Reduction of Share Capital under Companies Act

The provisions relating to the reduction of share capital under the Companies Act are covered under section 66 of the Companies Act, 2013 read with the National Company Law Tribunal (Procedure for reduction of the share capital of Company) Rules, 2016.

The present article briefly explains the provisions concerning the reduction of share capital.

Manner of reduction of share capital-

The company can opt for reduction of share capital in any of the following manner-

1. Extinguishing/ reducing the liability on any of its shares not paid; or

2. With/ without extinguishing/ reducing the liability on any of its shares-

a. Cancelling any paid-up share capital which is lost/ unrepresented by available assets; or

b. Paying off any paid-up share capital which is in excess of the requirements of the company.

Filing of an application to the Tribunal-

As per rule 2 of the National Company Law Tribunal (Procedure for reduction of the share capital of Company) Rules, 2016, the company willing to apply for reduction of share capital should follow the below steps-

1. File an application to the Tribunal in Form No. RSC-1 along with the fees of INR 5,000.

2. Following documents are to be filed along with the application-

a. The list of creditors (duly certified by the Managing Director/ two directors). The list should contain a name, address and amounts owed by the creditors. Notably, such a list of the creditors should have been prepared not earlier than 15 days from the date of filing of an application.

b. A certificate from the auditor certifying the correctness of the list of creditors.

c. A certificate from the auditor and declaration from the director stating that the company is not in arrears in the repayment of the deposits/ interest; and

d. A certificate from the auditor certifying that the accounting treatment as proposed by the company, for reduction of the share capital, is in conformity with the accounting standards as specified in section 133.

An action of the Tribunal post receipt of an application for reduction of share capital-

On receiving the application in Form No. RSC-1 from the company for reduction of share capital, the tribunal will take the following actions-

1. Issuance of notice-

As and when the Tribunal receives the application for reduction of share capital, firstly it will give notice to the following persons/ authorities for seeking their representation/ objections-

  • The Central Government (in Form No. RSC-2);
  • Registrar;
  • The Securities and Exchange Board (only in case the application is received from a listed company) (in Form No. RSC-2); and
  • The creditors of the company (in Form No. RSC-3).

Representation can be done by any of the above within a period of three months from the date of receipt of the notice from the Tribunal.

2. Publication of the notice in the newspaper-

The tribunal shall give the direction for publication of the notice in Form No. RSC-4, for seeking objections from the creditors as well as intimating the date of hearing, in the following manner-

  • The notice should be published in the following newspaper, in the State in which the registered office of the company is situated-
    • Leading English newspaper; and
    • Leading vernacular language newspaper.
  • The notice should be published within a period of seven days from the date on which the direction is given.

3. Order confirming the reduction of share capital

The Tribunal may pass the order confirming the reduction of share capital only after satisfying the following-

  • Debt/ claim of each and every creditor has been discharged; or
  • Debt/ claim of each and every creditor has been secured; or
  • The consent of the creditor has been obtained.

An action of the company on receipt of the order confirming the reduction of share capital-

Once the company receives the order confirming the reduction of share capital from the Tribunal, the company is required to take the following steps-

  • Publish the confirmation order in the manner as directed by the Tribunal.
  • Submission of the following documents with the Registrar within 30 days of the receipt of the order-
    • Certified copy of the Tribunal’s order confirming the reduction of share capital;
    • Minutes reflecting the following-
      • The amount of the share capital;
      • The number of shares in which it is to be divided;
      • The amount of each shares;
      • The amount at the date of the registration deemed to be paid-up on each share, if any.

Notably, the registrar, post receipt of the above document, will issue a certificate in Form No. RSC-7.

Important points-

  • Provisions of reduction of share capital under section 66 will not apply to the buy-back of own securities by the company.
  • Under the following circumstances, officers of the company will be liable to penalty under section 447 of the Companies Act, 2013-
    • Willfully/ knowingly conceals the name of the creditor entitled to object to the reduction; or
    • Willfully/ knowingly misrepresents the nature/ amount of the claim or debt of any creditor; or
    • Helps or is part of any concealment/ misrepresentation as stated above.

(Republished with Amendments)

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