A Company may reduce paid up share capital by following ways;

1. Reduction of share capital with the approval of NCLT (Section 66 of Companies Act, 2013); External agency’s approval.

2. Reduction through buyback of paid up capital from the existing shareholders (Section 68 Companies Act, 2013): Internal management and shareholder’s approval.

1. Reduction of Share Capital with the Approval of NCLT

[Section 66 of Companies Act, 2013 and The National Company Law Tribunal (Procedure for reduction of share capital of company) Rules, 2016]

A Company limited by shares may reduce its shares by “pay off any paid up share capital which is in excess of the wants of the Company” [Section 66 (1) (b) (ii)].

Procedure for Reduction of Share Capital with the Approval of NCLT

  • It should have the power under its Articles of Association to do so. If the articles do not contain any provision for reduction of capital, the articles must first be altered so as to give such power.
  • Convene a Board meeting to consider & approve the reduction and to call for an Extra Ordinary General meeting (EGM) of shareholders.
  • Issue the notice of EGM to shareholders.
  • Convene EGM; place the matter before the shareholders. The resolution containing reduction of shares must be approved by 75 % of shareholder i.e. the resolution must be a special resolution.
  • Prepare list of creditor (both secured and unsecured)
  • Obtain NOC from creditors.
  • Obtain a certificate from company’s statutory auditor stating that the accounting treatment of proposed reduction is in conformity with the accounting standards.
  • File an application (Form RSC-1) to National Company Law Tribunal (NCLT) along with the applicable fees by briefing the reason of reduction of share capital. The application shall be accompanies with
    • List of creditors duly certified by MD
    • A certificate from auditor to the effect that the list of creditors is verified by the auditors.
    • A certificate from auditor to the effect that the accounting treatment proposed by the company is in conformity with the accounting standard specified in section 133.

Upon receiving the application, the NCLT shall give notice of application to Central Govt. (Ministry of Corporate Affairs), Registrar of Companies (RoC), SEBI (in case of listed company) and to every creditors of the company seeking representation, if any, within maximum three months from the date of receipt of notice.

If no representation is received by the above mentioned stakeholders, NCLT shall presume that they have no objection to it.

NCLT may, if it satisfied that the debt or claim of every creditor of the company has been discharged or determined or has been secured or his consent is obtained, make an order confirming the reduction of share capital

POST APPROVAL ACTIVITY

  • The Company shall have to publish the NCLT Order in such manner as the NCLT may direct. (Publish it in one English newspaper having wide circulation, one Hindi and one vernacular newspaper in the vicinity of registered office area)
  • Within 30 days of NCLT Order, the company shall file with the ROC
    • Certified order of NCL
    • A minute approved by NCLT showing; the amount of share capital, the number of share in to which it is to be divided (no of remaining share), amount of each share.
  • The ROC shall register the matter and will issue a certificate to that effect.

2. Reduction of share capital Through Buyback of Paid up Capital from the Existing Shareholders

[Section 68 Companies Act, 2013 and Companies (Share capital and debenture) Rules, 2014]

A Company may buy back its shares and thereby reduce its paid up share capital.

  • It is authorized by the articles of the company.
  • A special resolution is passed at the general meeting (EGM) of the company if it is up to 25 % of paid up capital and free reserve However, this resolution is not required where the buy-back is 10% or less of the total paid-up equity share capital and free reserves of the company and such buy-back is authorized by the Board by means of resolution passed at its meeting.
  • The total debt of the Company (including unsecured debt) should not be more than 2 times the paid-up capital and free reserves after buy back.
  • All shares proposed to be bought-back must be fully paid-up
  • No buy-back shall be made within a period of one year from the closing date of preceding buy-back.

FUNDS FOR BUY BACK OF SHARES

According to Section 68(1) of the Companies Act, a company can purchase its own shares out of:

  • free reserves; or
  • the securities premium account; or
  • the proceeds of issue of any shares or other specified securities. Provided, however, that the buy-back cannot be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

Observation:

Non profitable company which has less or no free reserve can utilize the money lying in the securities premium account. 

Procedure for Reduction of share capital Through Buyback of Paid up Capital from the Existing Shareholders

According to the Rule 17

The company making a buyback must:

  • File letter of offer with the Registrar of Companies along with the prescribed fee in Form SH-8. The letter of offer must be dated and signed by atleast 2 directors of the company. The Form SH-8 must be accompanied with the following mandatory attachments;
  • Details of the promoters of the company.
  • Certificate of Solvency by auditor(s).
  • Certified true copy of the board resolution authorizing buy back.
  • Copy of the notice of the general meeting issued under section 68(3) along with the explanatory Statement thereto; and
  • Audited financial statements of last three years.
  • File the Declaration of Solvency (prepared in Form SH-9) with Registrar of Companies along with the letter of offer.
  • Dispatch the letter of offer to shareholders immediately after filing with the Registrar of Companies (this preferably should be done through registered post or Speed Post or Certificate of Posting) but not later than 20 days from the date of filing with the Registrar of Companies.
  • The offer shall be kept open for at least 15 days and up to maximum 30 days from the date of dispatch of offer letter.
  • Complete the verification of the offers received within 15 days from the date of closure of the offer. The shares offered will be deemed to be accepted unless a communication of rejection is made within 21 days from the date of closure of offer.
  • Open a “Special Bank Account” and deposit therein all the monies payable on this buyback.
  • Within 7 days from the completion of verification of offers (or communication of rejection), make payment of the consideration in cash to the shareholders whose securities have been accepted and return the share certificates to the shareholders whose shares have not been accepted.
  • The calculation with reference to the buyback must not be based on the audited financial statements older than 6 months from the date of letter of offer.

Observation:

Audited financials based on which the calculation of share capital and free reserve or share premium is to be calculated must not be older than six months, otherwise get the audit done.

  • Ensure the letter of offer shall contain true, factual and material information and shall not contain any misleading information and must state that the directors of the company accept the responsibility for the information contained in such document.
  • Do not issue any new shares including by way of bonus shares from the date of passing of special resolution authorizing the buy-back till the date of the closure of the offer under Rules, except those arising out of any outstanding convertible instruments.
  • Do not utilize any money borrowed from banks or financial institutions for the purpose of buying back its shares.
  • Make sure the company has not defaulted in filing annual return (Section 92) with the ROC. No company in default of section 92 can purchase is own shares, directly or indirectly.

POST BUYBACK COMPLIANCES

  • File a return in Form SH 11 with the Registrar of Companies after completion of the buy-back. Along with this return, attach a certificate in Form SH-15 signed by 2 directors of the Company stating that the buy-back has been made in compliance with the provisions of the Companies Act and the Rules.
  • The company shall extinguish and physically destroy the shares or securities so bought back within seven days of the last date of completion of buy-back.
  • Post completion of buy-back, the company shall not make a further issue of the same kind of shares or other securities including allotment of new shares or other specified securities within a period of six months except by way of:

1. bonus issue;

2. in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.

REGISTER OF BUYBACK

The company shall maintain a register of shares or other securities which have been bought-back in the form prescribed in Form SH-10. 

RECOMMENDATION

Reduction of share capital by taking approval of NCLT is a tedious and time consuming exercise and need valid clarification to convince the tribunal.

Buyback is simple and more realistic way to reduce the issue share capital. There is no tax implication; neither on company nor on shareholders.

3. Extract of Section 66 of Companies Act, 2013

66. Reduction of share capital

(1) Subject to confirmation by the Tribunal on an application by the company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital in any manner and in particular, may—

(a) extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up; or

(b) either with or without extinguishing or reducing liability on any of its shares,—

(i) cancel any paid-up share capital which is lost or is unrepresented by available assets; or

(ii) pay off any paid-up share capital which is in excess of the wants of the company, alter its memorandum by reducing the amount of its share capital and of its shares accordingly:

Provided that no such reduction shall be made if the company is in arrears in the repayment of any deposits accepted by it, either before or after the commencement of this Act, or the interest payable thereon.

(2) The Tribunal shall give notice of every application made to it under sub-section (1) to the Central Government, Registrar and to the Securities and Exchange Board, in the case of listed companies, and the creditors of the company and shall take into consideration the representations, if any, made to it by that Government, Registrar, the Securities and Exchange Board and the creditors within a period of three months from the date of receipt of the notice:

Provided that where no representation has been received from the Central Government, Registrar, the Securities and Exchange Board or the creditors within the said period, it shall be presumed that they have no objection to the reduction.

(3) The Tribunal may, if it is satisfied that the debt or claim of every creditor of the company has been discharged or determined or has been secured or his consent is obtained, make an order confirming the reduction of share capital on such terms and conditions as it deems fit:

Provided that no application for reduction of share capital shall be sanctioned by the Tribunal unless the accounting treatment, proposed by the company for such reduction is in conformity with the accounting standards specified in section 133 or any other provision of this Act and a certificate to that effect by the company’s auditor has been filed with the Tribunal.

(4) The order of confirmation of the reduction of share capital by the Tribunal under sub-section (3) shall be published by the company in such manner as the Tribunal may direct.

(5) The company shall deliver a certified copy of the order of the Tribunal under subsection (3) and of a minute approved by the Tribunal showing—

(a) the amount of share capital;

(b) the number of shares into which it is to be divided;

(c) the amount of each share; and

(d) the amount, if any, at the date of registration deemed to be paid-up on each share, to the Registrar within thirty days of the receipt of the copy of the order, who shall register the same and issue a certificate to that effect.

(6) Nothing in this section shall apply to buy-back of its own securities by a company under section 68.

(7) A member of the company, past or present, shall not be liable to any call or contribution in respect of any share held by him exceeding the amount of difference, if any, between the amount paid on the share, or reduced amount, if any, which is to be deemed to have been paid thereon, as the case may be, and the amount of the share as fixed by the order of reduction.

(8) Where the name of any creditor entitled to object to the reduction of share capital under this section is, by reason of his ignorance of the proceedings for reduction or of their nature and effect with respect to his debt or claim, not entered on the list of creditors, and after such reduction, the company is unable, within the meaning of sub-section (2) of section 271, to pay the amount of his debt or claim,—

(a) every person, who was a member of the company on the date of the registration of the order for reduction by the Registrar, shall be liable to contribute to the payment of that debt or claim, an amount not exceeding the amount which he would have been liable to contribute if the company had commenced winding up on the day immediately before the said date; and

(b) if the company is wound up, the Tribunal may, on the application of any such creditor and proof of his ignorance as aforesaid, if it thinks fit, settle a list of persons so liable to contribute, and make and enforce calls and orders on the contributories settled on the list, as if they were ordinary contributories in a winding up.

(9) Nothing in sub-section (8) shall affect the rights of the contributories among themselves.

(10) If any officer of the company—

(a) knowingly conceals the name of any creditor entitled to object to the reduction;

(b) knowingly misrepresents the nature or amount of the debt or claim of any creditor; or

(c) abets or is privy to any such concealment or misrepresentation as aforesaid, he shall be liable under section 447.

(11) If a company fails to comply with the provisions of sub-section (4), it shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees.

4. Extract of Section 68 of Companies Act, 2013

68. Power of company to purchase its own securities

(1) Notwithstanding anything contained in this Act, but subject to the provisions of sub-section (2), a company may purchase its own shares or other specified securities (hereinafter referred to as buy-back) out of—

(a) its free reserves;

(b) the securities premium account; or

(c) the proceeds of the issue of any shares or other specified securities:

Provided that no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

(2) No company shall purchase its own shares or other specified securities under sub-section (1), unless—

(a) the buy-back is authorised by its articles;

(b) a special resolution has been passed at a general meeting of the company authorising the buy-back:

Provided that nothing contained in this clause shall apply to a case where—

(i) the buy-back is, ten per cent. or less of the total paid-up equity capital and free reserves of the company; and

(ii) such buy-back has been authorised by the Board by means of a resolution passed at its meeting;

(c) the buy-back is twenty-five per cent. or less of the aggregate of paid-up capital and free reserves of the company:

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

(d) the ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more than twice the paid-up capital and its free reserves:

Provided that the Central Government may, by order, notify a higher ratio of the debt to capital and free reserves for a class or classes of companies;

(e) all the shares or other specified securities for buy-back are fully paid-up;

(f) the buy-back of the shares or other specified securities listed on any recognised stock exchange is in accordance with the regulations made by the Securities and Exchange Board in this behalf; and

(g) the buy-back in respect of shares or other specified securities other than those specified in clause (f) is in accordance with such rules as may be prescribed:

Provided that no offer of buy-back under this sub-section shall be made within a period of one year reckoned from the date of the closure of the preceding offer of buy-back, if any.

(3) The notice of the meeting at which the special resolution is proposed to be passed under clause (b) of sub-section (2) shall be accompanied by an explanatory statement stating—

(a) a full and complete disclosure of all material facts;

(b) the necessity for the buy-back;

(c) the class of shares or securities intended to be purchased under the buy-back;

(d) the amount to be invested under the buy-back; and

(e) the time-limit for completion of buy-back.

(4) Every buy-back shall be completed within a period of one year from the date of passing of the special resolution, or as the case may be, the resolution passed by the Board under clause (b) of sub-section (2).

(5) The buy-back under sub-section (1) may be—

(a) from the existing shareholders or security holders on a proportionate basis;

(b) from the open market;

(c) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

(6) Where a company proposes to buy-back its own shares or other specified securities under this section in pursuance of a special resolution under clause (b) of sub-section (2) or a resolution under item (ii) of the proviso thereto, it shall, before making such buy-back, file with the Registrar and the Securities and Exchange Board, a declaration of solvency signed by at least two directors of the company, one of whom shall be the managing director, if any, in such form as may be prescribed and verified by an affidavit to the effect that the Board of Directors of the company has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year from the date of declaration adopted by the Board:

Provided that no declaration of solvency shall be filed with the Securities and Exchange Board by a company whose shares are not listed on any recognised stock exchange.

(7) Where a company buys back its own shares or other specified securities, it shall extinguish and physically destroy the shares or securities so bought back within seven days of the last date of completion of buy-back.

(8) Where a company completes a buy-back of its shares or other specified securities under this section, it shall not make a further issue of the same kind of shares or other securities including allotment of new shares under clause (a) of sub-section (1) of section 62 or other specified securities within a period of six months except by way of a bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.

(9) Where a company buys back its shares or other specified securities under this section, it shall maintain a register of the shares or securities so bought, the consideration paid for the shares or securities bought back, the date of cancellation of shares or securities, the date of extinguishing and physically destroying the shares or securities and such other particulars as may be prescribed.

(10) A company shall, after the completion of the buy-back under this section, file with the Registrar and the Securities and Exchange Board a return containing such particulars relating to the buy-back within thirty days of such completion, as may be prescribed:

Provided that no return shall be filed with the Securities and Exchange Board by a company whose shares are not listed on any recognised stock exchange.

(11) If a company makes any default in complying with the provisions of this section or any regulation made by the Securities and Exchange Board, for the purposes of clause (f) of sub-section (2), the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees, or with both.

Explanation I.—For the purposes of this section and section 70, “specified securities” includes employees’ stock option or other securities as may be notified by the Central Government from time to time.

Explanation II.—For the purposes of this section, “free reserves” includes securities premium account.

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Author Bio

Name: Amit Saha
Qualification: CS
Company: IBC SOLAR PROJECTS PRIVATE LIMITED
Location: New Delhi, New Delhi, IN
Member Since: 21 May 2018 | Total Posts: 1

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Tags : Companies Act (2475) Companies Act 2013 (2248)

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