Reduction of Equity Share Capital (under Companies Act)

The process of reducing or decreasing the shareholder equity either through share cancellation or repurchasing of the shares is known as share reduction. Reduction of share capital also means that the company will decrease the number of shares.

What is Equity Share Capital?

The equity share capital is the invested money that is not repaid to the investors in the course of the normal business. The equity shares are the risk that the owners of the company take through the purchase of companies stock.

The equity capital of the company is normally calculated through evaluating the company assets whether intangible or tangible through current market evaluation.

Reasons Behind Reduction of Share Capital

The need for reducing share capital may arise in various circumstances such as accumulated losses in the business or wrong evaluation of the assets of the company etc there is much reason for which a company might need to reduce the share capital:

  • The company may need to pay off the debts that they have taken or they might need to distribute their assets to the shareholders as well.
  • If the financial position of the company is not as strong and if they need more capital resources than they can employ in such case they need to reduce shares of the company.
  • If the assets of the company are overvalued and the balance sheet of the company needs to be cleared out, in such case the reduction of the capital will make up for all the fictitious amount or assets in the balance sheet.

The process is also known as reconstruction and revaluation of the assets by reducing the share capital of the company. The process is also known as Internal reconstruction whereas the company can take up external reconstruction as well for the following reasons:

  • To create and redistribute reserves so that they can enable future dividends to the shareholders
  • So that the company can return the excess capital to the shareholders
  • External reconstruction of the company can also be done for facilitating share buyback
Remember:  Reduction of shares involve sensitive issues for the company and hence all the legal aspects of the company must be handled carefully.

Document Checklist Before Capital Reduction

  • The company needs to pass a board resolution confirming the reduction in the share capital
  • And, the company will have to pass a special resolution as well after the confirmation from the NCLT. The special resolution must be passed by the shareholders of the company.
  • Statement of company capital reflecting the company's share capital that is to be reduced.
  • Copy of the following with Registrar of companies (ROC):
  1. Solvency statement
  2. MOA settling the details of the share capital
  3. Special resolution
  4. Statement of director providing affirmation to the solvency statement within 15 days.

Procedure for Reduction of Share Capital

The procedure of share capital reduction or Equity reduction is governed through section 66 of companies act and NCLT rules, 2016. The transfer of power to the tribunal to govern reduction in the capital was done after the amendment of companies act 2013.

Step - 1

The company needs to pass a board resolution stating the reduction of share capital as the objective of the meeting. In the meeting, they also need to sign the statement of solvency by all the directors.

Step - 2

For carrying out the process in the NCLT the company needs to pass a special resolution by all the shareholders of the company.

Step - 3

The applicant company needs to file the reduction of share capital application with the NCLT along with Form RSC-1. The form must be accompanied with a list of the creditors and the statement must be signed by the MD of the company and in case the MD is absent then at least 2 directors of the company must sign the statement.

Step - 4

The director of the company must make a declaration that the company has to pay no arrears or interest on the date of filing the application.

Step - 5

The NCLT will have to give notice to ROC and SEBI as to the reduction of share capital within 15 days of the application in Form RSC-2.

Step - 6

The company will have to carry out a newspaper advertisement within 7 days of the directing orders given by NCLT in an English language or any other vernacular language seeking objection on such reduction.

Step - 7

The NCLT may hold an enquiry in the claims of the company or for hearing the objections of the company in reference to securing debts of the creditors and after the hearing, if the NCLT is satisfied it will provide with an order confirming the reduction of share capital of the company

The order of NCLT has to be filed with the ROC in Form INC-28 within 30 days of passing the order.

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