REDUCTION OF SHARE CAPITAL WITH NCLT RULES 2016,

REDUCTION OF SHARE CAPITAL

In this article, it is discussed about “Reduction of Share Capital” and its procedure under section 66 of the Companies Act, 2013 in line with NCLT Rules, 2016 and recent case law.

On 07th December, 2016, Ministry of Corporate Affairs (MCA) has vide its Commencement Notification notified various sections of Companies Act, 2013 which includes arbitration, compromise, arrangements and reconstruction and winding up companies which has come into force with effect from 15th December, 2016.

The Section 66 which is the governing provision for Reduction of Share Capital of a company is one amongst those sections notified on 07th December, 2016.

Immediately, thereafter, MCA has further, notified the National Company Law Tribunal (Procedure for Reduction of Share Capital of Company) Rules, 2016 on 15th December, 2016.

What is Reduction of Capital…..?

Reduction of share capital is regarded as one of the process of decreasing company’s share capital (apart from Redemption of preference shares and Buy Back of shares which are governed by other provisions separately). The Reduction of Share Capital means reduction of issued, subscribed and paid up share capital of the company. In simple words it can be regarded as ‘Cancellation of Uncalled Capital’ i.e. part of subscribed share capital.

The need of reducing share capital may arise in various situations, few are listed below:

§  Returning of surplus to shareholders;

§  Eliminating losses, which may be preventing the payment of dividends;

§  May be as part of scheme of compromise or arrangements;

§  To simply capital structure;

Previously, reduction of share capital was governed by section 100 to 104 of the Companies Act, 1956. As per the old act, it was subjected to the confirmation of court, under new Act 2013, the said powers of court has been transferred to Tribunal (NCLT).

Reduction of Share capital can be affected in any of the following manner:

I	II	III
In respect of share capital not paid-up, extinguishing or reducing the liability on any of its shares or	Cancel any paid-up share capital, which is lost, or is not represented by available assets.	Pay off the paid-up share capital, which is in excess of the needs of the company. this may be achieved either with or without extinguishing or reducing liability on any of its shares
For example, if the shares are of face value of INR 125 each of which INR 100 has been paid, the company may reduce them to INR 100 fully paid-up shares and thus relieve the shareholders from liability on the uncalled capital of INR 25 per share);	For example, if the shares of face value of INR 100 each fully paid-up is represented by INR 75 worth of assets. In such a case, reduction of share capital may be effected by cancelling INR 25 per share and writing off similar amount of assets); or	For example, shares of face value of INR 100 each fully paid-up can be reduced to face value of INR 75 each by paying back INR 25 per share.)

After “Capital Reduction” the number of shares in the company will decrease by the reduction amount.

 Points to remember:

1.       A company constituted with limited liability by shares or guarantee and having share capital is alone entitled to reduce its liability of members. 2.       It should have the power under its Articles of Association to do so. If the articles do not contain any provision for reduction of capital, the articles must first be altered so as to give such power. 3.       Reduction is regarded as internal restructuring of company, therefore decision of majority will prevail by way of special resolution. 4.       The reduction effected by such resolution must be confirmed by the National Company Law Tribunal (‘Tribunal’) 5.       No capital reduction can be undertaken if the company is in arrears in the repayment of any deposits (including interest payable thereon) accepted by it. 6.       Reduction takes effect on registration of the documents with the Registrar of Companies. 7.       Reduction is different from Diminution of shares which is regarded as cancellation of unsubscribed share capital. 8.       Nothing in this section shall apply to buy back of  its own securities u/s 68 of the Companies Act, 2013 9.       Offenses under this section are compoundable under section 441 of the Companies Act, 2013.

What are Statutory Provisions….? (As the case may be)

•         I.            Section 66 of the Companies Act, 2013; Reduction by way of cancellation of shares
•       II.            Rule 2 to 6 of the National Company Law Tribunal (Procedure for Reduction of Share Capital of Company) Rules, 2016
•    III.            Section 61 of the Companies Act, 2013; Alteration of share capital involves reduction in authorised share capital by cancellation of shares
•     IV.            Section 230 of the Companies Act, 2013; where tribunal passes order under scheme of compromise or arrangement,
•       V.            Section 242 of the Companies Act, 2013; In the case of oppression and mismanagement
•     VI.            In case of listed company; SEBI (LODR) Regulations, 2015.

What does procedure involve….?

§  Board Resolution

§  Special Resolution subject to confirmation of NCLT

§  A statement of solvency duly signed by all the Directors

§  A statement of capital which reflects the company’s share capital as reduced Special resolution must be passed by the shareholders, supported by a solvency statement in the prescribed form.

§  Register with ROC

                                 i.            Copies of the solvency statement

                               ii.            A memorandum setting out details of the share capital MOA

                             iii.            The special resolution

                             iv.            A statement by Director confirming that the solvency statement was made not more than 15 days.

Compliances to be done on NCLT Part

1.       Application to NCLT in Form RSC-1, with following documents:

                                 i.            List of creditors, indicating their names, address and amount owed to them, class wise; duly certified by Managing Director of Company or by 2 directors in his absence, made on date not earlier than 15 days prior to the date of filing,

                               ii.            Certificates by Auditor to the effect that;

a)      the list of creditors referred above is correct as per the records of the company verified;

b)     the company is not, as on the date of filing of the application, in arrears in the repayment of the deposits or the interest thereon

c)      he accounting treatment proposed by the company for the reduction of share capital is in conformity with the accounting standards specified in section 133 or any other provisions of Act.

                             iii.            Declaration by a director of the company that the company is not, as on the date of filing of the application, in arrears in the repayment of the deposits or the interest thereon;

2.       NCLT shall within 15 days of submission of application give notice to ROC and SEBI(if listed) in Form RSC-2 and to every creditor in Form RSC-3

**Notice to creditors in Form RSC-3 shall be sent within 7 days seeking their representations and objections. ** representations and objections, if any to be made within 3 months from the date of receipt or notice and copy of such representation shall simultaneously be sent to the company

3.       Newspaper Advertisement: Form RSC-4 within 7 days of direction by NCLT in leading English and vernacular language newspaper, for seeking their representations and objections. (To be uploaded on company’s website simultaneously)

** representations and objections, if any to be made within 3 months from the date of receipt or notice and copy of such representation shall simultaneously be sent to the company

4.       Company to file an affidavit in Form RSC-5 confirming the despatch and publication of the notice within 7 days from the date of issue of such notice.

5.       Company shall send the representations and objections, if any received along with responses of the company within 7 days of expiry of period up to which objections were sought.

6.       NCLT may hold any enquiry or adjudication or claims or for hearing the objection give such directions as may deem proper with reference to securing the debts or claims of creditors who do not consent to the proposed reduction.

7.       The order confirming the reduction of share capital and approving the minute shall be in Form No. RSC – 6 on such terms and conditions as may be deemed fit.

8.       Order copy of NCLT to be filed in e-form INC 28 with ROC within 30 days of passing order.

9.       ROC shall issue certificate in Form RSC-7 to that effect.

CASE: WRINGLY INDIA PRIVATE LIMITED incorporated under Companies Act, 195 -Petitioner

(In the matter of section 100 to 104 of the Companies act, 1956)

Presently under section 66 of the Companies Act, 2013

Dated: 28^th July, 2017

§  The petition was originally filed with High Court, Delhi erstwhile under Companies Act, 1956, & matter listed dated 15/07/2016., notice of petition was simultaneously issued ROC, Regional directors and same were published in newspapers as directed

§  High court transferred same order dated 02/02/2017 after Central Government notified section 66 of the Companies Act, 2013 dated 07/12/2016 and National Company Law Tribunal (Procedure for Reduction of Share Capital of Company) Rules, 2016 dated 15/12/2017.

§  Subsequent to transfer, the matter came up for hearing dated 20/04/2017.

§  PETITION FILED: The petition was filed for reduction of  paid up capital of INR 87,42,28,200 divided into 87,42,282 (Eighty Seven Lakh Forty Two Thousand Two Hundred Eight Two)equity shares of INR 100 each up to INR 43,07,97,700 divided into 43,07,977 ( Forty Three Lakh Seven Thousand Nine Hundred Ninety Seven) equity shares of INR 100 each.

§  REASON FOR REDUCTION: Reorganizing internal share capital structure of company to wipe out accumulated losses as per last audited balance sheet of the company year ended 31^st March, 2015 which resulted in erosion of net worth of company during immediately preceding four years.

§  It was disclosed that the proposed reduction of share capital shall be carried out  by utilising balance amount of securities  premium account and amount so reduced by INR 44,34,40,500 to be transferred to Profit & Loss account to adjust accumulated loss as standing in balance sheet of year 31^st March, 2015.

§  No adverse remarks were observed from affidavits/ reports and newspapers so filed in relation to proposed reduction of share capital apart from the following material fact that

                  i.            There were only unsecured creditor as on 29/02/2016 and consents have been obtained.

                ii.            That Petitioner Company is wholly owned subsidiary WM, Wringlley Jr. Company along with two other group/ subsidiary companies a foreign entity, there reduction of capital should simultaneously comply with FEMA/ RBI regulations.

              iii.            Petitioner Company has incurred in previous financial; years continuously resulting in erosion of net worth and resorted to reduction of capital in Financial year 2010 and 2014 as well.

              iv.            Company has not filed annual returns for year-end 31^st March, 2016 with ROC

                v.            Petitioner filed rejoinder affidavit to the above facts.

Taking into consideration all the facts, hence no objections received from concerns in relation to reduction of capital of company, tribunal passed order thereby giving effect.

DISCLAIMER: The entire contents of this document have been developed on the basis of relevant information and are purely the views of the authors. Though the authors have made utmost efforts to provide authentic information however, the authors expressly disclaim all or any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document. READER SHOULD SEEK APPROPRIATE COUNSEL FOR YOUR OWN SITUATION. AUTHOR SHALL NO BE HELD LIABLE FOR ANY OF THE CONSEQUENCES DIRECTLY OR INDIRECTLY.

(Author-CS Anjali Gorsia, Company Secretary in Practice from Nagpur (Maharashtra) and can be contacted at csanjali.gorsia@gmail.com)