FAQs on Reduction of Share capital - Complete Prospective
Q 1. What is meant by Reduction of share capital?
Reduction is just way to do reducing the amount of capital via cancellation and repurchase of shares.
Q 2. What is meant by Reduction of share capital under the companies act?
As per the section 66(1) A company limited by shares or limited by guarantee and having a share capital may, by passing special resolution, subject to confirmation by the Tribunal on an application by the company, reduce the share capital in any manner and particular, may-
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-
1) Cancel any paid up share capital which is lost or is unpresented by available assets or
2) Pay off any paid up share capital which is in excess of the wants of the company
3) Alter it’s memorandum by reducing the amount of its share capital and of its shares accordingly.
Q 3. To whom make an application by the company?
As per section 66(2) of the act, The tribunal shall give notice of every application made by company to
– Central Government
– The securities and exchange board of India
– The creditors of the company, reply from them should be made within a period of 3 months from the date of receipt of the notice.
IF NO REPRESENTATION has been received from them within a said period, it shall be presumed that they have no objection to the reduction.
Q 4. In which cases the diminution of share capital is not to be treated as reduction of capital?
As per section 61(1) of the companies act, 2013. Diminution of capital is the cancellation of the unsubscribed part of the issued capital.
1) Where the company cancels shares which have not been taken or agreed to be taken by any person.
2) Where Redeemable preference shares are redeemed in accordance with the provision of section 55
3) Where any shares are forfeited for non payment of calls and such forfeiture amounts to Reduction of capital.
4) Where the company buys- back its own shares under section 68 of the act
5) Where the reduction of share capital is effected in pursuance of the order of the tribunal sanctioning any compromise or arrangement under section 230.
6) No reduction of capital would be allowed in case of Arrears in the Repayment of Deposits and interest thereon.
Q 5. What is the procedure for reduction of share capital along with mentioned prescribed FORM no.
a) Convene a Board meeting, send notice to all directors at least 7 days before the date of the meeting and shorter notice sent by Company in case of urgent matter.
b) pass necessary board meeting along with taking approval of shareholders by passing special resolution
c) Filling form with ROC in FORM no- MGT 14 within 30 days from the date of the passing special resolution.
d) make an application to NCLT in FORM no- RSC 1 along with fee
e) The Tribunal shall, within fifteen days of submission of the application, give notice, or direct that notice be given for seeking representations and objections, if any from
the Central Government, Registrar of Companies, in all cases, in Form RSC-2
the Securities and Exchange Board of India, in the case of listed companies in Form RSC-2
the creditors of the company, in all cases in Form RSC-3. Notice shall be sent within 7 days of the directions given by NCLT to each creditor whose name entered in the list of the company.
f) NCLT shall give direction to publish the notice in FORM RSC 4 within 7 days in English and vernacular language newspaper.
g) The order confirming the reduction of share capital and approving the minutes shall be in FORM RSC 6 and ROC shall issue a certificate to that effect in FORM RSC -7.
Q 6. What is the reduction of share in India?
Provided that, Company can reduced the face value of its shares from RS. 10 per share to RS. 1 per share.
Q 7. Explain case law as regards of Reduction of share capital?
The best example mentioned in case law SIEL Ltd., In re. ( 2008) 144 com cases 469 Del)
For the reduction of Capital, majority will prevail. If the majority by special resolution decides to reduce the share capital of the company, it has right to decide to reduce the share capital of the company and It has right to decide by company that there shouldn’t be any effect and selective reduction is permissible for the company limited by shares. In the same class of shares, company should reducing the share capital without dealing in the same manner with all other shares.
Q 8. What is the difference between of buy back of shares and Reduction of share Capital?
Reasons for Buy back of shares-
– To return cash to shareholders
– To operate an Employee incentive scheme.
The name of the companies who are really bought back of shares in real life such as-
Example of Buyback of shares-
Quick heal Technologies Ltd.
Aarti drugs Ltd.
Reduction of share capital-
– Return surplus capital
– Creating distributable reserves
– Supporting a share buy back or redemption.
The name of the companies who are really reduction of shares in real life such as-
Example of capital Reduction-
Sirius XM radio,
An American broadcasting company
Q 9. Explain the case law when the Reduction of Capital when the company is defunct.
As per the case law Great Universal Stores Ltd re, Reduction of Capital when company is defunct, the ROC has been empowered under section 560( Correspondence to section 248 of the companies act, 2013) Due to non working of Company there is chances to strike of the company from Registar. Therefore, where the company has ceased to trade and registrar exercises his power under section 560 In thus situation a reduction of Capital cannot be prevented.
Q 10. Explain case laws on Reduction of Capital?
(British and American Trustee and Finance Corporation v. Couper )-
Reduction of share capital is base on the after fulfill conditions is approved. Basically, In reduction of capital 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 deems fit such as No sanction for reduction unless complied with accounting.
(British and American Trustee coron v. Couper, 1894)
The Court, at the time of exercising its discretion, is duty bound to ensure that the reduction in capital is fair and equitable. In short the court shall consider the following, while sanctioning the reduction-
- The interest of creditors must be safeguarded.
- The interest of shareholders must be considered.
- Lastly the public interest must be considered as well.
(Asian Investment Ltd, Re, (1992) 73 com cases 517, 523)
It is, however not necessary that extinhguishment of shares in all cases should necessarily result in reduction of share capital. Accordingly where Reduction is not involved section 100 (correspondence to section 66 of the act) would not be attracted.
Q 11. Does a company which is incorporated under the companies act, 2013 have the right of reduction in its share capital on selective basis?
The company has every right to reduce its share capital on selective basis, the statement is incorrect.
The provision of section 66 have not been enforced so far. Section 100 of the companies act, 1956 is still applicable in this context. Accordingly, subject to confirmation by the court, a company limited by shares or a company limited by guarantee and having a share capital may, if authorised by its articles, by special resolution, does reduction in share capital in any way and in particular and without prejudice to the generality of the forgoing power, may-
- Reduce or extinguish the liability on any of its shares in respect of share capital not paid up e.g- where the shares are of ₹100 each with ₹75 paid up reduce them to ₹75 fully paid up shares and thus relieve the shareholders from liability on the uncalled capital of ₹ 25 per share.
- Either with or without extinguishing or Reducing liability on any of its shares, cancels any paid up share capital which is lost, or is unrepresented by available assets or
- Either with or without extinguishing or Reducing liability on any of its shares, pay of any paid up share capital which is in excess of the wants of the company where the shares are fully paid up, reduce them to ₹ 75 each and pay back, ₹ 25 per share.
Q 12. Can unlimited company reduced its share capital of a company?
As per the case law states in Borough Commercial and Bidg. Society, (1893) 2 ch 242 an unlimited company to which section 100( Correspondence to section 66 of the companies act, 2013) does not apply, can reduce its capital in any manner that it’s memorandum and articles of association allow. It is not goverened by section 61 and 66 of the act ( Correspondence to section 27 and 30 of the companies Act, 2013)
Section 13 (Correspondence to section 4 of the companies act, 2013) does not provide that its capital shall be stated in the memorandum. However, even if its capital is stated in the memorandum, the companies act impliedly gives power to the member to alter it.
Q 13. Explain the procedure for reduction of one class ?
This provision is stated in case law Marwari Stores Ltd. v Gouri Shankar Goenka( 1936) 6 Com cases 285.
Where there is only one class of shares, then same percentage should be paid off or cancelled in respect of each share, But In case if there is different amount are paid up on shares of the same class, the reduction can be affected as per the amount so paid up.