Share Capital Reduction: Process, Impact & Key Implications

Summary: Under Section 66 of the Companies Act, 2013, a company may reduce its share capital for various reasons, such as eliminating unpaid liabilities, canceling lost capital, or returning surplus funds. The process requires passing a special resolution and obtaining approval from the National Company Law Tribunal (NCLT). Before granting approval, the NCLT seeks objections from creditors, the central government, and regulatory authorities like the ROC and SEBI (for listed entities). Once satisfied, the tribunal confirms the order, which the company must publish and submit to the ROC within 30 days, detailing the revised capital structure. Financially, share capital reduction decreases shareholders’ equity on the balance sheet, often used to offset accumulated losses. This can improve Earnings Per Share (EPS) by reducing outstanding shares while maintaining net income, potentially attracting investors. Other benefits include simplifying the capital structure and allowing surplus capital distribution to shareholders. However, shareholders may face tax liabilities on distributed amounts. The capital reduction is reflected in the statement of changes in equity, showing its impact on reserves and overall financial stability.

ANALYSIS ON SECTION 66 OF COMPANIES ACT 2013

Reduction of Share Capital When Required?

There is some instance when Company requires reducing its capital

1. Reduce the liability on any of its shares in respect of the share capital not paid up

2. Either with or without extinguishing or reducing liability on any share

• • Cancel any paid up share capital which is lost or is unrepresented by available assets
  • Pay off any paid up share capital which is in excess of the wants of company

Process (Brief)

1 Company shall apply to National Company Law Tribunal in prescribed method after passing Special Resolution.

Note Where the Company is in default for non-payment of Deposits and Interest Payable either before or after of commencement of this act Thereon would not be able to reduce its Share Capital

2 Tribunal Will ask for objections from Creditors Central Government and Regulatory Authorities (ROC in all Cases) (SEBI in Listed Entity)

Note after examining objections received if any from above mentioned authorities’ tribunal will give the directions.

3 If Tribunal is satisfied tribunal will confirm the order to reduce the capital.

Note Tribunal will thoroughly examine the claim of all the creditors and concerned department.

4 Company shall publish the order as prescribed by the tribunal.

5 Company shall deliver the order copy to ROC within 30 days:-

The amount of share capital

The number of share into which it is to be divided

The amount of Each Share

The amount if any at the date of registration deemed to be paid-up on each share

Impact of Reduction of Share Capital on the Financial Statement of company after completion of process

WHEN A COMPANY REDUCES ITS SHARE CAPITAL (BASIC IMPACT)

The primary impact on its financial statements is a decrease in the total shareholders’ equity on the balance sheet, reflecting the reduced capital value, often achieved by writing off accumulated losses against the capital

Which can also lead to an improved Earnings Per Share (EPS) figure if net income remains the same; this can be seen as a positive signal to investors, potentially increasing the stock price.

(MAJOR OR ADVANCE IMPACT ON BALANCE SHEET)

Share Capital: The “share capital” line item on the balance sheet will be reduced by the amount of the capital reduction.

Example :If Company has reduced the Paid up Share Capital by Rs 5,00,000

Reserves: Depending on the method used to reduce capital, specific reserve accounts may also be decreased.

Statement of Changes in Equity:

The capital reduction will be explicitly shown as a deduction from the equity section, reflecting the decrease in shareholders’ equity.

Potential benefits of reducing share capital:

IMPROVED EPS:

If net income remains the same, reducing the number of outstanding shares can lead to a higher EPS, potentially enhancing the company’s attractiveness to investors.

ELIMINATING ACCUMULATED LOSSES:

Companies can use capital reduction to write off large accumulated losses, improving their financial position on paper.

SIMPLIFYING CAPITAL STRUCTURE:

By reducing the number of shares outstanding, a company can streamline its capital structure.

RETURNING SURPLUS CAPITAL TO SHAREHOLDERS:

In some cases, a capital reduction can be used to distribute excess cash to shareholders.

TAX IMPLICATIONS:

Shareholders may need to pay taxes on any capital distributions received as a result of the reduction.