Can a Company Reduce its Share Capital?

For a company to reduce its share capital, a special resolution is passed in the board meeting, and with the consent of the Board Members, the application is sent to the Tribunal for its confirmation to reduce the share capital.

The share capital of the company may be reduced in these situations:

• If the share capital is not paid, then the liability should be reduced or eliminated

• If the share capital is lost or is not available by the assets, then it should be cancelled

• If the share capital is in excess, then its liability can be reduced by selling them off

What is share capital reduction?

The funds raised by a company in exchange for its shares are known as the share capital of a company. It is a source of finance for the company, and the number of shares in a company can vary from one another whereas share capital reduction is a process of tapering shareholder’s assets by cancelling, repurchasing or reducing the shares invested in the company.

One of the main reason for reducing the share capital of the company is to increase shareholder’s value and to produce more capital in the company. Share Capital reduction does not affect the company’s market capitalisation only the number of shares outstanding or are available to trade in the market will be reduced. The reduction amount will decrease the number of shares through the process of capital reduction.

In a few cases, the process of capital reduction is carried out if the company’s profits and revenues cannot be recovered by its expected future earnings. Thus selling or reducing of shares payback the shareholders the amount they invested.

Guidelines to follow for share capital reduction

• Any company constituted to limited liability by shares or guarantee and holds share capital is entitled to reduce its liability of members on its own
• The company should have the power by its Articles of Association to do so. If the articles do not contain any provision for the reduction, then the article is altered for the same.
• Reduction of shares is a sensitive and internal matter. Thus restructuring of the company requires a majority decision by way of passing a special resolution.
• The National Company Law Tribunal must confirm the reduction effected by such resolution
• No capital reduction can be done if the company is in debt with the repayment of any deposits accepted by the company.
• Reduction only takes effect after registration of all the documents with the Registrar of Companies.
• The reduction is different from Diminution of shares which is regarded as cancellation of unsubscribed share capital.

Procedure to be followed for share reduction

Many companies decide to reduce capital through repurchase agreements (buybacks) or share cancellation. The share capital of a company is the only security on which creditors rely. The rules for share capital reductions are set out in Chapter 10 of Part 17 of the Companies Act 2006.

Step-1: Board Resolution

A board meeting is held to pass a special resolution for the approval of the members to reduce the amount of share capital of the company.

Step-2: Filing of forms

Form MGT-14 is filled and sent to ROC within 30 days of passing the Board Resolution.

An application is filed in Form R SC-1 along with a prescribed fee of INR 5000 to NCLT. The application filed should consist of:

• List of creditors with their names, addresses and the amount owed to them approved by the managing director within 15 days of filing the application
• A certificate from the Auditor of the company confirming the authenticity of the creditors.
• A certificate by the auditor and declaration by a director of the company that the company is not filing the application and there are no errors in the repayment of the deposits.
• A certificate by the company’s auditor to the effect that the accounting treatment proposed by the company for the reduction of share capital conforms with the accounting standards specified in section 133 or any other provisions of Act.

Step-3: Notice by NCLT

After receiving the application, NCLT will give notice to ROC and SEBI in Form R SC-2 within 15 days and notice to creditors in Form R SC-3 within seven days

NCLT shall also give notice in Form RSC-4 giving directions to publish the notice in any two leading newspapers as well as on the website of the company

Step-4: Filing an Affidavit

After receiving the notice, the company will file an affidavit in Form RSC-5 confirming the publication of notice

Step-5: Raising an objection

If the ROC, SEBI or creditors have any objection, then it shall be sent to NCLT and the company within three months of receiving the notice. If no objection is raised within the said period, then the NCLT will deliver the order of reduction in Form RSC-6

In case any objection is raised the same needs to be clarified by the Company and submitted to the NCLT within seven days of receiving the objection.

Step-6: Certificate by ROC

After receiving the order from NCLT, the company will deliver a certified copy of the order and minute approved by the Tribunal to the ROC and file E-form INC-28 within 30 days of the receipt of order. The ROC will then issue a certificate to that effect in Form RSC-7.