Reduction of Share Capital under Section 66 of the Companies Act, 2013 

Overview: 

Reduction of the share capital, as its name suggests, refers to the reduction of either the paid-up value or the face value of the company’s share capital. The paid-up value of the shares refers to the amount paid by the shareholders for the shares issued to them by the company. It can be equal to or less than the face value.

Why is it done?

A company with excess liquid cash may want to reduce its holding to burn the excess cash. Sometimes, it is better to pay off the equity holders of the company instead of holding the cash and parking these funds in low-yield low-risk investments. Sometimes, in the case of demergers, a reduction in capital can also be used to separate the relevant business or company assets.

The easiest way to reduce the shareholding is through Section 68: Buy Back of Shares. However, if a company fails to fulfil the criteria mentioned in Sec 68 then another way to go about is through Section 66- Reduction of Share Capital.

Provisions: 

The Companies Act, 2013 governs the reduction of share capital under Section 66.

There are five ways in which a company can reduce its share capital:

• Canceling the part of paid-up share capital because the asset has lost its value.
• Canceling the part of face value as well as paid-up share capital, since the asset has lost its value.
• Canceling the part of the face value of shares that is not paid up.
• Canceling the paid-up share capital by returning the money to shareholders.
• Canceling the face value and paid-up share capital by returning the money to shareholders.

In case (b), (c), and (e), the Memorandum of Association needs to be altered as the face value of the shares is reduced. In cases (a) and (d), the company can call the reduced part of the face value of shares in the future as only the paid-up amount is reduced and not the nominal amount but can’t do so in other cases as face value is reduced.

The company must include the phrase “AND REDUCED” in its financial statements for five years after the reduction.

Mandatory requirements for Reduction of Share Capital

1. No reduction of share capital shall be made if the company is in arrears in the repayment of any deposits accepted by it, either before or after the commencement of the Companies Act,2013, or the interest payable thereon;
2. No application for reduction for share capital shall be sanctioned by the Tribunal unless the accounting treatment proposed by the company for such reduction conforms with the accounting standards specified in section 133 or any other provision of this act.

Procedure 

The pre-requisite for share capital reduction is the passing of a special resolution in a general meeting and approval from the National Companies Law Tribunal (NCLT).

Post the resolution, the company has to first make an application to NCLT in Form RSC 1 along with a list of Creditors and a certificate from the company’s auditor that the accounts have been prepared in compliance with Section 133 of the Act and concerning Company not being arrears in repayment of Deposits. NCLT, after satisfaction and within fifteen days of the submission of the application, will direct the company to give notice to the Central Government (Regional Director), Registrar of Companies (RoC), and SEBI (if the company is listed) about the prospective reduction in Form RSC 2 and to the creditors of the company in Form RSC 3. Within three months of receiving Form RSC 2 and RSC 3, if any of the above parties have any objection to the reduction, the same can apply to NCLT about its objection. If no response is received within the time, it shall be approved by the parties. The company has to publish a notice Form RSC-4 about the reduction in two newspapers (one in an English newspaper having nationwide circulation in English and one in a local newspaper in the vernacular language). Within 7 days of publication, file an affidavit on dispatch and publication of notice in RSC 5 with NCLT. After satisfaction, NCLT will issue an order of reduction in Form RSC 6. Within 30 days of receipt of the order, submit a copy of the order and minutes showing particulars such as the amount of share capital, the number of shares into which the share capital is to be divided with the amount of each share, etc. to RoC. will issue the certificate of reduction in Form RSC 7.

List of documents: 

• MOA, AOA & Certificate of Incorporation
• Last Audited financials along with Auditor report and director report
• List of Creditors as of date of application
• Details of shareholder, including the number of shares held, address, etc
• Statutory Auditor Certificate u/s 133 stating that the accounting treatment proposed by the company for the reduction of share capital conforms with the accounting standards specified in section 133 or any other provisions of the
• Statutory Auditors Certificate about no arrear of repayment dues as of date
• Copy of PAN of Company
• Provisional financials of the company as of date
• Details of the reason for the reduction in share capital

The above-mentioned points are just a few of the preliminary document’s requirements, more documents may be required as per specific cases.

Conclusion 

While most of the time, companies are looking for further funds to invest in their business there are times when the business is flush with excess funds due to various reasons.

For example, in the case of Export Oriented Units when the Price of INR drops significantly against the US Dollar the company can sometimes find itself with excess cash in hand.

Disclaimer 

The content published on this blog is for informational purposes only. The opinions expressed here are solely those of the respective authors and do not necessarily reflect the views of Fintrac Advisors. We make no warranties regarding the completeness, reliability, and accuracy of this information. Any action you take based on the information presented on this blog is strictly at your own risk, and we will not be liable for any losses and damages in connection with the use of our blog. We recommend seeking professional expertise for any such work. External links on our blog may lead to sites that are not under our control, and we are not responsible for the nature, content, and availability of those sites.