In this article, it is discussed about “Reduction of Share Capital” and its procedure under section 66 of the Companies Act, 2013 in line with NCLT Rules, 2016 and recent case law.
On 07th December, 2016, Ministry of Corporate Affairs (MCA) has vide its Commencement Notification notified various sections of Companies Act, 2013 which includes arbitration, compromise, arrangements and reconstruction and winding up companies which has come into force with effect from 15th December, 2016.
The Section 66 which is the governing provision for Reduction of Share Capital of a company is one amongst those sections notified on 07th December, 2016.
Immediately, thereafter, MCA has further, notified the National Company Law Tribunal (Procedure for Reduction of Share Capital of Company) Rules, 2016 on 15th December, 2016.
What is Reduction of Capital…..?
Reduction of share capital is regarded as one of the process of decreasing company’s share capital (apart from Redemption of preference shares and Buy Back of shares which are governed by other provisions separately). The Reduction of Share Capital means reduction of issued, subscribed and paid up share capital of the company. In simple words it can be regarded as ‘Cancellation of Uncalled Capital’ i.e. part of subscribed share capital.
- The need of reducing share capital may arise in various situations, few are listed below:
- Returning of surplus to shareholders;
- Eliminating losses, which may be preventing the payment of dividends;
- May be as part of scheme of compromise or arrangements;
- To simply capital structure;
Previously, reduction of share capital was governed by section 100 to 104 of the Companies Act, 1956. As per the old act, it was subjected to the confirmation of court, under new Act 2013, the said powers of court has been transferred to Tribunal (NCLT).
Points to remember
- A company constituted with limited liability by shares or guarantee and having share capital is alone entitled to reduce its liability of members.
- 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.
- Reduction is regarded as internal restructuring of company, therefore decision of majority will prevail by way of special resolution.
- 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.
- Reduction takes effect on registration of the documents with the Registrar of Companies.
- Reduction is different from Diminution of shares which is regarded as cancellation of unsubscribed share capital.
- Nothing in this section shall apply to buy back of its own securities u/s 68 of the Companies Act, 2013
- Offenses under this section are compoundable under section 441 of the Companies Act, 2013.