The Reduction of Share Capital means reduction of issued, subscribed and paid up share capital of the company. Previously, reduction of share capital was governed by section 100 to 104 of the Companies Act, 1956, now it is governed by section 66 of the Companies Act, 2013. As per old act, it was subjected to the confirmation of high court, but under new Act, the said powers of high court has been transferred to National Company Law Tribunal (NCLT).
Buy back of shares and redemption of Preference Shares are also reduction of share capital but governed by specific provisions prescribed under Act. Such reductions in the form of buy back and redemption do not require sanction/approval from Tribunal (NCLT).
Company may reduce share capital by reducing or extinguishing the liability on any of its partly paid up shares. For e.g: if the shares are of face value of Rs. 100 each of which Rs. 50 has been paid, the company may reduce them to Rs. 50 fully paid-up shares and thus relieve the shareholders from liability on the uncalled capital of Rs. 50 per share.
Company may reduce share capital by cancelling any shares which are lost or is unrepresented by available assets. For e.g: if the shares of face value of INR 100 each fully paid-up is represented by Rs. 75 worth of assets. In such a case, reduction of share capital may be effected by cancelling Rs. 25 per share and writing off similar amount of assets.
Company may reduce share capital by paying off fully paid up shares which is in excess of the wants of the company. For e.g: shares of face value of Rs. 100 each fully paid-up can be reduced to face value of Rs. 75 each by paying back Rs. 25 per share.
No reduction of share capital 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.
A company limited by shares or limited by guarantee and having a share capital may reduce the share capital by passing a special resolution, subject to the confirmation by the Tribunal (NCLT).
NCLT shall give notice of application for reduction of capital to the following:
and shall take into consideration the representations, if any, made to it by that C.G, ROC, SEBI and the creditors within a period of 3 months from the date of receipt of the notice. If no representation has been received within the said period, it shall be presumed that they have no objection to the reduction.
No application for reduction of share capital shall be sanctioned by the Tribunal unless the accounting treatment proposed by the company 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.
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.
The company shall deliver a certified copy of the order of the Tribunal and of a minute approved by the Tribunal showing—
to the Registrar within 30 days of the receipt of the copy of the order, who shall register the same and issue a certificate to that effect.
If any officer of the company
He shall be liable under section 447.
If a company fails to comply with the provisions, it shall be punishable with fine which shall not be less than Rs. 5 lakh but which may extend to Rs. 25 lakh.
> Convene a Board Meeting
> Dispatch notice of general meeting to all the shareholders at least before 21 days.
> Hold the general meeting and pass Special Resolutionapproving reduction of share capital.
> If you have secured creditors, take NOC from them in writing.
> File Special Resolution alongwith e-form MGT-14with ROC within 30 days of passing.
> Apply to NCLT by filing an application in Form RSC-1to confirm reduction. The application shall be accompanied with the following attachments:
> The NCLT shall within 15 days of submission of the application give a notice to ROC, SEBI in Form RSC-2and to every creditors of the company in Form RSC-3.
> The NCLT shall also give direction for the notice to be published in Form RSC-4within 7 days of such direction in a leading English and vernacular language newspaper and for uploading on the website of the company.
> The company shall file an affidavit in Form RSC-5confirming the dispatch and publication of the notice within 7 days from the date of issue of such notice.
> The NCLT may dispense with the requirement of giving notice to the creditors or publication of notice, if every creditor has been discharged or secured or given his consent in writing.
> Representation by ROC, SEBI and creditors shall be sent to NCLT within 3 months of receipt of notice and copy of which shall also be sent to the company. If no such representation has been received by NCLT within the said period, it shall be presumed that they have no objection.
> Company shall send the representation or objections so received alongwith responses of the company thereto within 7 days of expiry of period upto which objections were sought.
> NCLT may hold any enquiry on adjudication of claim and/or give direction for securing the debts of the creditors.
> The order confirming the reduction of share capital shall be in Form RSC-6.
> The company shall deliver a certified copy of the order of the NCLT under sub-section (3) and of minute approved by the Tribunal to the ROC and file E-form INC-28within 30 days of the receipt of order.
> The ROC shall issue a certificate to that effect in Form RSC-7.
When any company reduces the share capital by way of reducing the face value of shares or by way of paying off part of the share capital, it amounts to extinguishment of the rights of the share holder to the extent of reduction of share capital. Therefore it is regarded as transfer under section 2(47) of the IT Act and would be chargeable to tax.
The income received on capital reduction would be taxable as under: