Legal
On 07th December, 2016, Ministry of Corporate Affairs (MCA) has vide its Commencement Notification notified various sections of Companies Act, 2013.Section 66 which is the governing provision for Reduction of Share Capital of a company, is one amongst those sections notified on 07th December, 2016. MCA has further, notified the National Company Law Tribunal (Procedure for Reduction of Share Capital of Company) Rules, 2016 on 15th December, 2016
Previously, Reduction of Share Capital was governed under Section 100 of the Companies Act, 1956 subject to the confirmation of the Court.
Broad-spectrum
The Reduction of share capital is a delicate matter for both managerially and legally, its need to be handled with caution. Another name of reduction of share capital is internal reconstruction. Process of Reduction of share capital is first summed- up by the Hon'ble Supreme Court in Punjab Distilleries India Ltd. v. CIT, (1965) 35 Com Cases 541, 544
The power of reduction is general, and extends to every possible mode of reducing capital, including the cancellation of uncalled capital which can only be called up in a winding up, the surrender for re-issue of unpaid shares obtained by subdividing partly paid shares into shares of smaller amount and attributing the whole of the amounts paid-up to the shares not to be surrendered, the repayment of paid-up capital, which is in excess
Need of the Reduction of Share Capital:
The need for reducing capital may arise in various ways, for example, trading losses, heavy capital expenses, and assets of reduced or doubtful value. As a result, the original capital may either have become lost or a company may find that it has more resources than it can profitably employ. In either case, the need may arise to adjust the relation between capital and assets. Indian National Press (Indore) Ltd., In re, (1989) 66 Com Cases 387, 392 (MP)
Following will not consider as a reduction of share capital:
i. Where a company cancels shares which have not been taken or agreed to be taken. This is not, however, deemed to be a reduction of capital. (Section 61)
ii. Where redeemable preference shares are redeemed in accordance with the provisions of sections 55.
iii. Where any shares are forfeited for non-payment of calls, though the forfeiture as a fact amounts to a reduction of capital.
iv. Where there is a surrender of shares or a gift is made to a company of its own shares. (The gift may be accepted in the name of a nominee of the company).
v. Where the nominal share capital of a company is reduced by cancelling any shares which have not been taken or agreed to be taken by any person.
vi. Where company purchases its own shares in pursuance of the provisions in section 68.
vii. Where a sum of money was received for allotment of shares but that could not be done, paying back that money to the depositor did not require the procedure for reduction of capital even though the money was shown as a part of company's subscribed capital. Rupak Ltd. v. ROC, (1984) 56 Com Cases 206 (Pat).
Conditions:
a. A Company not allowed to implement the scheme of [1] reduction of share capital if, company is in arrears in the repayment of any deposit accepted by it or interest payable thereon.
b. Company should have power in Article of Association for Reduction of Share Capital.
In Dexine Patent Packing & Rubber Co., 1903 WN 82, For a company to reduce its share capital in any manner set out in this section, it must have power given to it under its articles to do so. An authority to do so given by the memorandum of association is of no avail
West India & Pacific Steamship Co., Re, (1868) LR 9 Ch App 11, If the articles do not contain any provision for reduction of capital, the articles must first be altered so as to give the power and then the resolution for reducing capital must be passed, as a special resolution and the reduction effected by such resolution must be confirmed by the court.
c. There can’t be any retrospective approval of Reduction of Share Capital. Alexander Henderson Ltd., Re, (1967) SLT (Notes) 17 (Scottish)
Powers of Shareholders:
[2] The general rule is that the prescribed majority of the shareholders are entitled to decide whether there should be a reduction of capital, and, if so, in what manner and to what extent it should be carried into effect. When the reduction is consequent on a change in the method of carrying on the company's business, it is for the shareholders to decide to what extent its capital is in excess of its wants, and on the adequacy of the consideration for the reduction of their share capital, but the powers of the shareholders must be exercised so as to safeguard the rights of creditors, the just and equitable treatment of shareholders and the interest of the investing public. These principles are affirmed in British & American Trustee & Finance Corporation v. Couper, 1894 AC 399 (HL);
Ques: Whether shareholders meeting can be dispensed with by consent of the 75% of the shareholders or more?
It must be said that there is no warrant anywhere in the Act for holding the view that the consent of 75% of members holding not less than 75% voting rights subsequently obtained can validate a defective special resolution. In a decision of the Madras High Court, Self Help Private Industrial Estate Private Ltd., In re, (1972) 42 Com Cases 605 (Mad)
Duties of the Tribunal:
The Court's jurisdiction is not confined to matters relating to the reduction alone. All circumstances relating to the adjustment of the interests of the different classes of shareholders, but not mere possibilities that may ultimately affect them may properly be taken into account.
Tribunal’s task is to see that the procedure, by which a resolution is carried through, is formally correct and that creditors are not prejudiced; it has the further duty of satisfying itself that the scheme is fair and equitable between the different classes of shareholders.
Ques: Whether buy-back of securities (Section 68) is part of the reduction of share capital in other words whether provisions of section 66 attract on process of buyback of shares?
As per provisions of Section 66(6) nothing in this section shall apply to buy-back of its own securities by a company under section 68. Reduction of share capital through buy- back of shares doesn't require the approval of the Tribunal. Asian Investments Ltd., Re, (1992) 73 Com Cases 517, 523 (Mad).
Taxation Aspects:
Ques: Whether Distribution over and above the accumulated profits, in excess of original cost of acquisition of shares would be considered as capital gain.
Where a company reduces its share capital under section 100(1)(c) by paying off part of the share capital by reducing the face value of shares, such reduction amounts to extinguishment of the right of the member to the extent of reduction of face value of shares and therefore is a transfer under section 2(47) of the Indian Income-tax Act, 1961 and the amount received is liable to capital gains tax under section 45. Kartikeya Sarabhai v. CIT, (1982) Tax LR 1877. But see, CIT v. G. Narasimhan, (1979) 49 Com Cases 375 (Mad).
Modes of reduction of share capital
The Act does not prescribe the manner in which the reduction of capital is to be effected nor is there any limitation on the power of the Tribunal to confirm the reduction, except that it must be satisfied that every creditor of the company has either consented to the said reduction or they have been paid off or their interest has been secured.
Reduction of share capital may be effected in one of the following ways: {Section 66(1)}
i. Extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up. (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
ii. 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
iii. 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.)
Process of Reduction of Share Capital
Step 1 - Preparation of Draft Scheme
Check whether the Articles of association of the company contain the powers to reduction of share capital. if the AOA doesn’t contain the power of reduction of share capital then first alter the Article of Association by follow the process mentioned in section 14.
i. Prepare the draft scheme of reduction of share capital as per provisions given below.
ii. Convene the [3]Board Meeting for following purposes:
- Approve the draft scheme from the Board of Directors.
- Calling of EGM of Shareholders of the Company
- Approval of Notice of EGM
Step 2 - Holding of General Meeting
iii. Hold the General Meeting and Passed the Special Resolution passed.
iv. File MGT-14 with ROC within 30 days of passing of Special Resolution.
Step 3 - Filing of Application with NCLT
Company shall prepare an application for reduction of share capital in form RCS-1 mentioning the details about applicant, jurisdiction, limitation, relief sought, the basis on which each class of members or creditors has been identified for the purposes of approval of the scheme etc. Company will submit the application along with following documents:
- List of Creditors
- A certificate from the auditor of the company to the effect that the list of creditors referred to in clause (a) is correct as per the records of the company verified by the auditor:
- A certificate by the auditor and declaration by a director of the company is not, as on the date of filing of the application, in arrears in the repayment of the application, in arrears in the repayment of the deposits or the interest thereon ; and
- A certificate by the company’s auditor to the effect that the accounting treatment proposed by the company for the reduction of share capital is in conformity with the accounting standards specified in section 133 or any other provisions of the Act.
- A certified true copy of the memorandum and articles of association of the company.
- A certified true copy of the notice of the general meeting together with the explanatory statement annexed to the notice, at which the special resolution had been passed.
- A certified true copy of the special resolution authorizing the reduction of share capital.
- A certified true copy of the latest audited balance sheet and profit and loss account of the company together with all the schedules and other papers attached/annexed thereto.
- A certified true copy of the minutes of proceedings at the general meeting at which the special resolution for reduction of share capital was passed.
- An affidavit verifying petition. Memorandum of Appearance with copy of board resolution.
Step 4 - Process to be taken up by the NCLT
The Tribunal shall, within fifteen days of submission of the application under rule 2, give notice, or direct that notice to be given to-
- the Central Government, Registrar of Companies, in all cases, in Form No, RSC-2;
- the Securities and Exchange Board of India, in the case if listed companies in Form No. RSC-2;
- the creditors of the company, in all cases in Form No. RSC-3
Notice to Creditor:
The notice under shall be sent, within seven days of the direction given under that sub-rule or such other period as may be directed by the Tribunal, to each creditor whose name is entered on the list of creditors submitted by the company about the presentation of the application and of the said list,
The notice should state the amount of the proposed reduction of share capital and the amount or estimated value of the debt or the contingent debt or claim or both for which the creditor’s name is entered in the said list, and the time within which the creditor may send his representations and objections.
Publication of Notice:
The NCLT shall also give direction for the notice to be published inForm RSC-4within seven days of such direction in a leading English and vernacular language newspaper and for uploading on the website of the company.
Note: Provided that the objections, if any, shall be filed in the Tribunal within three months from the date of publications of the notice with a copy served on the company.
Confirmation of Publication of Notice:
The company shall file an affidavit in Form RSC-5confirming the dispatch and publication of the notice within seven days from the date of issue of such notice
Note: Where the Tribunal is satisfied that the debt or claim of every creditor has been discharged or determined or has been secured or his consent is obtained, it may dispense with the requirement of giving of notice to creditors or publication of notice under this rule or both.
Step 5 - Representation by Regulators
Representation by ROC, SEBI and creditors shall be sent to NCLT 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 NCLT within the said period, it shall be presumed that they have no objection.
Submission of Representation:
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.
NCLT may hold any enquiry on adjudication of claim and/or give direction for securing the debts of the creditors.
Step 6 - Order by NCLT
The order confirming the reduction of share capital and approving the minute shall be in Form No.RSC-6on such terms and conditions as may be deemed fit.
Step 7- Filing of Form with ROC
The company shall deliver a certified copy of the order of the NCLT under sub-section (3) and of minute approved by the Tribunal to the ROC and fileE-form INC-28.within 30 days of the receipt of order.
The Certificate issued by the Registrar under sub-section (5) of section 66 shall be in Form No.RSC-7.
Conclusion:
Apart from reduction of capital under section 66, there is another circumstance, when share capital can be reduced. In the case of oppression and mismanagement, the Tribunal has been given powers under section 242 to pass an order as it thinks fit which may provide for purchase of shares of any members by the company and consequent reduction of the share capital.
Each transaction must be decided on its own facts. B.C. Red Cedar Shingle Co. Ltd. v. Stoltze Mfg. Co. Ltd., (1932) 1 DLR 762 (Canada)
[1] Either before or after the commencement of this Act
[2] Poole v. National Bank of China, 1907 AC 229; Caldwell & Co, Ltd. v. Caldwell, 1916 SC 120 (HL): Re, De La Rue (Thomas) & Co. Ltd,, (1911) 2 Ch 361." Per LORD NORMAND in Westburn Sugar Refineries Ltd., (1951) 1 All ER 881 (HL).
[3] In case of Listed Company, After the conclusion of the Board meeting, send to the stock exchanges, where the securities of the company are listed, particulars of the proposed reduction in the share capital of the company as per the requirement of Regulation 30 of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015
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