The provision of reduction of share capital, which was earlier available under
Sections 100-105 of the Companies Act, 1965, has now been dealt under section 66
of the Companies Act of 2013 (hereinafter referred to as 'the Act'). Section 66
makes provision for reduction of share capital by a company, whether limited by
shares or guarantee, to reduce their share capital with an objective of either
mitigating their losses or refunding funds to the shareholders which are surplus
with the company.[i]
A company may also reduce the share capital in order to
release the liability to pay up the unpaid share capital. Such reduction has to
be pre-approved by NCLT by making an application, and thereafter by a special
resolution passed by the company. [ii]
Why to Reduce Share Capital?
Sometimes, when a company is incurring losses, the balancesheet does not depict
a true picture of the assets and liabilities of the company. The assets, in this
case the share capital
are overvalued, as they hold a much greater value in the
balance sheet than it actually has due to the losses incurred by the company. In
order to capture a true picture of the liabilities and assets of the company,
such restructuring of capital asset is necessary. [iii]
Another reason for such
restructuring is that sometimes the company has more share capital, i.e. more
capital resources than it can gainfully invest. In such cases, it is needed for
a company to adjust or balance its assets and capital by returning the surplus
to the shareholders in the proportion of their shareholding. [iv] Such form of
restructuring is called internal restructuring, as opposed to the external
restructuring which involves the procedure of winding up of a company by an
external source. [v]
A company need not reduce the share capital against all
shareholders. Bombay high court observed that the words 'any shareholders' used
in the Companies Act clearly show that the intention of the legislature is
clear. The reduction of the share capital may be made against all or any of the shareholders. [vi]
Following are the reasons for why a company may reduce its capital assets [vii]:
- When the company is not able to meet its obligations.
- When the company is incurring losses.
- When the company has more surplus than it can actually profitably
Modes and Procedure of Reduction
The reduction of share capital, or the internal restructuring of a company can
be done in various ways. The objective is to mitigate losses and restructuring
of share capital in a way to balance out the assets and the liabilities.
Following are the ways to reduce capital under Section 66 of the Act:
- Cancellation of paid-up share capital that is not presented by the
existing assets with or without reduction of liabilities on any of the
- Extinguishment or reduction of unpaid share capital.
- Paying off any paid-up capital, which is surplus to the requirements of
For a company to avail the provision of reduction of share capital, the company
shall first make an application to the Tribunal (NCLT). After obtaining a
sanction from the Tribunal, the restructuring shall come into force by a special
resolution passed by the company.
The Tribunal shall make sure the following
conditions are fulfilled before granting the sanction:
- There is no objection from the creditors.
- In case of objection by the creditors, their consent has been obtained
by the company.
- The rights of the creditors have been secured or they have been paid
Section 66 read with the National Company Law Tribunal (Procedure for reduction
of share capital) Rules, 2016 formulate the procedure of reduction of share
capital. Rule 2(1) lays down the procedure of making an application to the
Tribunal. An application to this effect has to be filed with the Tribunal in
Form No. RSC-1 along with a fee of Rs. 5000/-.
The application above has to be supplemented with the following:
- A list of creditors in the order of their class, along with their names,
address, and amount owed, duly signed by the managing director of the
- The auditor shall certify the above-mentioned list of creditors.
- A declaration to the effect that the company is not in arrears in the
repayment of the deposits or the interest by one of the directors of the
company and certified by the auditor.
- The certificate to the effect that such restructuring is in accordance
with the other provisions of the Companies Act.[viii]
The Tribunal shall send a notice to all creditors (Form No. RSC-3), and
to Security Exchange Board of India and the Registrar for Companies (in Form No.
RSC-2), within 15 days of the filing of the application and shall specify in the
notice, the time the creditors/ the authorities have to raise any objections to
The creditors or the authorities described above shall raise
objections, if any to the notice within three months of receipt of such notice,
failing which the Tribunal shall assume that there are no objections.
Order of reduction:
The Tribunal shall pass an order confirming the reduction of
share capital as sought by the company in Form No. RSC-6. Upon receiving the
order, the company shall obtain a certificate to that respect from the Registrar
of Companies in Form No. RSC-7.
SEBI has made some amendments in the listing agreement making it compulsory for
the companies to obtain approval of SEBI along with the order of the Tribunal.
The company has to make an application before SEBI before applyingthe reduction
of share capital before the Tribunal. The company shall make sure that such
restructuring does not violate any of the security laws or the stock exchange
requirements such as SEBI Act, 1992, the Securities Contracts (Regulation) Act,
1956, the Depositories Act, 1996 and the requirements of the Companies Act, 1956
which are controlled by SEBI.[ix]
Can Creditors Object to Reduction?
First and the foremost, while making an application to the Tribunal, the
applicant, i.e. the company shall have to satisfy the court that the interests
of all creditors have been secured and dealt with. If the Tribunal observes that
such restructuring might disrupt or violate the rights of the creditors, such
application may not be allowed by the court. [x]
Even if the application is allowed by the Tribunal, and the company is
successful in being able to get a special resolution passed in an Annual General
Meeting, the creditors can again object to such restructuring within the
stipulated time. Such objections will be taken into consideration by the
Tribunal before passing an order in Form No. RSC-6.[xi]
Judicial Interpretation of Reduction of Share Capital
The reduction of share capital is a vastly studied and interpreted area of the
companies' law. Because it is in the hands of the courts to decide whether or
not a company can perform internal restructuring, the courts make observations
as to why such company could/could not reduce the share capital, and in turn
interpreting the law on this point.
The Orissa HC in OCL India Pvt. Ltd
. (1998)[xii] observed that the court is not
concerned with how a company carries out its reduction of share capital. The
court, while granting the sanction is only concerned with the fact that whether
a proper procedure has been adopted by the company as prescribed in the Act. The
court also has to make sure that the rights of all creditors and shareholders
have been secured and there are no objections from any of the two.
nutshell, the following three criteria are considered by the courts while
passing the order of reduction:
- There are no objections from the creditors, and the company has secured
- There are no objections from the shareholders, andthe
company has secured their rights.
- The company has followed the procedure prescribed under Section 66 of
the Companies Act, 2013 r/w the National Company Law Tribunal (Procedure for
reduction of share capital) Rules, 2016.
In Sandvik Asia Ltd. v. Bharat Kumar Padansi
[xiii], the company filed an
application for extinguishing a class of shareholders called the non-promoter
shareholders. The non-promoter shareholders opposed the said application and the
single judge ruled in favour of the said shareholders. The said order was
challenged before the appellate court where the order was reversed. It was
observed by the appellate court that because majority shareholders have voted in
favour of the restructuring, there is no reason for the court of refuse
The Bombay High Court observed that if a company made an application for
reduction of share capital, such application could not be rejected by the
Tribunal merely based on the fact that another method of restructuring might be
more beneficial to the shareholders or the creditors. If the creditors and the
shareholders have given their consent, the court shall be bound to approve such
an application. [xiv] The reduction shall be final only when the Court registers
its order with the Registrar. The Registrar shall then give a certificate to the
effect of reduction of share capital as prescribed by the company.
Section 66 of the Companies Act deals with the reduction of share capital by the
company in case the company is in loss or has surplus money, more than it can
profitably invest in the business of its company. Such reduction can either be
done by reduction of the unpaid share capital or by paying off the paid share
capital that is in surplus. S. 66, along with rules discussed above, lay down
the procedure by which a company limited by guarantee or by shares can reduce
its share capital.
The company shall take approval from the Tribunal after
getting a special resolution passed in the AGM of the company. The company then
sends notices to the creditors, Registrar and the SEBI regarding the applied
restructuring to raise objections, if any. In case, none of the creditors or the
authorities raise any objection within the stipulated time of 3 months from the
date of receipt of the notice; the Tribunal assumes that there are no objections
and sanctions the restructuring.
The courts have interpreted the provisions and
have laid down the law. Suppose the courts are satisfied that the right of the
creditors and shareholders are secured, and there seem no objections whatsoever,
they shall allow the application, even when there is an alternate remedy
available which seems more beneficial.
The courts have also held that the
Tribunal only has to make sure there are no objections and not dwell into the
matter of how the company is carrying out the restructuring. While winding up of
companies is called external restructuring, such measures taken by the company
in order to curb its losses, as dealt in this articles is called the internal
restructuring of the company.
Written By: Pushkaraj Ghorpade
- Ketan Dalal, �Capital Reduction - Regulatory & Tax Issues: Part 1�, LSI,
(Aug 01, 2019),
- S. 66, the Companies Act, 2013.
- Indian National Press (Indore) Ltd., In re. (1989) 66 Com Cases 387, 392
- Deban Satyadarshi Nanda, �Reduction of Share Capital: Analysis�, Corporate
Law Reporter, (Feb 23, 2015), http://corporatelawreporter.com/2015/02/23/reduction-share-capital-analysis/.
- N Venkiteswaran, �Restructuring of Corporate India: The Emerging Scenario�,
(Oct 02, 2020), https://journals.sagepub.com/doi/pdf/10.1177/0256090919970301.
- Elpro International Limited, (2008) 86 SCL 47 (Bom).
- Corporate Restructuring, Corporate Restructuring, Valuations and
Insolvency, the Institute of Company Secretaries of India, (Oct 3,
- M. Govindaranjan, �Procedure for Reduction of Share Capital under
Companies Act, 2013�, TMI,(January 9, 2017), https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=7191
- Amendment to the listing agreement regarding disclosure pertaining to
schemes of arrangement/merger/amalgamation /reconstruction filed before the Court�,SEBI, (May 08, 2003), https://www.sebi.gov.in/legal/circulars/may-2003/amendment-to-the-listing-agreement-regarding-disclosure-pertaining-to-schemes-of-arrangement-merger-amalgamation-reconstruction-filed-before-the-court_15867.html.
- Ocl India Ltd. v. Unknown, AIR 1998 Ori 153.
- Radhe Developers and Others v. ITO 113 TTJ (Ahd) 330.
- Supra note 10.
- Sandvik Asia Ltd. v. Bharat Kumar Padansi (2009) 92 SCL 272.
- Chetan G. Cholera v. Rockwool (I) Ltd. (2010) 102 SCL 93.
3rd�Year BA.LLB(Hons) from NMIMS, School of Law Navi Mumbai