Reduction of securities premium by reduction of share capital or through scheme of arrangement?
Introduction.
Companies Act 2013, (‘the Act’), the companies are allowed to issue shares of the company at a premium (i.e. at a price more than the face value of the shares). But in such case, the premium received on shares issued and allotted, cannot be credited to paid up share capital. Such amount then is credited to a separate reserve account called ‘Securities Premium Reserve (‘SP’)’ and is shown under the head ‘Reserves and Surplus’ on the liability side of the balance sheet[i].
Section 52 of the Act provides for creation and utilization of SP. Sub-section (1) of section 52[ii] of the Act states that, provisions of capital reduction shall apply to SP as if it is paid up capital for any purpose other than those specified in sec 52 whereas, definition of ‘paid up share capital’ as prescribed under clause 64 of section 2 of the Act[iii] does not include SP.
Therefore, there arises a question that, if a company wishes to reduce its SP only without reducing share capital, then can it do so under section 66 of the Act or it has to be done under a scheme of arrangement under section 230 of the Act? In this article, we shall try to find an answer to this question with the help of legal provisions and a judicial pronouncement.
Legal provisions.
Section 66 of the Act[iv] states that a company may reduce its share capital inter-alia without reducing or extinguishing any liability on shares. However, section 66 talks about reduction of capital and can SP be treated as capital of the company?
As discussed above, under clause (64) of section 2 of the Act, only the paid-up value of shares is considered as paid-up capital and since SP forms part of ‘Reserves and Surplus’, it is not a part of paid-up capital. However, if we refer to sub-section 1 of section 52, it clearly says that, provisions of capital reduction shall apply to SP as if it is paid up capital of the company. Therefore, exclusively for the purpose of capital reduction, SP can be considered as paid-up capital and be reduced by following the process of capital reduction.
Judicial pronouncement.
In the matter of capital reduction of Vetoquinol India Animal Health Private Limited [‘the Company’], the Company was desirous of reducing SP of the Company against the accumulated losses. This matter was before Hon’able National Company Law Tribunal Mumbai bench [‘Hon’able Tribunal’] for its approval for the said reduction as required under section 66(1) of the Act.
Hon’able Tribunal, vide its judgment dated January 25, 2023, confirmed that, sub-section (1) of section 52 of the Act equates the SP with paid up capital and therefore, provisions of the Act relating to capital reduction is applicable to reduction of SP against accumulated losses. Also, the articles of association of the Company allows reduction of SP in any manner permitted by law. Hence Hon’able Tribunal approved the proposed capital reduction of SP against accumulated losses which were not represented by the assets of the Company.
Conclusion.
Hence on the basis of legal provisions and the judicial pronouncement, it can be stated that, SP can be equated to paid up capital for the purpose of capital reduction and can be reduced by following the process provided by section 66. There is no need for the companies to go for scheme of arrangement under section 230 for reducing SP.
[i] Schedule III, Part B
[ii] 52. (1) Where a company issue shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shares shall be transferred to a “securities premium account” and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the securities premium account were the paid-up share capital of the company.
[iii] (64) “paid-up share capital” or “share capital paid-up” means such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paid-up in respect of shares of the company, but does not include any other amount received in respect of such shares, by whatever name called;
[iv] 66. (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:
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Author: Rutuja Umadikar
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