1. INTRODUCTION

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 utilising reserves / share premium account against the accumulated business losses.

2. COMPANIES ACT, 2013

While the new Companies Act, 2013 has come into force, some of the sections including those governing reduction of share capital are yet to be notified. Till then the provisions under the Companies Act, 1956 shall continue to apply.

The provisions relating to capital reduction under the new Companies Act, 2013 are as under:

2.1 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]

2.2 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:

1. 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
2. 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
3. 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.

3. PROCEDURAL ASPECTS AS PER COMPANIES ACT, 2013

3.1 Special Resolution

Unless a special resolution, as authorised by the articles, is passed for reduction of share capital, a company cannot effect share capital reduction.

However, in the following cases there is no need to follow the process as provided in section 66,

1. Where redeemable preference shares are redeemed in accordance with the provisions of sections 55.
2. Where any shares are forfeited for non-payment of calls, though the forfeiture as a fact amounts to a reduction of capital.
3. Where the nominal share capital of a company is reduced by cancelling any shares, which have not been taken or agreed to be taken by any person. (Section 61)
4. Where company purchases its own shares in accordance with provisions of section 68.

3.2 Tribunal Sanction

Next step would be to make an application to the Tribunal for obtaining the sanction to reduction. Before confirming the reduction the Tribunal shall give notice of the application to the Central Government, Registrar and SEBI (in case of listed companies) and creditors of the company and take into consideration their representations.

If no representation is received from the Central Government, Registrar, SEBI or the creditors within the period of 3 months, it would be presumed that they have no objection to the reduction.

The Tribunal will not sanction the scheme unless :

• It is satisfied that every creditor of the company has either consented to the said reduction or their debt/claim has been secured or discharged.
• 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

The order of confirmation of the reduction of share capital by the Tribunal is to be published by the company in such manner as the Tribunal may direct.

The company has to deliver the certified copy of the order of the Tribunal to the Registrar within 30 days of the receipt of the copy of the order, who shall register the same and issue a certificate to that effect.

4. 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.

5. IMPLICATIONS UNDER INCOME-TAX ACT, 1961 (‘IT Act’)

When any company reduces the share capital as per the provisions of the Companies Act, 2013 by way of reducing the face value of shares or by way of paying off part of the share capital, it amounts to extinguishment of the rights of the share holder to the extent of reduction of share capital. Therefore it is regarded as transfer under section 2(47) of the IT Act and would be chargeable to tax.

The income received on capital reduction would be taxable as under:

• Amounts distributed by the company on capital reduction to the extent of its accumulated profits will be considered as deemed dividend under section 2(22)(d) and the company will have to pay dividend distribution tax on the same,
• Distribution over and above the accumulated profits, in excess of original cost of acquisition of shares would be chargeable to capital gains tax in the hands of the share holders.