How to reduce share capital of company?

As the reduction of capital is a sensitive issue both managerially and legally, it needs to be handled with care. The reduction of capital is always subject to confirmation by the Tribunal based on the application by the company. The company that intends to apply for reduction may either be a

private limited company by share or a company limited by share or guarantee. This proposed reduction in the capital must be approved by special resolution passed by the company. The company may reduce its share capital in the following ways:

Reduce or extinguish the liability on any of the shares with respect to the share capital not paid.
Reducing liability on any of its shares by paying off any paid up share capital which is in excess or cancelling any paid up share capital which is lost or is unrepresented by available assets.

If the capital of a company is reduced, it results in alteration of its memorandum by reducing the amount of its share capital and shares accordingly. In case the company is in arrears in the repayment of any deposits accepted by it or the interest payable, then reduction of capital cannot be made.

Procedure for reducing share capital

A notice shall be given by the Tribunal of every application made to for reduction of capital to the Registrar, SEBI, Central Government and creditors in case of listed companies. Representations may be made to the Registrar, SEBI, Central Government and creditors within 3 months from the date of receipt of the above notice. Incase, no representations are received from the Registrar, SEBI and the Central Government within 3 months, it shall be presumed that they have no objection to the reduction in the share capital. Any claim of debt from any creditor should be determined or secured by the company. Or else the company should obtain the consent of its creditors for the reduction of capital. The order confirming the reduction of share capital shall be made only after it is satisfied that the claim of ever creditor of the company has been determined or secured and consent is obtained. The order may contain conditions for the same. Accounting standards specified in section 133 or other provision of

Companies Act 2013 needs to be followed and the accounting treatment for reduction of share capital should conform to the same. A certificate shall be obtained from auditors of the company and filed before the Tribunal. The tribunal is not to sanction this reduction until the certificate has been filed. This reduction of share capital confirmation order is to be published by the company as directed by the Tribunal. The company is to deliver a certified copy of the order to the Registrar within 30 days of receipt of the copy along with the minutes having the following data:

Total share capital
The amount of each share
The number of shares into which it is to be divided
The amount to be paid at the date of registration on each share

The registrar shall register and issue a certificate for the same. A member of the company, whether past employees or present, shall not be liable to any contribution exceeding the amount of difference between the amount paid on the share of reduced amount which is to be deemed to have been paid and the share amount as fixed by an order of reduction. Incase the company is unable to pay the amount of claim, each person who was on board/ member of the company is liable to contribute to the payment of the claim. If the company winds up, the Tribunal may decide on a list of persons liable to contribute and make and enforce orders on the persons in the list. However, the amount to be contributed may not exceed the amount which the contributor would be liable to contribute on the day immediately prior to the date of filing of the order before the Registrar. Incase the company fails to comply with the provisions related to the order publication, it would be punishable with a fine not less than Rs. 5 Lakhs which may also be increased to Rs. 25 Lakhs hence it is essential to comply with the aforesaid provisions.

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Frequently Asked Questions

Common questions about Reducing Share Capital: Legal Compliance & Procedure.

Reducing share capital is a sensitive issue that requires careful handling due to its managerial and legal implications. It can be used to extinguish or reduce the company's liability on unpaid shares, cancel excess paid-up capital, or write off lost capital unrepresented by available assets. However, it also results in altering the company's memorandum by reducing the share capital and the number of shares accordingly.

No, a company cannot reduce its share capital if it is in arrears in the repayment of any deposits accepted by it or the interest payable thereon. This is a legal requirement that must be fulfilled before initiating the process of share capital reduction.

The Tribunal plays a crucial role in the share capital reduction process. The company must apply to the Tribunal for confirmation of the proposed reduction, and the Tribunal will sanction the reduction only after ensuring that the claims of all creditors have been determined, secured, or consented to.

The company must either determine or secure the claim of every creditor or obtain the consent of its creditors for the reduction of capital. The Tribunal will not sanction the reduction until it is satisfied that all creditors' claims have been addressed.

The company must obtain a certificate from its auditors and file it before the Tribunal. The Tribunal will not sanction the reduction until this certificate has been filed, ensuring that the accounting treatment for the reduction conforms to the applicable accounting standards.

The company must publish the Tribunal's order confirming the reduction of share capital as directed by the Tribunal. Additionally, the company must deliver a certified copy of the order to the Registrar within 30 days of receipt, along with the relevant details of the reduced share capital.

If a company fails to comply with the provisions related to the publication of the Tribunal's order for share capital reduction, it may be punishable with a fine ranging from Rs. 5 Lakhs to Rs. 25 Lakhs. Therefore, it is essential to comply with the prescribed provisions.

Yes, if the company is unable to pay the amount of a creditor's claim, each person who was a past or present member of the company may be liable to contribute to the payment of the claim, subject to certain limitations specified in the Companies Act.

If the company winds up after the share capital reduction, the Tribunal may decide on a list of persons liable to contribute to the payment of claims and make and enforce orders on those persons. However, the amount to be contributed will be limited to the amount the contributor would have been liable for on the day immediately prior to the filing of the reduction order.

The purpose of obtaining a certificate from the auditors is to ensure that the accounting treatment for the reduction of share capital conforms to the applicable accounting standards specified in Section 133 or other provisions of the Companies Act, 2013. This certificate is a mandatory requirement before the Tribunal sanctions the reduction.