Meaning Of Reduction Of Share Capital

Capital reduction is the process of decreasing a company’s shareholder equity through share cancellations and share repurchases, also known as share buybacks. The reduction of capital is done by companies for numerous reasons, including increasing shareholder value and producing a more efficient capital structure.

Ways for Reduction of capital

The company can reduce its share capital by one or more of the following ways:-

(a) extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up; or

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

(i) Cancel any paid-up share capital which is lost or is unrepresented by available assets; or

(ii) Pay off any paid-up share capital which is in excess of the wants of the company,

(iii) Alter its memorandum by reducing the amount of its share capital and of its shares accordingly:

Provided that no such reduction 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.

Benefits Of Share Capital Reduction

The most common reasons why a company may want to reduce its capital are:

1. To increase or to create distributable reserves to enable future dividends to be paid to shareholders.
2. To return surplus capital to shareholders.
3. To facilitate a share buyback or redemption of shares, or.
4. As part of a scheme of arrangement.

Process of Share Capital Reduction

Step 1:- Convene the Board Meeting for following  purposes:

• Approve the draft scheme from the Board of Directors.
• Calling of EGM of Shareholders of the Company
• Approval of Notice of EGM

Step 2:- Holding of General Meeting

• Hold the General Meeting and Passed the Special Resolution passed.
• File MGT-14 with ROC within 30 days of passing of Special Resolution.

Step 3:- Application to NCLT

Apply to NCLT by filing an application in Form RSC-1 along with prescribed fee of Rs. 5,000/- to confirm reduction.

The application shall be accompanied with:

1. List of creditors duly certified by the Managing Director, or in his absence, by two directors, as true and correct, which is made as on a date not earlier than fifteen days prior to the date of filing of an application showing the details of the creditors of the company, class-wise, indicating their names, addresses and amounts owed to them;

2. A Certificate from the Auditor of the Company to the effect that the list of creditors as mentioned above is Correct as per the records of the Company verified by the auditor.

3. A certificate by the auditor and declaration by a director of the company that the company is not, as on the date of filing of the application, in arrears in the repayment of the deposits or the interest thereon; and Accounting Treatment proposed by the company for reduction of share capital is in conformity with the Accounting standards.

4. A certificate by the company’s auditor to the effect that the accounting treatment proposed by the company for the reduction of share capital is in conformity with the accounting standards specified in section 133 or any other provisions of Act.

5. A certified true copy of the memorandum and articles of association of the company.

6. A certified true copy of the notice of the general meeting together with the explanatory statement annexed to the notice, at which the special resolution had been passed.

7. A certified true copy of the special resolution authorizing the reduction of share capital.

8. A certified true copy of the latest audited balance sheet and profit and loss account of the company together with all the schedules and other papers attached/annexed thereto.

9. A certified true copy of the minutes of proceedings at the general meeting at which the special resolution for reduction of share capital was passed.

10. An affidavit verifying petition. Memorandum of Appearance with copy of board resolution.

Step 4:- Process to be taken up by the NCLT

1. The NCLT shall within 15 days of submission of the application give a notice to ROC and SEBI in Form RSC-2 and to every creditors of the company in Form RSC-3.

• The notice shall be sent to all the creditors within 7 days of the directions given by the NCLT. The NCLT shall also give directions for the notice to be published in Form RSC-4 within seven 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 seven days from the date of issue of such notice.

Step-5-Representation by Regulators

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.

Step 6:- Submission of Representation

1. Company shall send the representation or objections so received along with responses of the company thereto within 7 days of expiry of period upto which objections were sought.
2. NCLT may hold any enquiry on adjudication of claim and/or give direction for securing the debts of the creditors.

Step 7:- Issue of Order

The order confirming the reduction of share capital shall be in Form RSC-6.

Step 8 :- Filling of e-forms to ROC

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.

Step 9 :- Issue Of Certificate

The ROC shall issue a certificate to that effect in Form RSC-7.