{"id":55090,"date":"2023-04-13T18:33:46","date_gmt":"2023-04-13T13:03:46","guid":{"rendered":"https:\/\/corpbiz.io\/learning\/?p=55090"},"modified":"2023-04-13T18:33:48","modified_gmt":"2023-04-13T13:03:48","slug":"what-is-the-reduction-of-share-capital-under-companies-act-2013","status":"publish","type":"post","link":"https:\/\/corpbiz.io\/learning\/what-is-the-reduction-of-share-capital-under-companies-act-2013\/","title":{"rendered":"What is The Reduction of Share Capital under Companies Act, 2013?"},"content":{"rendered":"\n<p>The reduction of share capital in India is governed by the Companies\nAct, 2013, and the rules made thereunder. The process involves obtaining the\napproval of the company&#8217;s shareholders, as well as the approval of the National\nCompany Law Tribunal <strong>(NCLT)<\/strong><sup><a class=\"text-primary\" href=\"https:\/\/nclt.gov.in\/\"><strong>[1]<\/strong><\/a><\/sup>. The\ncompany must also publish a notice of the proposed reduction of share capital\nin a newspaper, and provide an opportunity for any interested person to object\nto the proposal.<\/p>\n\n\n\n<p>The reduction of share capital can be undertaken by a company for\nvarious reasons, such as to eliminate accumulated losses, to return capital to\nshareholders, or to adjust the capital structure of the company. However, it\nmust be noted that the reduction of share capital cannot be used as a tool for\nreducing liabilities, nor can it be done to evade statutory obligations or\ndefraud creditors.<\/p>\n\n\n\n<p>Once the NCLT approves the reduction of share capital, the company\nmust file the order with the Registrar of Companies (ROC), and the reduction\nbecomes effective on the date specified in the order. The company must also\nfile an application for the necessary changes to be made to the company&#8217;s\nmemorandum and articles of association.<\/p>\n\n\n\n<p>It is a useful tool for companies to manage their capital structure,\nbut it must be done in a transparent and legal manner, with the interests of\nall stakeholders being taken into account.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title ez-toc-toggle\" style=\"cursor:pointer\">Page Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 eztoc-toggle-hide-by-default' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/corpbiz.io\/learning\/what-is-the-reduction-of-share-capital-under-companies-act-2013\/#What_Is_The_Need_For_Reduction_Of_Share_Capital_In_A_Company\" >What Is The Need For Reduction Of Share Capital In A\nCompany?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/corpbiz.io\/learning\/what-is-the-reduction-of-share-capital-under-companies-act-2013\/#Modes_of_Reduction_of_Share_Capital\" >Modes of Reduction of Share Capital<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/corpbiz.io\/learning\/what-is-the-reduction-of-share-capital-under-companies-act-2013\/#Steps_Included_For_the_Reduction_of_Share_Capital\" >Steps Included\nFor the Reduction of Share Capital<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/corpbiz.io\/learning\/what-is-the-reduction-of-share-capital-under-companies-act-2013\/#Conclusion\" >Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_Is_The_Need_For_Reduction_Of_Share_Capital_In_A_Company\"><\/span>What Is The Need For Reduction Of Share Capital In A\nCompany?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The reduction of share capital is a process that involves decreasing\nthe total amount of a company&#8217;s authorized share capital. This can be done for\na variety of reasons, including:<\/p>\n\n\n\n<ul><li><strong>Financial Reasons:<\/strong><\/li><\/ul>\n\n\n\n<p>If a company has more authorized share capital than it needs, it may\nchoose to reduce its share capital to improve its financial position. This can\nbe done by returning capital to shareholders or by canceling unissued shares.<\/p>\n\n\n\n<ul><li><strong>Simplification Of Capital Structure<\/strong>:<\/li><\/ul>\n\n\n\n<p>Companies may choose to reduce their share capital to simplify their\ncapital structure. This can be done by canceling shares that are not needed or\nby consolidating shares.<\/p>\n\n\n\n<ul><li><strong>Compliance With Regulatory Requirements<\/strong>:<\/li><\/ul>\n\n\n\n<p>In some cases, companies may be required by law to reduce their\nshare capital. For example, if a company&#8217;s assets have fallen below its\nliabilities, it may need to reduce its share capital to avoid being insolvent.<\/p>\n\n\n\n<ul><li><strong>Share Buybacks<\/strong>:<\/li><\/ul>\n\n\n\n<p>Companies\nmay also reduce their share capital through share buybacks. This involves\nbuying back some of the company&#8217;s shares from shareholders, which reduces the\ntotal number of shares outstanding and therefore the total share capital.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Modes_of_Reduction_of_Share_Capital\"><\/span>Modes of Reduction of Share Capital<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>As per the Companies Act, 2013, a company can reduce its share capital\nthrough the following modes:<\/p>\n\n\n\n<ul><li>By extinguishing\/reducing the\nliability on any of its shares concerning the share capital not paid up;<\/li><li>By cancelling any paid-up share\ncapital that is lost or unrepresented by available assets;<\/li><li>By paying off any unpaid share\ncapital that is in excess of the company&#8217;s needs;<\/li><li>By returning the paid-up share\ncapital that is in excess of the company&#8217;s requirements to its shareholders;<\/li><li>By consolidating and dividing\nall or any of its share capital into shares of larger amounts than the existing\nshares;<\/li><li>By converting all or any of its\nfully paid-up shares into stock, and re-converting that stock into fully\npaid-up shares of any denomination;<\/li><li>By reducing its share capital\nin any other manner that is prescribed by the Companies Act, 2013.<\/li><\/ul>\n\n\n\n<p>It is important to note that reduction of share capital cannot be\ndone if the company is in default of repayment of deposits or interest thereon,\nor if it has defaulted in payment of any statutory dues, such as income tax or\ngoods and services tax, or if there are any pending legal proceedings against\nthe company. The reduction of share capital also requires the approval of the\nNational Company Law Tribunal (NCLT).<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Steps_Included_For_the_Reduction_of_Share_Capital\"><\/span>Steps Included\nFor the Reduction of Share Capital<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Reduction of share capital refers to the process by which a company\nreduces the amount of its share capital by cancelling or extinguishing any part\nof it that is not required by the company. The reduction of share capital can\nbe carried out under the provisions of the Companies Act, 2013 in India.<\/p>\n\n\n\n<p><em>The following are the vital\nsteps involved in the reduction of share capital in a company in India:<\/em><\/p>\n\n\n\n<ul><li><strong>Check the Articles of Association (AoA) of the company: <\/strong>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.<\/li><li><strong>Call for a Board meeting<\/strong>: The Board of Directors of the company should convene a meeting and pass a resolution to reduce the share capital of the company.<br>The resolution should specify the following details: <ul><li>The amount of reduction in\nshare capital<\/li><li>The reasons for the reduction<\/li><li>The source from which the\nreduction will be made (e.g., cancellation of shares or redemption of shares)<\/li><li>Any other terms and conditions\nrelated to the reduction<\/li><\/ul><\/li><\/ul>\n\n\n\n<ul><li><strong>Obtain approval from shareholders:<\/strong> The\nshareholders of the company must approve the resolution passed by the Board of\nDirectors. The company must send a notice of the general meeting to all the\nshareholders of the company at least 21 days before the date of the meeting.\nThe notice should contain the details of the proposed reduction and the reasons\nfor the reduction. The shareholders should vote on the resolution in the\nmeeting, and it should be passed by a special resolution (i.e., a resolution\npassed by at least 75% of the shareholders).<\/li><li><strong>File an application with the National Company Law Tribunal (NCLT):<\/strong> The Company must file an application with the NCLT for approval of\nthe reduction of share capital. The application should include the following\ndocuments:<ul><li><em>A copy of the Board resolution<\/em><\/li><li><em>A copy of the shareholders&#8217; resolution<\/em><\/li><li><em>A statement of the company&#8217;s assets and liabilities as on the date\nof the resolution<\/em><\/li><li><em>A report by the company&#8217;s auditor stating that the proposed\nreduction will not have an adverse effect on the company&#8217;s creditors<\/em><\/li><\/ul><\/li><\/ul>\n\n\n\n<ul><li><strong>Obtain approval from the NCLT:<\/strong> The NCLT\nwill examine the application and if satisfied, it will issue an order approving\nthe reduction of share capital. The order should be filed with the Registrar of\nCompanies (RoC) within 30 days of receipt of the order.<\/li><li><strong>Update the share capital<\/strong>: Once the order\nof the NCLT is received and filed with the RoC, the company&#8217;s share capital\nshould be updated in the records of the RoC.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The reduction of <strong><a href=\"https:\/\/corpbiz.io\/change-in-share-capital\">share capital<\/a><\/strong> 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.<\/p>\n\n\n\n<p class=\"text-left\"><b>Read Our Article<\/b>: <mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/corpbiz.io\/learning\/5-kinds-of-share-capital\/\">What Are The Types Of Share Capital? \u2013 Detailed Overview<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>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&#8217;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 [&hellip;]<\/p>\n","protected":false},"author":55,"featured_media":55091,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[120],"tags":[3433],"acf":{"service_id":"1"},"authorName":"Soumyadipa Banik","authorImageUrl":"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2023\/02\/MicrosoftTeams-image-66.jpg","authorDescription":"Soumyadipa is a legal professional and has completed her Masters (L.L.M.) in Business Law from Amity University. She is an aspiring content writer and legal researcher with more than a year experience. She have earlier worked for Startup companies and written business and legal articles, blogs and website content. She is good at presenting complex issues in organized, easy-to-understand terms and committed to provide highly persuasive content.","postViews":12220,"readingTime":4,"_links":{"self":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/55090"}],"collection":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/users\/55"}],"replies":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/comments?post=55090"}],"version-history":[{"count":2,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/55090\/revisions"}],"predecessor-version":[{"id":55093,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/55090\/revisions\/55093"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media\/55091"}],"wp:attachment":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media?parent=55090"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/categories?post=55090"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/tags?post=55090"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}