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Reduction of Share Capital

Reducing share capital allows companies to optimize their capital structure by offsetting losses or writing down impaired assets. A company can reduce capital by passing a special resolution and amending its Articles of Association, then obtaining approval from the National Company Law Tribunal. Capital may be reduced by extinguishing unpaid share capital, cancelling paid-up capital not backed by assets, or paying off surplus paid-up capital. The Tribunal will confirm reductions unless shareholders are prejudiced or their interests are not secured. However, companies in arrears on deposit repayments cannot reduce capital.

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Ritisha Choudhary
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224 views1 page

Reduction of Share Capital

Reducing share capital allows companies to optimize their capital structure by offsetting losses or writing down impaired assets. A company can reduce capital by passing a special resolution and amending its Articles of Association, then obtaining approval from the National Company Law Tribunal. Capital may be reduced by extinguishing unpaid share capital, cancelling paid-up capital not backed by assets, or paying off surplus paid-up capital. The Tribunal will confirm reductions unless shareholders are prejudiced or their interests are not secured. However, companies in arrears on deposit repayments cannot reduce capital.

Uploaded by

Ritisha Choudhary
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Concept: -

Reduction of the issued, subscribed, and paid-up capital of the company is referred to as reducing the
share capital. Companies primarily reduce capital to produce a capital structure that is more effective.
Reductions in share capital can occur for a variety of reasons, such as accumulating company losses,
assets with diminished or uncertain value, etc. Utilizing reserves or a share premium account to offset
the accumulated business losses is another way to reduce capital.

The company derives its right/power from the Articles of Association (AoA) of the company to reduce
the share capital and by passing a special resolution; it can be brought into effect. AoA being the
constitution of the company, if does not provide any power or provision for reduction of share capital,
can be amended by passing a special resolution for getting the AoA altered/amended. The reduction of
share capital is finally then confirmed by the NCLT after meeting the necessary compliances as discussed
below.

The provision under section 66 of the Companies Act, 2013 provides the modes by which the company
can reduce the share capital however, they’re not exhaustive. Section 66 provides the following modes:-

1. Extinguishing or reducing the liability on any of its shares with regard to unpaid share capital
2. Any paid-up share capital that has been lost or is not supported by accessible/available assets
should be cancelled. The liability on any of its shares may be eliminated or reduced with or
without doing so.
3. Pay off the surplus paid-up share capital over what the company actually needs. This may be
done with or without discharging or lessening the obligation on any of its shares.

The provision does not put any limitation on the Tribunal to confirm the reduction unless there is any
prejudice caused to the shareholders or their interest have not been secured or they have not been
paid. However, a company cannot proceed with the reduction of share capital if it is in arrears in the
repayment of any deposits.

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