Reduction of Share Capital in a company

Reduction of Capital as per Companies Act 2013

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

CONDITION:

• 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.

• It should have the power under its Articles of Association to do so.

• All creditors entitled to object to the reduction have either consented to the said reduction or that they should be paid off or their interest secured

• Before filing a petition one have to obtain the consent of BSE listing agreement, if the company is a listed entity.

PROCEDURE:

• Call for Board Meeting for the approval of the proposal

• Call for Members meeting for Reduction of capital & be approved by special resolution passed by the company

• File Form MGT 14 for intimating special Resolution & alteration of MOA/AOA for change of Capital in EOGM and eForm SH 7 for reduction in share capital

• File the petition with Tribunal for its sanction, Also 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 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., it shall be presumed that they have no objection to the reduction, if no representation made by any within the said period.

• 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.

ORDER FOR REDUCTION

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.

Publication of Order

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.

Filing of Order of Tribunal with ROC

File order within 30 days from the receipt of the copy of the order along with a minute approved by the Tribunal

DEFAULT & PENALTY:

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.

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.

IMPLICATIONS UNDER INCOME-TAX ACT, 1961 (‘IT ACT’)

When any company reduces the share capital as per the provisions of the Companies Act, 1956 by way of reducing the face value of shares or by way of paying off part of the share capital, it amounts to extinguishments of the rights of the member to the extent of reduction of face value of share capital and therefore it is treated as transfer under sec. 2(47) of the IT Act. The amount received is liable to capital gain tax u/s. 45 of the IT Act.

There are two aspects involved in the taxability of the income received on reduction of capital in the hands of the shareholders of the company:

1. Amounts distributed by the company on reduction of share capital to the shareholders

attributable to accumulated profits will be considered as deemed dividend u/s. 2(22)(d) and will be chargeable accordingly, and,

3. Distribution attributable to capital will be subject to capital gains tax u/s. 45.

Only the distribution, which is over and above the accumulated profits, can be treated as capital receipts in the hands of shareholder and only when the capital receipt is in excess of original cost of acquisition of that interest which stands extinguished, capital gains will arise to the shareholder.

This is supported by the following case laws:

• Kartikeya V. Sarabhai vs. CIT, 228 ITR 163 (SC),

It is held in this case that even if there is reduction in the face value of the shares and consequent payment by the company to the shareholder towards such reduction, the transaction results in extinguishments of right in the shares held by the shareholder. Consequently, the reduction of the share capital would be eligible to capital gains. The Supreme Court has referred the decision in the matter of Anarkali Sarabhai vs. CIT (SC), 224 ITR 422 in which case preference shares were redeemed in entirety whereas in the present case it was partly redeemed by reduction of share capital, therefore the analogy is same.

*Tribunal means NCLT

For more details, contact CS Neha Seth & Associates at csnehaseth@gmail.com or call us at 9871903449