The funds raised by a company in exchange for its shares are known as the share capital of a company. It is a source of finance for the company, and the number of shares in a company can vary from one another whereas share capital reduction is a process of tapering shareholder’s assets by cancelling, repurchasing or reducing the shares invested in the company.
One of the main reason for reducing the share capital of the company is to increase shareholder’s value and to produce more capital in the company. Share Capital reduction does not affect the company’s market capitalisation only the number of shares outstanding or are available to trade in the market will be reduced. The reduction amount will decrease the number of shares through the process of capital reduction.
In a few cases, the process of capital reduction is carried out if the company’s profits and revenues cannot be recovered by its expected future earnings. Thus selling or reducing of shares payback the shareholders the amount they invested.
Many companies decide to reduce capital through repurchase agreements (buybacks) or share cancellation. The share capital of a company is the only security on which creditors rely. The rules for share capital reductions are set out in Chapter 10 of Part 17 of the Companies Act 2006.
A board meeting is held to pass a special resolution for the approval of the members to reduce the amount of share capital of the company.
Form MGT-14 is filled and sent to ROC within 30 days of passing the Board Resolution.
An application is filed in Form R SC-1 along with a prescribed fee of INR 5000 to NCLT. The application filed should consist of:
After receiving the application, NCLT will give notice to ROC and SEBI in Form R SC-2 within 15 days and notice to creditors in Form R SC-3 within seven days
NCLT shall also give notice in Form RSC-4 giving directions to publish the notice in any two leading newspapers as well as on the website of the company
After receiving the notice, the company will file an affidavit in Form RSC-5 confirming the publication of notice
If the ROC, SEBI or creditors have any objection, then it shall be sent to NCLT and the company within three months of receiving the notice. If no objection is raised within the said period, then the NCLT will deliver the order of reduction in Form RSC-6
In case any objection is raised the same needs to be clarified by the Company and submitted to the NCLT within seven days of receiving the objection.
After receiving the order from NCLT, the company will deliver a certified copy of the order and minute approved by the Tribunal to the ROC and file E-form INC-28 within 30 days of the receipt of order. The ROC will then issue a certificate to that effect in Form RSC-7.