Reduction of Share Capital
Updated: Mar 4
Reduction of share capital means the reduction of issued, subscribed and paid-up capital of the Company. The reduction of capital is mainly done by companies for producing a more efficient capital structure. Reduction of share capital may arise in various circumstances, for example, accumulated business losses, assets of reduced or doubtful value, etc. The reduction of capital can also be done by utilizing reserves / share premium account against the accumulated business losses.
After a capital reduction, the number of shares in the company will decrease by the reduction amount. While the company's market capitalization will not change as a result of such a move, the float, or number of shares outstanding and available to trade, will be reduced.
The act of capital reduction may also be enacted in response to a decline in a company's operating profits or a revenue loss that cannot be recovered from a company's expected future earnings. In some capital reductions, shareholders will receive a cash payment for shares canceled, but in most other situations, there is minimal impact on shareholders.
A company is required to reduce its share capital using a set of specific steps. First, a notice must be sent out to creditors of the resolution of the capital reduction. Second, the company has to then submit an application for entry of the reduction of share capital no earlier than three months after publication of the initial notice. Share capital reduction is then expected to be paid to shareholders no earlier than three months after the entry of reduction in the commercial register.
Many companies decide to reduce capital through repurchase agreements (buybacks). For example, Sirius XM Radio, an American broadcasting company that provides ad-free satellite radio services, announced on January 29, 2019 that its Board of Directors had approved an additional $2 billion common stock repurchase. The additional $2 billion repurchase in 2019 will bring the company's buyback authorizations to $14 billion in total since 2013. Sirius XM will fund the repurchase through cash on hand, future cash flow from operations, and future borrowings.
Power of the company for reduction of share capital
For a company to reduce its share capital, it should have the power under its Articles of Association to do so. If the articles do not contain any provision for reduction of capital, the articles must first be altered so as to give such power and then the special resolution for reducing capital must be passed. The reduction effected by such resolution must be confirmed by the National Company Law Tribunal (‘Tribunal’). No capital reduction can be undertaken if the company is in arrears in the repayment of any deposits (including interest payable thereon) accepted by it. [Section 66]
Mandatory requirements for Reduction Of Share Capital
To hold Board meeting for Reduction of Share Capital.
Reduction of the Share Capital shall not be made if the company is in arrears in the repayment of any deposits accepted by it, either before or after the commencement of Companies Act, 2013, or the interest payable thereon. [Provison of Section 66(1)]
Debt or claim of every creditor of the company has been discharged or determined or has been secured or his consent is obtained
No application for reduction of share capital shall be sanctioned by the Tribunal unless the accounting treatment, proposed by the company for such reduction 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. [Provison of Section 66(3)]
To hold the General Meeting and passing the required resolution for the Reduction of Share Capital.
Modes of reduction of share capital
The Act does not prescribe the manner in which the reduction of capital is to be effected nor is there any limitation on the power of the Tribunal to confirm the reduction, except that it must be satisfied that every creditor of the company has either consented to the said reduction or they have been paid off or their interest has been secured.
Reduction of share capital may be effected in one of the following ways:
In respect of share capital not paid-up, extinguishing or reducing the liability on any of its shares. (For example, if the shares are of face value of INR 100 each of which INR 75 has been paid, the company may reduce them to INR 75 fully paid-up shares and thus relieve the shareholders from liability on the uncalled capital of INR 25 per share); or
Cancel any paid-up share capital, which is lost, or is not represented by available assets. This may be done either with or without extinguishing or reducing liability on any of its shares (For example, if the shares of face value of INR 100 each fully paid-up is represented by INR 75 worth of assets. In such a case, reduction of share capital may be effected by cancelling INR 25 per share and writing off similar amount of assets); or
Pay off the paid-up share capital, which is in excess of the needs of the company. This may be achieved either with or without extinguishing or reducing liability on any of its shares. (For example, shares of face value of INR 100 each fully paid-up can be reduced to face value of INR 75 each by paying back INR 25 per share.)
Paid-up share capital for the purpose of capital reduction would include securities premium and capital redemption reserve.
REDUCTION OF CAPITAL UNDER SECTION 242
Apart from reduction of capital under section 66, there is another circumstance, when share capital can be reduced. In the case of oppression and mismanagement, the Tribunal has been given powers under section 242 to pass an order as it thinks fit which may provide for purchase of shares of any members by the company and consequent reduction of the share capital.