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Reduction of Share Capital--A Complete Analysis

S. Swaminathan

Reduction of share capital is a difficult task as the Companies Act, 2013 aimed at conserving the corporate capital. In this article, author tries to discuss the provisions of laws applicable to reduction of capital.

1. Preliminary

Reduction of share capital is regarded as one of the process of decreasing the companys share capital. It means reduction of issued, subscribed and paid up share capital of the company. A company may alter share capital by reducing its share capital in the manner specified in section 66 of the Companies Act, 2013. The Articles must provide the power of reduction of share capital to the company otherwise it would have to be altered so as to vest this power in the company. However, redemption of preference shares and buy back are also other ways of reduction of share capital but governed by provisions specifically prescribed under the Companies Act, 2013. On reduction of share capital, the company is required to alter its memorandum of association by reducing the amount of its share capital and its shares.

Section 66 of the Companies Act, 2013 and the National Company Law Tribunal (Procedure for reduction of share capital of Company) Rules, 2016 deal with the manner for reduction of share capital of company. Accordingly, a company limited by shares or a company limited by guarantee and having a share capital may, reduce its share capital by passing special resolution in general meeting and subject to the confirmation of the Tribunal.

2. Approval of members by special resolution

Reduction of share capital requires the approval of shareholders in general meeting by special resolution and confirmation by the National Company Law Tribunal.

3. Modes of reduction of share capital

According to section 66(1), share capital of a company may be reduced in any of the following manners --

(a) Extinguishment or reduction of liability in respect of unpaid share capital. In other words, the nominal value of the share would be reduced.

(b) Cancellation of paid-up share capital which is lost or is unrepresented by available assets. The unpaid amount, if any, may or may not be extinguished.

(c) Pay off any paid-up share capital in excess of wants of company. This means that company may pay back to the shareholders some part of the paid-up share capital if company has surplus liquid fund and which is not needed for its immediate operations.

Where a company, reducing its share capital by cancelling and extinguishing some equity shares held by its subsidiary and some shares held by the public, passes the requisite resolution approving the reduction by a special majority in an extraordinary general meeting called for this purpose, and there is no fault in the reasoning given by the Single Judge approving the same and also the valuation of shares could not be faulted, reduction to be allowed--vide Chander Bhan Gandhi v. Reckitt Benckiser (India) Ltd. (2012) 107 CLA 511 (Del)

4. Prohibition as to reduction of capital

Reduction of share capital would not be made if the company is in arrears of the repayment of any deposits accepted by it or the interest payable thereon. Thus, till repayment of deposits or payment of interest on deposits is not paid, the company cannot resort to reduction of share capital under section 66.

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