Reduction of share capital

Reduction of share capital means the reduction of issued, subscribed and paid-up capital of the Company. The reduction of capital is mainly done by companies for producing a more efficient capital structure. Reduction is an important event in the company’s history since the creditors of the company get impacted by such a move. It is important to note that reduction is different from a stock split. In a stock split, the company only divides the face value over a larger number of shares. 

Example; 

Thus, a company with a share having a face value of ₹10 per share may reduce it to ₹6 per share. Thus, an amount equal to ₹4 per share is either returned to the shareholders or written-off. 

Need of Reducing Share Capital 

The need of reducing share capital may arise in various circumstances, for example,  

Modes of Reduction 

Example: If the shares are of face value of ₹10 each of which ₹5 has been paid, the company may reduce them to ₹5 fully paid-up shares and thus relieve the shareholders from liability on the uncalled capital of ₹5 per share.  

Example, If the shares of face value of ₹10 each fully paid-up is represented by ₹7 worth of assets. In such a case, reduction of share capital may be effected by cancelling ₹3 per share and writing off similar amount of assets. 

Example: shares of face value of ₹100 each fully paid-up can be reduced to face value of ₹75 each by paying back ₹25 per share. 

Procedure for Reduction of Share Capital 

S. No Particulars Form No. Time Period 
Company is authorized by its Article of Association to reduce the share capital. – – 
Issue Notice to hold Board of Directors Meeting to approve the Scheme of Reduction of Capital. – 7 Days 
Convene and hold a Board Meeting for the purpose of Reduction of Capital. – – 
Company has to file the copy of Special Resolution and Explanatory Statement with the ROC. MGT-14 Within 30 days from the date of passing the Special Resolution. 
Prepare a List of Creditors, which should be class-wise, indicating their names, addresses and amounts owed to them. – Not earlier than 15 days prior to making of application to Tribunal. 
Filing of Application with the NCLT to approve the Reduction of Share Capital along with the prescribed fee of ₹5000.  RSC-1   
The Tribunal shall give notice or direct the Company that notice to be given to the The Central Government ROC seeking their representations and objections if any. RSC-2 Within 15 days from the submission of Application. 
The Tribunal shall give notice or direct the Company that notice to be given to the The creditors of the company seeking their representations and objections if any. To each creditor whose name is entered in the list of creditors submitted by the company   Stating 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 such creditor’s name is entered in the said list, and the time within which the creditor may send his representations and objections.  RSC-3  Notice shall be sent within 7days.  
The Tribunal shall also give directions for the Notice to be published in one leading English Newspaper and one leading Vernacular language Newspaper and for uploading on the website of the company (if any). RSC-4 Within 7 days of direction given by Tribunal. 
10 The company or the person who was directed to issue notices and the publication in newspaper shall file an affidavit confirming the dispatch and publication of the notice. RSC-5 Within 7 days from the date of issue of the Notice. 
11 If 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 or both.  – – 
12 Representation by ROC, SEBI and Creditors shall be sent to the Tribunal 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.  within 3 months of receipt of notice. 
13 Company shall send the representation or objections so received to the Tribunal along with responses of the company thereto. – Within 7 days of expiry of period up to which the objections were sought. 
14 If the Tribunal is satisfied with the process of Reduction of Share Capital, it may pass an order confirming the Reduction of Share Capital and approving the minutes. RSC-6 – 
15 The company shall file with the ROC a certified copy of the order approving the Scheme of Reduction of Share Capital and of minute by the Tribunal. INC-28  Within 30 days from the date of the receipt of order copy. 
16 The ROC shall issue a certificate under section 66(5) of the Companies Act, 2013 confirming the reduction of share capital. RSC-7 – 

Company on post confirmation: 

The following details shall be submitted within 30days. 

Prohibition in reduction of share capital: 

Penalty: 

Taxation Aspect: 

Fema: 

Pricing guidelines: 

Particulars Listed Company Un-Listed Company 
Issue by an Indian company - Price should not be less than  The price worked out in accordance with the relevant SEBI guidelines. The fair value worked out as per any internationally accepted pricing methodology for valuation on an arm’s length basis, duly certified by a Chartered Accountant or a SEBI registered Merchant Banker or a practicing Cost Accountant. 

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