REDUCTION OF SHARE CAPITAL-OVERVIEW

REDUCTION OF SHARE CAPITAL

WHAT DO YOU MEAN BY REDUCTION OF SHARE 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).

Q.) WHAT ARE THE DIFFERENT MANNER OF REDUCTION OF SHARE CAPITAL ?

I	II	III
In respect of share capital not paid-up, extinguishing or reducing the liability on any of its shares or	Cancel any paid-up share capital, which is lost, or is not represented by available assets.	Pay off the paid-up share capital, which is in excess of the needs of the company. this may be achieved either with or without extinguishing or reducing liability on any of its shares
⇓	⇓	⇓
For example, if the shares are of face value of INR 125 each of which INR 100 has been paid, the company may reduce them to INR 100 fully paid-up shares and thus relieve the shareholders from liability on the uncalled capital of INR 25 per share);	For example, if the shares of face value of INR 100 each fully paid-up is represented by INR 75 worth of assets. In such a case, reduction of share capital may be effected by cancelling INR 25 per share and writing off similar amount of assets); or	For example, shares of face value of INR 100 each fully paid-up can be reduced to face value of INR 75 each by paying back INR 25 per share.)

After “Capital Reduction” the number of shares in the company will decrease by the reduction amount.

WHAT DO YOU MEAN BY NET WORTH?

Net worth is defined in Explanation 1 to section 50B as the difference between ‘the aggregate value of total assets of the undertaking or division’ and ‘the value of its liabilities as appearing in books of account’. This amendment has made it clear that the slump sale provisions apply to a non-corporate entity also.

The ‘aggregate value of total assets of the undertaking or division’ is the sum total of:

·         WDV as determined u/s 43(6)(c)(i)(C) in case of depreciable assets.

·         The book value in case of other assets.

WHAT ARE THE IMPLICATIONS OF COMPANIES ACT?

Section 180 of the Companies Act, 2013 imposes restrictions on the powers of the Board. One of the restrictions is ‘to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings.’

Therefore, in case of slump sale, section 180 shall get attracted and a special resolution of the members shall be required.

For the purpose of this section, ‘undertaking’ shall mean an undertaking in which investment of the company exceeds 20% of its net worth or which generates 20% of the total income.

‘Substantially the whole of the undertaking’ shall mean 20% or more of the value of undertaking.

WHAT PROVISONS ARE APPLICABLE AS STATUTORY COMPLIANCES?

I. Section 66 of the Companies Act, 2013; Reduction by way of cancellation of shares

II. Rule 2 to 6 of the National Company Law Tribunal (Procedure for Reduction of Share Capital of Company) Rules, 2016

III. Section 61 of the Companies Act, 2013; Alteration of share capital involves reduction in authorised share capital by cancellation of shares

IV. Section 230 of the Companies Act, 2013; where tribunal passes order under scheme of compromise or arrangement,

V. Section 242 of the Companies Act, 2013; In the case of oppression and mismanagement

VI. In case of listed company; SEBI (LODR) Regulations, 2015.

WHAT ARE THE VARIOUS POINTS TO BE REMEMBER?

1. A company constituted with limited liability by shares or guarantee and having share capital is alone entitled to reduce its liability of members.

2. 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.

3. Reduction is regarded as internal restructuring of company, therefore decision of majority will prevail by way of special resolution.

4. The reduction effected by such resolution must be confirmed by the National Company Law Tribunal (‘Tribunal’)

5. 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.

6. Reduction takes effect on registration of the documents with the Registrar of Companies.

7. Reduction is different from Diminution of shares which is regarded as cancellation of unsubscribed share capital.

8. Nothing in this section shall apply to buy back of its own securities u/s 68 of the Companies Act, 2013

9. Offenses under this section are compoundable under section 441 of the Companies Act, 2013.

WHAT IS THE PROCEDURE OF REDUCION OF SHARE CAPITAL?

·       Board Resolution

·       Special Resolution subject to confirmation of NCLT

·       A statement of solvency duly signed by all the Directors

·       A statement of capital which reflects the company’s share capital as reduced¡ Special resolution must be passed by the shareholders, supported by a solvency statement in the prescribed form.

·       Register with ROC

i. Copies of the solvency statement

ii. A memorandum setting out details of the share capital MOA

iii. The special resolution

iv. A statement by Director confirming that the solvency statement was made not more than 15 days.

WHEN WE TALK ABOUT NCLT, WHAT ALL ARE THE COMPLIANCES TO BE COMPLETED?

1. Application to NCLT in Form RSC-1, with following documents:

i. List of creditors, indicating their names, address and amount owed to them, class wise; duly certified by Managing Director of Company or by 2 directors in his absence, made on date not earlier than 15 days prior to the date of filing,

ii. Certificates by Auditor to the effect that;

a) the list of creditors referred above is correct as per the records of the company verified;

b) the company is not, as on the date of filing of the application, in arrears in the repayment of the deposits or the interest thereon

c) the accounting treatment proposed by the company for the reduction of share capital is in conformity with the accounting standards specified in section 133 or any other provisions of Act.

iii. Declaration by a director of the company that the company is not, as on the date of filing of the application, in arrears in the repayment of the deposits or the interest thereon;

2. NCLT shall within 15 days of submission of application give notice to ROC and SEBI(if listed) in Form RSC-2 and to every creditor in Form RSC-3

**Notice to creditors in Form RSC-3 shall be sent within 7 days seeking their representations and objections.

** representations and objections, if any to be made within 3 months from the date of receipt or notice and copy of such representation shall simultaneously be sent to the company

3. Newspaper Advertisement: Form RSC-4 within 7 days of direction by NCLT in leading English and vernacular language newspaper, for seeking their representations and objections. (To be uploaded on company’s website simultaneously).

** representations and objections, if any to be made within 3 months from the date of receipt or notice and copy of such representation shall simultaneously be sent to the company

4. Company to file an affidavit in Form RSC-5 confirming the despatch and publication of the notice within 7 days from the date of issue of such notice.

5. Company shall send the representations and objections, if any received along with responses of the company within 7 days of expiry of period up to which objections were sought.

6. NCLT may hold any enquiry or adjudication or claims or for hearing the objection give such directions as may deem proper with reference to securing the debts or claims of creditors who do not consent to the proposed reduction.

7. The order confirming the reduction of share capital and approving the minute shall be in Form No. RSC – 6 on such terms and conditions as may be deemed fit.

8. Order copy of NCLT to be filed in e-form INC 28 with ROC within 30 days of passing order.

9. ROC shall issue certificate in Form RSC-7 to that effect.

WHEN DOES TRIBUNAL CONFIRMS ITS ORDER?

The Tribunal may, if it is satisfied that the debt or claim of every creditor of the company has been discharged or determined or has been secured or his consent is obtained, make an order confirming the reduction of share capital on such terms and conditions as it deems fit.

WHEN WE HAVE TO FILE ORDER OF TRIBUNAL WITH ROC?

The company shall deliver a certified copy of the order of the Tribunal and of a minute approved by the Tribunal showing—

·           amount of share capital;

·           number of shares into which it is to be divided;

·           amount of each share; and

·           amount deemed to be paid-up on each share at the date of registration.

to the Registrar within 30 days of the receipt of the copy of the order, who shall register the same and issue a certificate to that effect.

WHEN WE TALK ABOUT NCLT, WHAT ALL ARE ITS IMPLICATIONS?

When any company reduces the share capital by way of reducing the face value of shares or by way of paying off part of the share capital, it amounts to extinguishment of the rights of the share-holder to the extent of reduction of share capital. Therefore it is regarded as transfer under section 2(47) of the IT Act and would be chargeable to tax.

The income received on capital reduction would be taxable as under:

·           Amounts distributed by the company on capital reduction to the extent of its accumulated profits will be considered as deemed dividend under section 2(22)(d) and the company will have to pay dividend distribution tax on the same,

·           Distribution over and above the accumulated profits in excess of original cost of acquisition of shares would be chargeable to capital gains tax in the hands of the share-holders.

IN CASE OF NON-COMPLINACE, WHAT IS THE PENALTY ON COMPANY AND PERSON RESPONSIBLE?

If any Officer of the company

·                knowingly conceals the name of any creditor entitled to object to the reduction;

·                knowingly misrepresents the nature or amount of the debt or claim of any creditor; or

·                abets or is privy to any such concealment or misrepresentation as aforesaid,

He shall be liable under section 447.

In case of the Company

If a company fails to comply with the provisions, it shall be punishable with fine which shall not be less than Rs. 5 lakh but which may extend to Rs. 25 lakh.

DISCLAIMER: THE ARTICLE IS BASED ON THE RELEVANT PROVISIONS AND AS PER THE INFORMATION EXISTING AT THE TIME OF THE PREPARATION. IN NO EVENT I SHALL BE LIABLE FOR ANY DIRECT AND INDIRECT RESULT FROM THIS ARTICLE. THIS IS ONLY A KNOWLEDGE SHARING INITIATIVE.

THE AUTHOR – CS DEEPAK SETH (ASSOCIATE PARTNER HELPINGHANDS PROFESSIONALS LLP) AND CAN BE REACHED AT CONTACTHHPRO@GMAIL.COM OR 9910248911.