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).
Need of Reduction of Share Capital
- Returning of surplus to shareholders;
- Eliminating losses, which may be preventing the payment of dividends;
- As a part of scheme of compromise or arrangements;
- simplify capital structure;
- When the company is making losses, the financial position does not present a true and fair view of the company. The assets are overvalued and the balance sheet consists of fictitious assets with debit balance in profit and loss account. In order to reduction of capital will write-off that portion of capital which is already lost and will make the balance sheet look healthy.
Modes of Reduction of share capital
- Extinguish or reduce the liability
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.
- Cancel any paid-up share capital
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.
- Pay off any paid-up share capital
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.
Prohibition on Reduction
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.
Special Resolution and Approval of NCLT
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).
Notice to Regulators & Creditors
NCLT shall give notice of application for reduction of capital to the following:
- Central Government
- Registrar of Companies
- Securities and Exchange Board, in the case of listed companies, and
- Creditors of the company
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.
Accounting Standard to be followed
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.
Order of 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.
Order of Tribunal to be filled with ROC
The company shall deliver a certified copy of the order of the Tribunal and of a minute approved by the Tribunal showing—
- amount of share capital;
- number of shares into which it is to be divided;
- amount of each share; and
- amount deemed to be paid-up on each share at the date of registration.
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.
Action under Section 447 i.e Punishment for Fraud
If any officer of the company
- knowingly conceals the name of any creditor entitled to object to the reduction;
- knowingly misrepresents the nature or amount of the debt or claim of any creditor; or
- abets or is privy to any such concealment or misrepresentation as aforesaid,
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.
PROCEDURE FOR REDUCTION OF SHARE CAPITAL
- Convene a Board Meeting
- To approve the reduction of share capital;
- To fix the date of general meeting of the company to get approval of members.
- Dispatch notice of general meeting to all the shareholders at least before 21 days.
- Hold the general meeting and pass Special Resolution approving reduction of share capital.
- If you have secured creditors, take NOC from them in writing.
- File Special Resolution alongwith e-form MGT-14 with ROC within 30 days of passing.
- Apply to NCLT by filing an application in Form RSC-1 to confirm reduction. The application shall be accompanied with the following attachments:
- List of creditors
- Certificate of auditor to the effect that list of creditors is correct
- Certificate of auditor that Company is not having any arrears of repayment of deposit and interest thereon;
- Certificate of auditor that Accounting Treatment proposed by the company for reduction of share capital is in conformity with the Accounting standards.
- Any other relevant documents.
- 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-5 confirming 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-28 within 30 days of the receipt of order.
- The ROC shall issue a certificate to that effect in Form RSC-7.
IMPLICATIONS UNDER INCOME TAX ACT
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:
- Amounts distributed by the company on capital reduction to the extent of its accumulated profits will be considered as deemed dividend under section 2(22)(d) and the company will have to pay dividend distribution tax on the same,
- Distribution over and above the accumulated profits in excess of original cost of acquisition of shares would be chargeable to capital gains tax in the hands of the share holders.