Article on Reduction of Share Capital.

Reduction of Share Capital (Section 66)

INTRODUCTION:

On December 7, 2016, the Ministry of Corporate Affairs (“MCA”) issued a notification whereby certain Sections of the Companies Act, 2013 (“the Act”) were notified to come into force with effect from December 15, 2016. The Section among others relates to Reduction of Share Capital (Section 66) of the Act. Further, MCA on December 15, 2016 also notified National Company Law Tribunal (Procedure for reduction of share capital of Company) Rules, 2016. In this issue we have discussed key provisions pertaining to Reduction of Share Capital.

KEY PROVISIONS OF SECTION 66 OF THE ACT:-

Section 66 of the Act, which deals with reduction of share capital, provides as follows:

Upon the confirmation of the Tribunal on an application made by the company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital by altering the memorandum of association in the following ways:

  • Extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up; [Example:- If a share of a Company is having a face value of Rs. 100 each  of which Rs. 75 is fully paid-up, the Company may reduce its share capital to Rs. 75 fully paid-up and relieve the shareholders from the liability of uncalled amount],-
  • Pay off any paid-up share capital which is in excess of the wants of the company; [Example:- Share of company having face value of Rs. 100 each fully paid-up can be reduced to Rs. 75 each by paying back Rs. 25 per share].

Notice by Tribunal:-

The Tribunal shall give Notice of every application to:-

  1. Central Government;
  2. Registrar of Companies;
  3. Securities and Exchange Board, in case of listed companies;
  4. Creditors of the Company.

Confirmation of reduction of share capital:-

If the Tribunal is satisfied that the claim of every creditor is discharged, make an order confirming reduction of share capital, on such terms and conditions as it may deem fit. Provided that no application shall be sanctioned by the Tribunal unless the accounting treatment, proposed by the company for such reduction is in conformity with the accounting standards specified in section 133 or any other provision of the Act and a certificate to that effect by the company’s auditor has been filed with the Tribunal. The order of confirmation of the reduction of share capital by the Tribunal shall be published by the company in such manner as the Tribunal may direct.

Non-applicability:-

The provisions of reduction of share capital shall not apply to buy-back of its own securities by a company under section 68 of the Act.

PROCEDURE FOR REDUCTION OF SHARE CAPITAL:-

  1. Convene a Board Meeting in order to approve Reduction of Share Capital and fixing date of General Meeting;
  1. Pass the Special Resolution in General Meeting;
  1. After passing of Special Resolution, Form MGT-14 is required to be filed with ROC;
  1. Application to National Company Law Tribunal (“NCLT”) is to be filed in Form RSC-1;
  1. The Application shall be accompanied with:-

List of creditors, certificate of auditor to the effect that the list of creditors are correct, certificate by auditor and declaration by the directors that there are no arrears in repayment of deposits or interest and certificate by auditor that the accounting treatment are in line with the accounting standards and other provisions of the act;

  1. Within 15 days of submission of application, the NCLT shall give a Notice to ROC and SEBI in Form RSC-2 and to every creditor in Form RSC-3.
  1. As per the Directions given by NCLT, notice to be published in Form RSC-4;
  1. The Company shall file affidavit in Form RSC-5 confirming the dispatch and publication of the notice within seven days from the date of issue of such notice;
  1. ROC, SEBI and Creditors shall send their representations if any, to NCLT within 3 months of receipt of Notice and a copy of which shall also be sent to Company. It shall be presumed that, if there are no representations received there are no objections;
  1. The order confirming reduction of capital shall be in Form RSC-6;
  1. The Company shall deliver a certified copy of order passed by NCLT in e-form INC-28;
  1. The ROC will then issue certificate to that effect in Form RSC-7.

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Disclaimer:- This Publication does not constitute professional advice. Devmantra Financial Services Private Limited neither accepts or assumes any responsibility or liability to any reader of this publication in respect of the information contained within it or for any decision reader may take or decide not to or fail to take.

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