The NCLT will examine the application and if satisfied, it will issue an order approving the reduction of share capital. The order should be filed with the Registrar of Companies (RoC) within 30 days of receipt of the order.
  • Update the share capital: Once the order of the NCLT is received and filed with the RoC, the company’s share capital should be updated in the records of the RoC.

Conclusion

The reduction of share capital is a legitimate process that must be followed by a company in India. The process involves obtaining approvals from the Board of Directors, shareholders, and the NCLT. The company must also update its records with the RoC after the reduction is approved.

Read Our Article: What Are The Types Of Share Capital? – Detailed Overview

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