How to Reduce Share Capital of a Company?

The company may reduce the Share Capital by following the provisions of the Companies Act, 2013 (“the Act”) and the National Company Law Tribunal Rules.

Further, the Buy-back of shares may also be followed for reducing the share capital. However, this article would guide you the ways to reduce the Share Capital by following the provisions of Companies Act except the provisions of Buy-back.

1. Meaning of Authorised and Paid-up share capital

The authorized Share Capital of a company is the maximum amount of share capital that a company can issue and the paid-up Share capital is amount of money paid in respect of shares of the company.

2. Modes of Reduction of Share Capital

In case of share capital not paid-up: extinguish or reduce the liability on any of such shares; or

In case of share capital paid-up: either with or without extinguishing or reducing liability on any of its paid-up shares:-

By cancelling any paid-up share capital which is lost or is unrepresented by available assets; or

By paying off any paid-up share capital which is in excess of the wants of the company

3. Pre-requisites for Reduction of Share Capital

Approval of National Company Law Tribunal (NCLT) is required
A Special Resolution should be passed
There should be no arrears of repayment of deposits
Accounting treatment for reduction should be as per Accounting Standard specified in Section 133 of the Act
A certificate by Statutory Auditor is to be given stating that the Accounting Standard has been followed.

4. Process to be followed for Reduction of Share Capital

Board meeting to approve the reduction
Call Extra-Ordinary General Meeting (EGM) to take members’ approval by Special Resolution (SR)
Hold EGM and pass SR
File MGT-14 within 30 days of passing SR
File application to NCLT in form RSC-1

Attachments of RSC-1:

The list of creditors

1. A Certificate from the auditor of the company showing that the list of creditors is correct as per the records of the company verified by the auditor;

2. A Certificate by the auditor and declaration by a director of the company that the company is not in arrears in the repayment of the deposits or the interest thereon; and

3. A Certificate by the company’s auditor showing that the accounting treatment proposed by the company for the reduction of share capital is in conformity with the accounting standards.

Within 15 days of receipt of application, NCLT should give notice of the application to the Central Government (CG), Registrar of Companies (ROC) and SEBI (in case of Listed Companies) in RSC-2 and to the Creditors in form RSC-3.

Publication of notice by company within 7 days from the date of Directions to CG, ROC, SEBI and Creditors, in RSC-4 in English Newspaper and Vernacular Newspaper

NCLT should wait for 3 months from the date of sending Notice to CG, ROIC, SEBI and Creditors. If any representations are not received within this period then it is presumed that they do not have any objection.

Affidavit in form RSC-5 by the company that the notice has been dispatched for publication.

If the company has received any representations or objections, then the same should be submitted to the NCLT within 7 days from the date within which the objections were ought to be received.

The order of NCLT confirming the reduction is in Form RSC-6.

File order of NCLT within 30 days of its receipt to the ROC in Form INC-28.

ROC will issue Certificate of reduction in form RSC-7.

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