REDUCTION OF SHARE CAPITAL

(Project Report)

Submitted to

MRS. NANDITA JHA

( Faculty of Corporate Law )

By

VIVEK KUMAR MISHRA

B. A. LL. B. (Hons.), Student
Semester – VII, Section – A, Roll No. 1576

CHANAKYA NATIONAL LAW UNIVERSITY

Nyaya Nagar, Mithapur, Patna – 800001, Bihar.

Corporate Law – I Reduction Of Share Capital 1

 Acknowledgement

I feel highly elated to work on the topic “Reduction of Share Capital” because it has
significant importance in the study Corporate Law & its functioning. The practical realization
of this project has obligated the assistance of many persons.

I would like to thank our faculty especially Mrs. Nandita Jha ma’am that she gave me an
opportunity to do work on this project & for her valuable guidance & support.

I would also like to thank the University & the Vice Chancellor for providing extensive
database resources in the library & through internet.

I would be grateful to receive comments & suggestions for further improvement of this project
report.

Vivek Kumar Mishra

Roll No. 1576
B. A. LLB.
Semester VII
Section A

Corporate Law – I Reduction Of Share Capital 2

 TABLE OF CONTENTS

Serial No. Topic Page No.

01 Introduction 04-06

02 Share Capital 07-09

03 Reduction in share capital 10-12

04 Reason for reduction in share capital 13

05 Conclusion 14

06 Bibliography 15

Corporate Law – I Reduction Of Share Capital 3

 Introduction
The Joint Stock Company is a big form of business organization. The amount required by the
company for its business activities is raised by the issue of shares. The amount so raised is
called ‘Share Capital’ (or capital) of the company. It may be noted that a company limited by
shares will have share capital. A company limited by guarantee or an unlimited company may
not have any share capital. The persons who buy the shares of company are called
‘Shareholders’.

Availability of capital can be one of the major constraints in setting up or expanding a business
because of limited pool of resources of the promoters of a company. To overcome this
constraint, a promoter can raise money from public by issuing shares of the company. The
funds raised in lieu of the shares are called share capital.

There are two types of shares in the share capital viz. Preference shares and Equity or Ordinary
shares. Though many promoters and investors contribute varying sums to the Company’s
capital yet, there is no separate Capital account for each investor or promoter. Hence, there is
a single consolidated Capital Account which is called the Share Capital Account.

In its strict sense, as used in accounting, share capital comprises the nominal values of all shares
issued (that is, the sum of their par values, as printed on the share certificates). If the allocation
price of shares is greater than their par value, e.g. as in a rights issue, the shares are said to be
sold at a premium (called share premium, additional paid-in capital or paid-in capital in excess
of par). Commonly, the share capital is the total of the aforementioned nominal share capital
and the premium share capital.

The share capital of a company is the only security on which the creditors rely. Any reduction
of share capital, therefore, diminishes the fund out of which they are to be paid. For these
specific reasons the companies limited by shares are not allowed to reduce the capital. But
sometimes there may be some genuine reasons for the reduction of share capital. The process
of decreasing a company’s shareholder equity through share cancellations and share
repurchases is known as reduction of share capital. The reduction of capital is done by
companies for numerous reasons including increasing shareholder value and producing a more
efficient capital structure.

Corporate Law – I Reduction Of Share Capital 4

The need of reducing capital may arise in various circumstances, for example, accumulated
business losses, assets of reduced or doubtful value, etc. As a result, the original capital may
either have become lost or a company may find that it has more resources that it can profitably
employ. In either of these cases, the need may arise to adjust the relation between capital and
assets In order to understand the concept of reduction in share capital, this project report has
been chapterised as follows:-

• Meaning of Share capital and its types

• Reduction in Share capital
• Reason for reduction in share capital

 Research problem

Reduction in share capital is an important aspect of any joint venture company and is
necessary at times for making profits. Procedure followed for such reduction is difficult
and thus causes many problems to others. In order to understand the procedure of the
same to avoid any such mistake, this project emphasis on the correct procedure to be
followed for the same.

 Hypothesis

The hypothesis that has been made is that Section 66 of the 1956 act describes the
procedure of the reduction of the share capital. It is subject to confirmation and
notification of the same and then the approval from the appropriate authority is
required. If approved by the tribunal the order of the same should be passed and required
amount should be given. It is subject to certain restrictions.

 Scope & objective

Reduction of share capital is subject to many restriction and changes and is also difficult
to understand and follow. The objective of the project is to clarify and simplify the same
by mentioning and discussing all the objects and measures to be followed during the
procedure.

Corporate Law – I Reduction Of Share Capital 5

  Research question

Keeping in mind various phases of the procedure, following are the research questions
that have been framed:-
• What is share capital?
• What is reduction in share capital?
• What are the procedures to be followed in reduction of share capital?
• What are the liabilities, restriction and limitation to be followed in reduction of
share capital?

 Nature of study

This project has been made by employing Doctrinal and Scholastic method of Research
& by using primary & secondary sources of information. The data for this study has
been mainly collected from the official sources of the Indian govt. and various state
governments. Scope of this project includes both the old and new act that is Companies
Act 1956 as well as Companies act, 2013.

Corporate Law – I Reduction Of Share Capital 6

 Share Capital
“Conservation of capital is one of the main purposes of Company Law.”

The share capital of a company is the only security on which the creditors rely. Any reduction
of share capital, therefore, diminishes the fund out of which they are to be paid. For these
specific reasons the companies limited by shares are not allowed to reduce the capital. But
sometimes there may be some genuine reasons for the reduction of share capital. The process
of decreasing a company’s shareholder equity through share cancellations and share
repurchases. The reduction of capital is done by companies for numerous reasons including
increasing shareholder value and producing a more efficient capital structure. The need of
reducing capital may arise in various circumstances, for example, accumulated business losses,
assets of reduced or doubtful value, etc. As a result, the original capital may either have become
lost or a company may find that it has more resources that it can profitably employ. In either of
these cases, the need may arise to adjust the relation between capital and assets.

Availability of capital can be one of the major constraints in setting up or expanding a business
because of limited pool of resources of the promoters of a company. To overcome this
constraint, a promoter can raise money from public by issuing shares of the company. The
funds raised in lieu of the shares are called share capital. There are two types of shares in the
share capital viz. preference shares and equity or ordinary shares. Though many promoters and
investors contribute varying sums to the Company’s capital yet, there is no separate Capital
account for each investor or promoter. Hence, there is a single consolidated Capital Account
which is called the Share Capital Account.

Types of Share Capital

There are various terms used in connection with the share capital of the company. They are as
follows:

• Authorized / Registered / Nominal Capital - This is the Maximum Capital which the
company can raise in its life time. This is mentioned in the Memorandum of the
Association of the Company. This is also called as Registered Capital or Nominal
Capital.

Corporate Law – I Reduction Of Share Capital 7

 • Issued Capital - This is the part of the Authorised Capital which is issued to the public
for Subscription. The act of creating new issued shares is called issuance, allocation or
allotment. After allotment, a subscriber becomes a shareholder. The number of issued
shares is a subset of the total authorized shares and Shares authorized = Shares issued
+ Shares unissued

• Subscribed Capital - The issued Capital may not be fully subscribed by the public.
Subscribed Capital is that part of issued Capital which has been taken off by the public
i.e. the capital for which applications are received from the public. So, it is a part of the
Issued Capital as follows:

Issued Capital = Subscribed Capital + Unsubscribed Capital

This can be understood by an example. If we say that 15000 shares of Rs.100 each are
offered to the public and public applies only for 12000 shares, then the Issued Capital
would be Rs.15 Lakh and Subscribed Capital would be Rs.12 Lakh.

• Called-up Capital - The Company may not need to receive the entire amount of capital
of capital at once. It may call up only part of the subscribed capital as and when needed
in instalments. Thus, the called – up Capital is the part of subscribed capital which the
company has actually called upon the shareholders to pay. Called – up Capital includes
the amount paid by the shareholder from time to time on application, on allotment, on
various calls such as First Call, Second Call, and Final Call etc. The remaining part of
subscribe capital not yet called up is known as Uncalled Capital. The Uncalled Capital
may be converted, by passing a special resolution, into Reserve Capital; Reserve Capital
can be called up only in case of winding up of the company, to meet the liabilities
arising then.

• Paid-up Capital - The Called-up Capital may not be fully paid. Some Shareholders
may pay only part of the amount required to be paid or may not pay at all. Paid-up
Capital is the part of called-up capital which is actually paid by the shareholders. The
remaining part indicates the default in payment of calls by some shareholders, known
as Calls in Arrears.
Thus,

Paid-up Capital = Called-up Capital – Calls in Arrears.

Corporate Law – I Reduction Of Share Capital 8

 • Reserve Capital - As mentioned above, the company by special resolution may
determine that a portion of the uncalled capital shall not be called up, except in the event
of the winding up of the company. This part is called Reserved Capital. It is kept
reserved for the Creditors in case of the winding up of the company.

Capital Reserves versus Reserve Capital

Capital Reserve and Reserve Capital are two different animals. 1 Capital Reserves are those
reserves which are created out of the Capital Profits. Capital Profits are those profits which are
not earned in the normal course of the business. Some examples are as follows:

• Profit on sale of fixed assets

• Profit on revaluation of fixed assets
• Premium on issue of shares and debentures
• Profit on redemption of debentures
• Profit earned by the company prior to its incorporation

Capital Reserves cannot be utilized for the distribution of dividends as dividends are something
which can be given from a profit that is earned by normal business of a company.

1
. Brilliant Bio Pharma ltd. v. Company Petition No. 91 of 2012 (on 12 th march 2013)

Corporate Law – I Reduction Of Share Capital 9

 Reduction of Share Capital
Reduction of capital is a sensitive issue; managerially, financially, economically, and legally.
Hence, reduction of capital by a company is always subject to confirmation by the Tribunal on
an application made by the company. Company applying for reduction may either be a
company limited by share or a company limited by guarantee but having a share capital.
Reduction of capital must be approved by special resolution passed by the company.

A company may reduce share capital in following manner –

(a) Extinguish or reduce the liability on any of its shares in respect of the share capital not paid
– up; or

(b) Either with or without extinguishing or reducing liability on any of its shares –
1. Cancel any paid – up share capital which is lost or is unrepresented by available assets; or
2. Pay off any paid – up share capital which is in excess of the wants of the company.

Reduction of capital of a company results in alteration of its memorandum by reducing the

amount of its share capital and of its shares accordingly. No reduction of capital shall be made
if the company is in arrears in the repayment of any deposits accepted by it or the interest
payable thereon.

Procedure to be followed for Reducing the share capital2

1.1 The Tribunal shall give notice of every application made to for reduction of capital to the
Central Government, Registrar and to the Securities and Exchange Board, in the case of listed
companies, and the creditors of the company and shall take into consideration the
representations, if any, made to it by that Government, Registrar, the Securities and Exchange
Board and the creditors within a period of three months from the date of receipt of the notice.
1.2 Where no representation has been received from the Central Government, Registrar, the
Securities and Exchange Board or the creditors within the period of these three months, it shall
be presumed that they have no objection to the reduction.

2
. https://aishmghrana.me/ as accessed on 5th September, 2019.

Corporate Law – I Reduction Of Share Capital 10

1.3 In respect of any debt of claim of every creditor should have been discharged or determined
or secured by the company. Otherwise, the company should obtained consent of creditors for
reduction of capital. The tribunal may make an order confirming the reduction of share capital
only after it is satisfied that the debt or claim of every creditor of the company has been
discharged or determined or has been secured or his consent is obtained. The order of the
tribunal may contain such terms and conditions as it may deem fit.3
1.4 Accounting treatment for reduction of share capital should be in conformity with the
accounting standards specified in section 133 or any other provision of Companies Act 2013.
The company shall obtain a certificate to this effect from auditors of the company and file it
before the Tribunal. The tribunal shall not sanction this reduction unless this certificate has
been filed.
1.5 The order of confirmation of the reduction of share capital by the Tribunal shall be
published by the company in the manner directed by the Tribunal. The company shall delivered
a certified copy of the order of the Tribunal before the Registrar within thirty days of receipt of
the copy of the order along with a minute approved by the Tribunal showing –
(a) The amount of share capital;
(b) The number of shares into which it is to be divided;
(c) The amount of each share; and
(d) The amount at the date of registration deemed to be paid – up on each share.

The registrar shall register the same and issue a certificate to that effect.
This Section 66 does not apply to buy – back of its own securities by a company under Section
68.

Problems faced during the Reduction of Share capital4

A member of company, past or present, shall not be liable to any call or contribution exceeding
the amount of difference, if any, between the amount paid on the share or reduced amount, if
any which is to be deemed to have been paid thereon and amount of shares as fixed by an order
of reduction.5

3
Priyanka Overseas Pvt. Ltd. v. Pashupati fabrics ltd. & others (2006 132 CompCas55CLB)
4
https://aishmghrana.me/ as accessed on 5th September, 2019.
5
Cosmosteels Pvt. Ltd. v. Jairam Dasgupta & Oth. (1978 AIR 375)

Corporate Law – I Reduction Of Share Capital 11

Where the name of any creditor not entered on the list of creditors and after such reduction the
company is unable to pay the amount of his debt or claim –
a. Every person, who was a member of the company on the date of the registration of order for
reduction by the Registrar, shall be liable to contribute to the payment of that debt or claim;
and
b. If the company is wound up, the Tribunal may, on application of any such creditor and proof
of his ignorance, settle a list of persons so liable to contribute and make and enforce calls and
orders on the contributories settled on the list.

The amount for contribution shall not exceed the amount which contributor would have been
liable to contribute if the company had commenced winding up on the day immediately before
the date of filing of order before the Registrar.

This provision shall not affect the rights of the contributors among themselves. 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 under section 447.6

If a company fails to comply with the provisions relating to publication of order, it shall be
punishable with fine which shall not be less than five lakh rupees but which may extend to
twenty-five lakh rupees.

6
Reckitt Benckiser India Ltd. v. Unknown [122 (2005) DLT 612]

Corporate Law – I Reduction Of Share Capital 12

 Reason for Reduction of Share Capital

The need for reducing the capital may arise on account of various reasons like to distribute
assets to shareholders, to remedy deficit, to reduce the basis for taxes, make up for trading
losses, heavy capital expenses, etc. Also, sometimes companies may have more capital
resources and reserves than they can profitably employ, giving rise to the need to readjust the
relation between capital and assets by reduction of capital.7 When a company has been making
losses, the financial position does not present a true and fair view of the state of the affairs of
the company. The assets are overvalued, and assets side of the balance sheet consists of
fictitious assets with debit balance in profit and loss account. Such situation does not depict
what a real net worth ought to be. In short, the company is over capitalized. Such a situation
brings the need for reconstruction.

Here, scheme of reduction will be to write-off that portion of capital which is already lost and
to make balance sheet healthy. Reconstruction is a process by which affairs of a company are
reorganized by revaluation of the assets, reassessment of liabilities and by writing off the losses
already suffered by reducing the paid up of shares and or varying rights attached to the
Reduction of share capital different classes of shares. The object of the reconstruction is usually
to recognize capital or to compound with creditors or to effect economies.8 Such a process is
called as Internal Reconstruction which is carried out without liquidating the Company. The
aforesaid comprise is an agreement between a company and its members and outside liabilities
when the company faces financial problems. Such arrangement involves sacrifice from
shareholders or creditors or by all. Accounting effect of the scheme along with other is detailed
below. However, there may be external reconstruction which is altogether different and
involves liquidation of the Company. The most common reasons why a company may want to
reduce its capital are: To increase or to create distributable reserves to enable future dividends
to be paid to shareholders:-

• To return surplus capital to shareholders

• To facilitate a share buyback or redemption of shares, or
• As part of a scheme of arrangement

7
Corporatelawjournal.com as accessed on 5th September, 2019.
8
Corporatedailyjournal.com as accessed on 5th September 2019.

Corporate Law – I Reduction Of Share Capital 13

 Conclusion
From the above discussion and analysis it is clear that Reduction of Share Capital is very
important aspect of company. It is one of the mechanism by which the company reduces the
share capital and thereby increases the value of shares or deducts the unnecessary shares.

But it is very important to follow the correct procedure and the court [Tribunal] is very much
strict about the procedure. The main objects of the courts are to protect the interest of the
creditors and the shareholders. Therefore the procedure should be followed in accordance with
the prescribed format in order to validate the reduction of the share capital.

The new provision in 2013 Act is very precise and very much to the point approach adapted by
the legislature. As compared to 1956 Act, these provisions are more simple and given under
one heading.

Corporate Law – I Reduction Of Share Capital 14

 BIBLIOGRAPHY

 REPORTS

1. Reducing share capital by company: An overview by Phelecia Barnett.

2. Share capital in foreign exchange accounting by American accounting
association by E. Fuerst.

 BOOKS
1. G.K.KAPOOR AND SANJAY DHAMIJA, COMPANY LAW AND
PRACTICE, TAXMANN, 20TH EDITION
2. A.K. MAJUMDAR, COMPANIES ACT 1956, SIXTEEN EDITION,
TAXMANN
3. T.P. GHOSH, COMPANIES ACT 2013, SECOND EDITION, TAXMANN
4. TAXMANN’S A COMPARATIVE STUDY OF COMPANIES ACT 2013 &
COMPANIES ACT 1956

 OTHER WEBLINKS:

1) http://indiacode.nic.in/acts-in-pdf/182013.pdf
2) http://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf
3) Corporatelawreporter.com
4) Ministry of Corporate Affairs of India (mca.gov.in)

Corporate Law – I Reduction Of Share Capital 15