In Bacha F. Guzdar v. Commissioner of Income Tax, Bombay,1955 ITR SC 271 the court gave that, share capital is also used to acquire movable and immovable properties that are required for running the business.
Reduction of share capital is regarded as one of the processes of decreasing a company’s share capital (apart from Redemption of preference shares and Buy Back of shares which are governed by other provisions separately). Reduction of Share Capital means reduction of issued, subscribed, and paid up share capital (either equity shares or preference shares or both) of the company. Section 66 of the Companies Act 2013 and National Company Law Tribunal (Procedure for Reduction of Share Capital of Company) Rules 2016, deals with the reduction of share capital. Previously, section 100-104 of the Companies Act, 1956 dealt with the reduction of share capital. As per the old Act, it was subjected to the confirmation of high court, but under the new Act, the said powers of H.C. have been transferred to the National Company Law Tribunal (NCLT).
Reduction of share capital is often resorted to by companies for internal restructuring or altering their capital structure. It also may occur, if a company has suffered a loss in its business, it might try to improve its image by reducing its capital and writing the loss in its final accounts.
Topics Covered in this article
Reasons for Reduction of Share Capital
- There are accumulated losses in the books of the Company which are currently being funded by its share capital and/or share premium and to the effect of same the balance sheet is “blown up” due to which a large share capital/premium is reflected on the liability side and accumulated losses on the asset side and setting off of the such accumulated losses against share capital/reserves leads to “resizing” the balance sheet;
- Returning of surplus to share-holders;
- Eliminating losses, which may be preventing the payment of dividends;
- Reduction of share capital can also be done as part of scheme of Compromise or Arrangements;
- Sometimes a company may have excess surplus funds. Over-capitalization is not good for business. If a company has more capital than that is required for its operation, it can reduce its share capital for optimum utilization. Finally, reduction may also occur when a company’s fixed assets have been over-valued, they can be valued appropriately by a reduction in the capital of the company as observed in the case of Cosmosteels Private Ltd. and Ors. v. Jairam Das Gupta and Ors, 1978 AIR 375.
Corporate Law provisions for Reduction of Share Capital
The new Companies Act of 2013 provides provisions governing the reduction of share capital under section 66. The National Company Law Tribunal (Procedure for Reduction of Share Capital of a Company) Rules, 2016 also deals with it.
Section 66 (1) :-
A company limited by shares or limited by guarantee and having share capital may reduce the share capital of the company in any manner by passing a special resolution. The reduction of share capital may-
- extinguish or reduce the liability of any of its shares in respect of the share capital not paid up; or
- either with or without extinguishing or reducing the liability on any of the shares-
- cancel any paid-up share capital which is lost or is unrepresented by available assets; or
- pay off any paid-up share capital which is in excess of the wants of the company,
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 a special resolution for reducing capital must be passed. The reduction affected by such resolutions must be confirmed by the National Company Law Tribunal (‘Tribunal’). As per Section 66 (1) proviso of Companies Act 2013, 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.
Filing application before Tribunal
For reduction of share capital under section 66 form of application or protection is given under Rule 2(1), which provides that an application to the tribunal to confirm a reduction of share capital of a company shall be filed before the National Company Law Tribunal in Form No. RSC-1. The fee payable is Rs. 5,000/-.
The application shall be accompanied with the following-
- the list of creditors duly certified by the Managing Director of the Company; in his absence, the list shall be certified by two directors as true and correct, which is made on a date not earlier than 15 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;
- a certificate from the auditor of the company to the effect that the list of creditors is correct as per the records of the company verified by the auditor;
- 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
- 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 the Act.
Copy of list of creditors
Rule 2(3) provides that copies of the list of creditors shall be kept at the registered office of the company. Any person desirous of inspection of the same may inspect and take extracts from the same at any time during the ordinary hours of business of the company. A sum of ₹50/- is payable for inspection. A sum of ₹10/- is payable per page for taking extracts of the list.
Issue of notice
Section 66(2) read with Rule 3 provides provisions for issue of notice and directions by the tribunal. According to it:
The tribunal shall, within 15 days of submission of the application, give notice, or direct that notice to be given to-
- the Central Government, Registrar of Companies, in all cases, in Form No. RSC – 2;
- the Securities and Exchange Board of India, in the case of listed companies in Form No. RSC-2;
- the creditors of the company in all cases in Form No. RSC -3 seeking their representations and objections, if any.
According to Rule 3(1) the notice to the creditors shall be sent, within 7 days of the direction given by the Tribunal or such other period as may be directed by the Tribunal to each creditor, whose name is entered in the list of creditors submitted by the company. The notice shall state about the presentation of the application and the amount of the proposed reduction of share capital and the amount or estimated value or the debt or the contingent debt or claim or both for which such creditor’s name is entered in the said list and the time within which the creditor may send his representations and objections.
Publication of Notice
Rule3(3) NCLT (Procedure for Reduction of Share Capital) Rules 2014, provides that the Tribunal shall give directions for the notice to be published in Form No. RSC-4 within 7 days from the date on which the directions are given. The advertisement shall be given in English language in a leading English newspaper, and a leading vernacular language newspaper both having wide circulation in the State in which the registered office of the company is situated or such newspapers as may be directed by the Tribunal and for uploading on the website of the company, if any, seeking objections from the creditors and intimating about the date of hearing.
Rule 3(4) NCLT (Procedure for Reduction of Share Capital) Rules 2014, provides that the notice shall state the amount of the proposed reduction of share capital and the places where the list of creditors may be inspected and the time fixed by the Tribunal within which the creditors of the company may send their objections.
Rule 3(5) NCLT (Procedure for Reduction of Share Capital) Rules 2014, provides that the company or the person who was directed to issue notice and the publication in the newspaper shall, as soon as may be, but not later than 7 days from the date of issue of such notices, file an affidavit in Form RSC – 5 confirming the dispatch and publication of the notice.
Dispensing with the notice
Rule 3(6) NCLT (Procedure for Reduction of Share Capital) Rules 2014, provides that where the Tribunal is satisfied that the debt or claim of every creditor has been discharged or determined or has been secured or his consent is obtained, it may dispense with the requirement of giving of notice to creditors or publication of notice under this rule or both.
Objections by authorities or creditors
Rule 4 NCLT (Procedure for Reduction of Share Capital) Rules 2014 provides that if the authorities or the creditors of the company desire to make any representation, the same shall be sent to the Tribunal within 3 months from the date of receipt of notice. The copy of such representation shall simultaneously be sent to the company. In case no representation has been received from the Central Government, Registrar, SEBI or the creditors, by the Tribunal, within the said period it shall be presumed that they have no objection to the reduction.
Company to represent
Rule 5 provides that the company shall submit to the Tribunal, within seven days of expiry of period up to which representations or objections were sought, the representations or objections so received along with the responses of the company thereto.
The Tribunal may give such directors with respect to holding of any enquiry or adjudication or claims or for hearing the objection or otherwise as laid down under Rule 5(2)NCLT (Procedure for Reduction of Share Capital) Rules 2014.
As per Rule 5(1) National Company Law Tribunal (Procedure for Reduction of Share Capital of Company) Rules, 2016, at the hearing of the application, the Tribunal may give such directions as may deem proper with reference to securing the debts or claims of creditors who do not consent to the proposed reduction, and the further hearing of the petitioner may be adjourned to enable the company to comply with such directions.
Order of the Tribunal
According to Section 66 (3) read with Rule 6(1) 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 he thinks fit.
As per Rule 6(2) National Company Law Tribunal (Procedure for Reduction of Share Capital of Company) Rules, 2016, the order confirming the reduction of share capital and approving the minute shall be in Form No. RSC-6 on such terms and conditions as may be deemed it.
Rule 6(1) of National Company Law Tribunal (Procedure for Reduction of Share Capital of Company) Rules, 2016 provides that, 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 provisions of the Act and a certificate to that effect by the company’s auditor has been filed with the Tribunal.
Filing the order with Registrar
Section 66(5) provides that the company shall deliver a certified copy of the order of the Tribunal and of a minute approved by the Tribunal, showing-
- the amount of share capital;
- the number of shares into which it is to be divided;
- the amount of each share; and
- the amount, if any, at the date of registration deemed to be paid up on each share, to the Registrar within 30 days of the receipt of the copy of the order, who shall register the same and issue a certificate in Form No. RSC – 7 to that effect as per Rule 6(1) NCLT(Procedure for Reduction of Share Capital of Company) Rules, 2016
Section 66 shall not apply to a buyback of its own securities by a company under Section 68 of the Companies Act, 2013.
Liability of Member
Section 66(7) provides that a member of the company, past or present, shall not be liable to any call or contribution in respect of any share held by him exceeding the amount of difference, if any, between the amount paid on the share, or reduced amount, if any, which is to be deemed to have been paid thereon, as the case may be, and the amount of the share as fixed by the order of reduction.
Section 66(8) provides that where the name of any creditor entitled to object to the reduction of share capital is, by reason of his ignorance of the proceedings for reduction or of their nature and effect with respect to his debt or claim, not entered on the list of creditors and after such reduction, the company is unable to pay the amount of his debt or claim-
- every person, who was a member of the company on the date of registration of the order for reduction by the Registrar shall be liable to contribute to the payment of that debt or claim, an amount not exceeding the amount which he would have been liable to contribute if the company had commenced winding up on the day immediately before the said date; and
- if the company is wound up, the Tribunal may, on the application of any such creditor and proof of his ignorance, if it thinks fit, settle a list of persons so liable to contribute and make and enforce calls and orders on the contributories settled on the list, as if they were ordinary contributories in a winding up.
Section 66(10) provides that 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.
Judicial Precedents in the NCLT
In ARI Consolidated Investments Private Limited, the Mumbai Bench of NCLT approved capital reduction of only non-promoter shareholders on repayment of capital to them. It seems that the NCLT view is that reduction of share capital without pay-out is not permitted, although no explicit provision restricting the same is mentioned under section 66 of the Companies Act, 2013.
The Mumbai bench of NCLT in the case of Ansa Deco glass Private Limited rejected the petition for reduction of share capital. In the given case, 75% of the shareholding was sought to be cancelled without any pay-out of consideration. The shareholders whose 75% shareholding was sought to be cancelled also approved the said reduction of share capital (what was intended in this case was that shareholders holding 75% of the share capital had agreed to the reduction without any payment, even though the reserves and surplus was approximately 12 crore). The said petition was rejected as it was found that “With these strong fundamentals of the company, it is strange that the majority of the shareholders are not being paid off / returned any consideration at the time of reduction of share capital in the present petition”. The said petition seems to be in compliance with the conditions set out under section 66 of the Companies Act, 2013, and the NCLT decision does not seem to be consistent with the provisions of the Companies Act, 2013 since all the necessary conditions set out were complied with.
Wrigley India Pvt. Ltd. incorporated under Companies Act, 1956 -Petitioner (In the matter of section 100 to 104 of the Companies act, 1956) Presently under section 66 of the Companies Act, 2013. Subsequent to transfer, the matter came up for hearing dated 20/04/2017.
The petition was filed for reduction of paid up capital of INR 87,42,28,200 divided into 87,42,282 (Eighty Seven Lakh Forty Two Thousand Two Hundred Eight Two) equity shares of INR 100 each up to INR 43,07,97,700 divided into 43,07,977 (Forty Three Lakh Seven Thousand Nine Hundred Ninety Seven) equity shares of INR 100 each.
Reason for Share capital ‘s reduction
Reorganizing internal share capital structure of company to wipe out accumulated losses as per last audited balance sheet of the company year ended 31st March, 2015 which resulted in erosion of net worth of company during immediately preceding four years.
It was disclosed that the proposed reduction of share capital shall be carried out by utilising balance amount of securities premium account and amount so reduced by INR 44,34,40,500 to be transferred to Profit & Loss account to adjust accumulated loss as standing in balance sheet of year 31st March, 2015.
No adverse remarks were observed from affidavits/reports and newspapers so filed in relation to proposed reduction of share capital apart from the following material fact that:
- There were only unsecured creditors as on 29/02/2016 and consents have been obtained.
- That Petitioner Company is a wholly owned subsidiary WM, Wringlley Jr. Company along with two other group/subsidiary companies a foreign entity; their reduction of capital should simultaneously comply with FEMA/ RBI regulations.
- Petitioner Company has incurred in previous financial years continuously resulting in erosion of net worth and resorted to reduction of capital in Financial year 2010 and 2014 as well.
- Company has not filed annual returns for year-end 31st March, 2016 with ROC.
- Petitioner filed a rejoinder affidavit to the above facts.
Taking into consideration all the facts, and having no objections received from concerns in relation to reduction of capital of company, tribunal passed order thereby giving effect.
Reduction of Share Capital is an important aspect of the company, it is one of the mechanisms by which the company reduces the share capital and thereby increases the value of shares or deducts the unnecessary shares. The new provisions of the Companies Act, 2013 are precise, as compared to the previous provisions of the Companies Act, 1956 under section 100-104 and are pertinent to the approach of the legislature.