1. INTRODUCTION

Reduction of share capital means the reduction of already issued, subscribed and paid-up capital of the Company.
The reduction of capital is mainly done by companies for:
-Returning of surplus to shareholders;
-Eliminating losses, which may be preventing the payment of dividends;
– As a part of scheme of compromise or arrangements; simplify capital structure;
– When the company is making losses, the financial position does not present a true and fair view of the company. The assets are overvalued and the balance sheet consists of fictitious assets with debit balance in profit and loss account. In order to reduction of capital will write-off that portion of capital which is already lost and will make the balance sheet look healthy.

2. APPLICABLE LAW:

Section 66 of the Companies Act 2013 and The National Company Law Tribunal (Procedure for reduction of share capital of Company) Rules, 2016 are extant law with respect to reduction of share capital of a company.

3. MODES OF REDUCTION OF SHARE CAPITAL:

Reduction of share capital may be effected in one of the following ways:

A. In respect of share capital not paid-up, extinguishing or reducing the liability on any of its shares. (For example, if the shares are of face value of INR 100 each of which INR 75 has been paid, the company may reduce them to INR 75 fully paid-up shares and thus relieve the shareholders from liability on the uncalled capital of INR 25 per share); or

B. Cancel any paid-up share capital, which is lost, or is not represented by available assets. This may be done either with or without extinguishing or reducing liability on any of its shares (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

C. 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, 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.)

4. PROCEDURE FOR REDUCTION OF SHARE CAPITAL:

(i) Ensure that (a) there no arrears in the repayment of any deposits accepted by the company or the interest payable thereon and (b) The Articles of Association contain specific provision to do so.

(ii) Convene a Board Meeting (a) To approve the reduction of share capital and (b) To fix the date of general meeting of the company to get approval of members.

(iii) Dispatch notice of general meeting to all the shareholders at least before 21 days or stipulated in the Articles of Association of the Company.

(iv) Hold the general meeting and pass Special Resolution approving reduction of share capital.

(v) File Special Resolution along with e-form MGT-14 with Registrar of Company, Kerala within 30 days of passing the Resolution.

(vi) Submit application to Tribunal by filing an application in Form RSC-1to confirm reduction with fee of Rs.5000/- The tribunal in this regard for Kerala Companies is National Company Law Tribunal (NCLT) Kochi. The application shall be accompanied inter alia with the following attachments: List of creditors Certificate of auditor to the effect that list of creditors is correct Certificate of auditor that Company is not having any arrears of repayment of deposit and interest thereon; Certificate of auditor that Accounting Treatment proposed by the company for reduction of share capital is in conformity with the Accounting standards.

(vii) The Tribunal shall within 15 days of submission of the application give a notice to ROC, SEBI in Form RSC-2 ( in the case of listed companies ) and to every creditors of the company in Form RSC-3.

(viii) The Tribunal shall also give direction for the notice to be published in Form RSC-4 within 7 days of such direction in a leading English and vernacular language newspaper and for uploading on the website of the company. The Tribunal may dispense with the requirement of giving notice to the creditors or publication of notice, if every creditor has been discharged or secured or given his consent in writing.

(ix) The company shall file an affidavit in Form RSC-5 confirming the dispatch and publication of the notice within 7 days from the date of issue of such notice.

(x) Representation by ROC, SEBI ( in the case of listed companies ) and creditors shall be sent to Tribunal within 3 months of receipt of notice and copy of which shall also be sent to the company. If no such representation has been received by Tribunal within the said period, it shall be presumed that they have no objection.

(xi) Company shall send the representation or objections so received along with responses of the company thereto within 7 days of expiry of period upto which objections were sought.

(xii) The Tribunal may hold any enquiry on adjudication of claim and/or give direction for securing the debts of the creditors.

(xiii) Thereafter the Tribunal will issue order confirming the reduction of share capital and approving the companies special resolution in Form RSC-6.

(xiv) The company shall deliver a certified copy of the order of the Tribunal under sub-section (3) and of minute approved by the Tribunal to the ROC and file E-form INC-28within 30 days of the receipt of order.

(xv) Then, the ROC shall issue a certificate to that effect in Form RSC-7 (Certificate of Registration of Order and Minute).

5. IMPLICATIONS UNDER INCOME TAX ACT

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 shareholder 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 shareholders.

Notes:

1. Where the name of any creditor entitled to object to the reduction of share capital under section 66 of the Companies Act 2013 is, by reason of his ignorance of the proceedings for reduction or of their nature and effect with respect to his debt or claim, not entered on the list of creditors, and after such reduction, the company commits a default, within the meaning of section 6 of the Insolvency and Bankruptcy Code, 2016, in respect of the amount of his debt or claim,

(a) every person, who was a member of the company on the date of the registration of the order for reduction by the Registrar, shall be liable to contribute to the payment of that debt or claim, an amount not exceeding the amount which he would have been liable to contribute if the company had commenced winding up on the day immediately before the said date; and
(b) if the company is wound up, the Tribunal may, on the application of any such creditor and proof of his ignorance as aforesaid, if it thinks fit, settle a list of persons so liable to contribute, and make and enforce calls and orders on the contributories settled on the list, as if they were ordinary contributories in a winding up.

2. If any officer of the company—
(a) knowingly conceals the name of any creditor entitled to object to the reduction;
(b) knowingly misrepresents the nature or amount of the debt or claim of any creditor; or
(c) abets or is privy to any such concealment or misrepresentation as aforesaid,
he shall be liable for Fraud under section 447 of the Companies Act 2013.