India: Capital Reduction: Procedures And Approvals Under The Companies Act 2013

INTRODUCTION

The process via which a company reduces its share capital is capital reduction. The aim is to carry out the process in a just and fair manner thereby protecting the interest of the creditors, shareholders and without hampering the working of the company. This research paper aims at finding out step- by- step procedural aspect to reduce share capital, which starts from draft proposal in order to obtain relevant approvals from various authorities. It further elucidates on the aspect of necessary approval required by a company in order to reduce the share capital. The study tries to bring out the fact that the procedure is transparent, fair, just and in conformity with the law with the help of various judicial pronouncements.

RESEARCH QUESTION

• What are the steps mentioned in section 66 of the act to carry out the process of capital reduction?
• What is the role of shareholders, creditors, NCLT and BoD in this process?

LITERATURE REVIEW

Company Law an Introduction, Avtar Singh

Dr. Avtar Singh¹ in his book has very well described all the sub sections of section 66 and laid out a trail of paramount judgements which helped in understanding the impact of share capital reduction on shareholders. The book also highlighted the concept of liability of "every person who was member of the company at the time the company got registered for reduction of capital" towards the creditors whose name was omitted by reason of ignorance from the list for the payment of debt. This helped in getting an understanding of section 271(2)² of the act as well. The book gave an insight into the duty of tribunal towards creditors and shareholders.

Company Law, Rinita Das

Author Rinita Das³ in her book has very precisely laid down the procedure of share capital reduction step by step. She further goes on to elaborate on the consequences of share reduction on a member of that company. The book also highlights the cases of violation and respective punishment for it. It has been laid down in the section that the application must be placed before the tribunal for approval. The author in her book has also pointed out the cases where such confirmation from the NCLT is not required.

National Company Law Tribunal (Practice & Procedure), Ajay Kumar

This book by Ajay Kumar⁴ turned out to be very fruitful because it helped me get a detailed insight into the various "applicable rules of NCLT". Along with that it also provides for the relevant forms to be filed pursuant to the rules. This helps a lot when it comes to drafting as it mentions all the details in the form. It further mentions case law wherein reduction of capital was allowed because it neither affected to interest of its shareholder neither had any effect on public at large and all the legal requirements were complied with⁵.

Company Law, Dr. Anik Kumar Thakur and Dr. Jyoti Rattan

The author⁶ here has shed light on the objective and benefits of reducing share capital. They further go on to explain clause 3 of section 66 with various case laws which helped get an understanding about various angels of order where the tribunal confirms the scheme employed by the company for the reduction of share capital.

DESCRIPTIVE ANALYSIS

PROCEDURE

Capital reduction is the process of decreasing a company's share capital through share cancellations and share repurchases.⁷ Section 66 of the Companies Act, 2013⁸ provides for the guidelines and procedure for reducing share capital. The capital can be either equity share capital or preference share capital. The reduction of share capital is one of the options available for withdrawal of cash in a company.⁹ But before going into the procedure of share capital reduction it must be noted that this step is taken for various reasons such as in times of crisis, demerger, restructuring of company, financial reason, improve financial health or maybe to simplify its capital structure.

1. A special resolution has to be passed by the company for reducing the share capital. The resolution must cover the details such as: amount to be reduced in the capital, reason for reducing, source of making such reduction say for example "cancellation or redemption of shares", any other terms and condition.
2. "The share capital clause" present in the Memorandum of Association (MoA) has to be amended by the company.
3. Next, an application for such capital reduction has to be filed before the tribunal namely NCLT in order to take a confirmation from them. The application must consist of the following documents: (a) record of company's creditors verified by the company's MD, (b) certificate provided by the auditor verifying the above record, (c) certificate which confirms that the accounting procedure used by the company is line with the accounting standards provided under section 133¹⁰ of the act or any other relevant provision, (d) statement given by director wherein it is approved that there has been no default at company's end while making interest payments or "repayment of deposits".
4. The NCLT further serves a notice about such reduction to concerned authorities like Central government, registrar, Securities and Exchange Board of India, creditors.
5. Once the notice is received, the four authorities mentioned above will have to give a representation within three months of receiving the notice before the tribunal. In case of failure of appearing before the tribunal, the presumption stands that the authorities have no dissatisfaction and approve the reduction of the share capital.
6. On satisfaction of tribunal with respect to the fact that all the debts of creditors have been duly discharged, the tribunal can sanction the reduction via an order. The terms and conditions have to followed which the tribunal deems fit.
7. Where proper accounting standard are not complied, the tribunal will not provide permission to the company for reducing the capital. This also applied in case where certificate containing auditor's approval for the above has not been filed.
8. The company shall publish the order of confirmation about reduction given by tribunal in the manner prescribed by the tribunal itself.
9. Memorandum of Association has to be amended by re-writing the reduced share capital and number of shares accordingly. Furthermore, AoA (Article of Association) must also be amended in appropriate manner and then adjusted properly. Then the provision relating to share capital must be modified and the "number of shares" in the company¹¹.
10. A copy of the order ought to be delivered to the Registrar which specifies the details such as: share capital amount, "number of shares into which it is divided", "amount of each share", paid up amount. Within thirty days of receiving this order, the same shall be registered and a certificate shall be issued by the Registrar.

APPROVALS

Approvals have to be obtained from shareholders, Board of directors and the National Company Law Tribunal.

Resolution must have been approved by the shareholders which is passed by BoD. The shareholders must be sent a notice informing them about the general meeting. The said notice should be sent 21 days before the proposed date of meeting. The notice must mention details such as "proposed reduction" and reason for the same. Votes are to be casted by each shareholder in order to pass the resolution.

National Company Law Tribunal on examining and being satisfied with the application that all rules and regulations have been complied to, issues an order stating approval of reduction process.

"No objection" from the creditors is also required in order to further the process of share capital production.

JUDICIAL PRONOUNCEMENTS

As laid down in Marwari Stores Ltd v. Gouri Shankar Goenka¹², the scheme employed to reduce share capital must be fair and reasonable irrespective of class of shareholders. So, in case of one class of shareholder bearing the reduction proportionality, the scheme is acceptable and confirmed.

In Josco Jewellers Pvt Ltd v. ROC¹³, the ratio was where a company wants to reduce its share capital and its paid-up capital is more than what is required for carrying out existing business, it is favourable for them to give back extra capital via reduction method. And since company has complied with all statutory procedures and no criticism has shown by any shareholder the reduction process can be allowed by NCLT.

Brillio Technologies Pvt Ltd vs. Registrar of Companies & Ors.¹⁴ It was observed that in order to making payment to non-promoter shareholder, "Security Premium Account" can be used. Selective reduction is allowed in cases where "non-promoter shareholders" are being provided with equitable value of their share. Section 66 of the companies act provides for simple way for share capital reduction free from any compromises or arrangements.

The decision of reducing capital is a domestic affair¹⁵ and in ordinary course a tribunal cannot interfere in it. NCLT's view doesn't have an overpowering effect. The decision of reduction was unanimously accepted by the shareholders with the objective of "improving their earnings per share¹⁶" and no objection was shown at the creditors' end. Necessary affidavits and documents were also submitted. In such circumstances the tribunal had to validate such a decision.

CONCLUSION

Through this research paper, a thorough analysis has been carried out on the assigned topic which broadly speaking is "process of reduction of capital under the companies Act, 2013". By reading various books by various great authors, a clear picture was established about various intricacies a company faces while carrying out the process. This picture was more cleared by reading various case laws in the book as well as from other sources. It also gave an insight into the role of NCLT and RoC (Registrar of Companies). Through various judicial pronouncements, the aim has been to highlight the importance of adhering to legal framework and to obtain the necessary approvals in order to reduce the share capital. Companies use this method as a strategy to improve and refine their capital structure and for eliminating or reducing losses while working within the four walls of the prescribed statute, sustaining their shareholders' and creditors' confidence and maintaining standards of corporate governance.

Footnotes