CS Dipanjali Nagpal

Reduction of Share Capital Rules: The new process for capital reduction before NCLT

The Ministry of Corporate Affairs (MCA) has notified the National Company Law Tribunal (Procedure for reduction of share capital of Company) Rules, 2016 on December 15, 2016, which read with Section 66 of the Act, 2013 lays down the procedure to be followed for the same. Section 66 has been enforced vide MCA Notification S.O. 3677 (E) dated 7th December 2016 with effect from 15th December 2016.

Reduction v/s Buyback

In the case of reduction of share capital, the company cancels any paid-up share capital which is lost or is unrepresented by available assets or pays off excess paid-up share capital. This is an alternative to the process of buy-back of company’s own securities under Section 68. In the case of buy-back, the shares are bought at a fair value. In the case of reduction, the company is returning the capital which not for the time being required by the company. The rules applicable to reduction may be the same as in the case of buyback and there does not seem to be any reason to hold that in a reduction process, the company cannot pay higher than the par value of the shares. Therefore, the company may pay the fair value and return capital, thus effectively providing companies with the option of exceeding the ceiling of 25%[1] of the aggregate of paid-up capital and free reserves of the company.

Particulars Nature of Approval
Buy-back of equity shares up to 10% of the total paid up equity and free reserves Approval of the Board at its meeting.
Buy-back of equity shares above 10% and up to 25% of the aggregate of paid-up equity capital and free reserves Approval of shareholders by way of special resolution passed at a general meeting.
Buy-back of equity shares above 25% of the aggregate of paid-up equity capital and free reserves Approval of Tribunal under Section 66.

Procedure for reduction of share capital

After the passing of a special resolution for reduction of share capital the company has to file a petition with the Tribunal as described herein below:-

Procedural Summary

  • An application along with the documents prescribed shall be made to the NCLT along with prescribed fee in Form RSC-1.
  • The NCLT shall within 15 days of submission of the application give a notice containing the prescribed details or direct that the notice containing the prescribed details be given to i. ROC in Form RSC-2 ii. SEBI in Form RSC-2 and iii. every creditor of the company in Form RSC-3.
  • The NCLT shall along with the above give directions for the notice to be published in Form no. RSC-4 within 7 days from the date on which the directions are given in a leading English and vernacular language newspaper and for uploading on the website of the company.
  • Persons in charge of issuing the notice or newspaper advertisement from the company shall not later than 7 days from the date of issuing the notice, file an affidavit in Form no. RSC-5 confirming the dispatch and publication of such notice.
  • In case the NCLT is satisfied that the debt or claim of every creditor has been discharged or determined or has been secured or his consent has been obtained it may dispense with the requirement of giving notice to the creditors or publication of the notice.
  • If the authorities or the creditors of the company referred to above desire to make any representation the same shall be sent to the NCLT within 3 months from the receipt of the notice and a copy of such representation shall be sent simultaneously to the company. In case no representation has been received within the said period by the NCLT it shall be presumed they have no objection in the reduction.
  • The company shall send to the NCLT within 7 days of the expiry of the period up to which representations or objections were sought, its response along with the objections so received.
  • The NCLT may give such directions as it may think fit with respect to the holding of any inquiry or adjudication of claims or hearing of objections or otherwise.
  • At the hearing, the NCLT may if it thinks fit give such directions as it seems proper with reference to securing the claims of the creditors who do not consent to the proposed reduction.
  • The order of the NCLT confirming a reduction shall be in Form RSC-6
  • The company shall deliver a certified copy of the order of NCLT to the Registrar within 30 days of the receipt of the copy of the same in Form RSC-7

[1] in respect of the buy-back of equity shares in any financial year, the reference to twenty-five per cent. shall be construed with respect to its total paid-up equity capital in that financial year.

(Author is associated with Vinod Kothari & Company and can be reached at corplaw@vinodkothari.com)

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