Reduction of Share capital

Meaning of Reduction of Share Capital

Reduction of share capital means decreasing the shareholder’s equity in the Company. The reduction of capital can be done to increase the shareholder value and for an efficient capital structure of the Company. Capital reduction is the process of decreasing a company’s share capital (both equity and preference share capital) through share cancellations.

Enabling Provisions

Section 66 of the Companies Act, 2013 read with NCLT (Procedure for reduction of Share Capital of Company) Rules, 2016 are the provisions applicable for Reduction of Share Capital of the Company.

Advantages of Share Capital Reduction

Some of the advantages of Capital Reduction of the Company are:

1. It helps the Company to return surplus funds to the shareholders.
2. It helps to eliminate the losses and thus rectifies the negative position of the Company.
3. It improves the Earnings per share (EPS) and increases the shareholder value.
4. Reduction of share capital gives a fair view of the financial health of the Company.
5. It helps to create an efficient capital structure in the Company.

Disadvantages of Share Capital Reduction

1. It limits the ability of the Company to raise capital in the future . Since the number of shares of the Company are reduced, the Company cannot issue new shares on a vast level.
2. It reduces the confidence of the investors and members of the Company as it indicates that the Company is struggling financially.
3. Reduction of share capital involves compliance with a lot of legal and regulatory requirements and hence is a tedious process.
4. Reduction of share capital of the Company is also a time-consuming process.

Procedure for Reducing Share Capital Reduction in a Company:

A Company limited by shares ?or limited by guarantee and having a share capital may reduce its share capital by special resolution in either of the following? ways:

(a) Reduce the liability on any of its shares – if the shares are not Paid – Up.

(b) either with or without extinguishing or reducing liability on any of its shares:

• cancel any paid-up share capital which is lost or is unrepresented by available assets; or
• pay off any ?which is in excess of the wants of the company

Reduction of Share Capital of the Company involves alteration in?the Memorandum of Association of the Company. It includes a specific pre-requisite that there shall not be any arrears in the repayment of the deposits accepted by the Company or the interest payable on such deposits should be fulfilled with.

Circumstances under which the share capital of the Company can be reduced without the Approval of the NCLT:

Some of the other provisions under which the capital can be reduced are as follows:

• When the shares are forfeited for non-payment of call money.
• Where the Company buy-back of its own securities by a Company under Section 68 of the Companies Act, 2013 along with Rule 17 of the Companies (share capital and debentures) Amendment Rules, 2016.
• Where redeemable preference shares are redeemed in accordance with the provisions of Section 55 of the Companies act, 2013.

The above provisions are outside the purview of reduction of share capital mentioned under Section 66 of the Companies Act, 2013.

Buyback of shares meaning:

It takes place when a Company purchases its own shares. It is a financial strategy that enables a Company to buy back its equity share and securities from the shareholders.

Enabling Provisions

Section 68 of the Companies Act, 2013 along with Rule 17 of the Companies (share capital and debentures) Amendment Rules, 2016 deals with the Buyback of shares of the Company.

1.Convene a Board Meeting to:

a. Approve the reduction of share capital. b. Fix the date of the General meeting of the company to get approval of members.

2. Dispatch notice of General Meeting to all the shareholders at least 21 days before.

3. Pass a Special Resolution in General Meeting.

4. In case the Company has secured creditors, take NOC (No Objection Certificate) from them in writing.

5. Apply to NCLT by filing an application to confirm reduction in RSC-1.

6. NCLT shall within 15 days give notice to:

a. ROC and SEBI in form RSC – 2

b. Every creditor in form RSC – 3

7. Notice to be published in form RSC-4 in leading English and vernacular language newspaper and upload on company’s website.

8.Affidavit Filing in form RSC – 5.

9.Representations from ROC, SEBI and creditors received, if any shall be sent to NCLT which the NCLT shall further send to Company.

10.The Company shall send the representation or objections so received along with responses of the Company thereto within 7 days of expiry of the period up to which objections were sought.

11. Order confirming reduction by NCLT will be given in form RSC-6.

12. Reporting of the certified copy of order received by NCLT to ROC in form INC –

13. Certificate by ROC in form RSC – 7.

Conclusion:

Thus, Reduction of Share Capital is a tedious procedure as it also includes the approval of NCLT. This procedure is often resorted by the Companies for various reasons like internal restructuring of the Company, for altering the Capital structure of the Company, to eliminate the losses of the Company, to rectify the negative position of the Company etc., and is thus a beneficial method of significant improvement for a Company.