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How to reduce share capital of company?

Reduce Share Capital

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.