A reduction of share capital means the company is reducing its paid-up capital. This can be done to write off losses, to return surplus capital to shareholders, or to restructure the capital base. Section 66 of the Companies Act, 2013 governs the process, and it requires NCLT approval.
The types of reduction
A company can reduce its capital by:
- Extinguishing or reducing the liability on unpaid shares
- Writing off paid-up capital that is lost or not represented by available assets
- Paying off paid-up capital that is in excess of the company's needs
The first two are usually for restructuring; the third is usually for returning surplus capital.
The NCLT procedure
The company passes a special resolution approving the reduction. It then files an application with the NCLT. The NCLT issues notices to the creditors, the Regional Director and the ROC. The creditors can object if the reduction affects their interests. The Regional Director can object on grounds of public interest. The NCLT hears the objections and, if satisfied, passes an order confirming the reduction.
The creditor objection
A creditor can object if the reduction would leave the company unable to pay its debts. The NCLT may require the company to secure the creditor's claim or to set aside an amount for the creditor. The creditor's consent is usually required unless the NCLT is satisfied that the creditor is protected.
The Regional Director's role
The Regional Director represents the government's interest. The Regional Director can object if the reduction is not in the public interest, if the company has not complied with the law, or if the reduction affects the interests of the employees or the creditors.
The order and filing
Once the NCLT passes the order, the company files it with the ROC along with the revised MOA. The reduction is effective from the date of the NCLT order or the date of filing, as specified. The company must update its register of members and share certificates.
The practical points
A capital reduction is a longer process than a buy-back. The company should prepare the valuation, the creditor consent and the solvency statement before filing. The NCLT will scrutinise the fairness of the reduction, especially where minority shareholders are affected.
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