Maintenance and Reduction of Capital Principles of Corporate Finance Law

Reduction of share capital

In past, several companies like Cadbury India Limited, Phillips India Limited, UTV Software, Atlas Capco etc used selective capital reduction as a tool to give exit to dissenting minority shareholders after delisting. Selective capital reduction means reduction of the share capital of some shareholders. It may be noted that the provisions of section 66 of the Companies Act, 2013, are very wide and the 2 clauses in section 66 of the Companies Act, 2013 are illustrative and not exhaustive. Furthermore, could such a selective capital reduction have to be optional in nature?

  • In May 2022, Tendam announced a 30% capital reimbursement, costing 80 million euros.
  • In case of the over valuation of assets, the shareholding pattern remains unchanged and no payment is made to the shareholders, FEMA compliances would be minimal.
  • In our view, to the extent the company possesses “accumulated profits”, proceeds of capital reduction would be considered as a deemed dividend under Sec 2 .
  • This refers to any special trading requirements for the local or foreign business of the company, any licensing requirements, agreements with trading partners, or any other historical reason.
  • If shareholders are unhappy with the maneuver, they can appeal to the court and request a stay order.
  • This should definitely, be done in our country, which gives utmost protection to the minorities in all walks of life.

As a result, companies with shares are not allowed to reduce the capital frequently. This procedure comes under the purview of the companies act of 2006. The firm can directly propose a reimbursement in front of the board members. Firms repay the capital to minimize financial losses, deliver assets, pay dividends, or reduce market capitalization. If one, consider taxability of capital reduction as per section 115QA then companies may distribute entire accumulated profits to the shareholders via capital reduction by paying lessor tax.

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But, through the elimination of minority shareholders, by the majority for its whim and fancies the democracy loses its shine. The constitution says that no person shall be deprived of property unless it is through authority of law. Constitutions objective was only to preserve public policies, but this also could be done only by authority of law. But here in most of the cases the elimination or acquisition of shares is done for private purposes, which doesn’t substantiate the cause. An application under Section 15 of the Companies Law confirming a special resolution for reducing the share capital of a company must be made by petition.

It can be done by either taking a court order or introducing a special resolution. Under the companies act 2006, a resolution is circulated among the board members. If a creditor goes to court, they can obtain a cancellation order—this procedure takes approximately six weeks . Capital reduction is the process of reducing tradable shares. In a share buyback, the company repurchases its shares from the market. In the early 2000s, there was no capital reduction companies act, and firms had to seek a court order. Since then, board members can raise a resolution, and the firm can go ahead with capital reimbursement if approved.

Time not of the essence in sale of immovable property agreements

In this latter case, the shareholders shall be required to sell or purchase such shares they either have in excess or are short of in order to allow the exchange of old shares with new ones. Share capital reductions must be carried out in accordance with the conditions provided by law.

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Shareholders must be provided with adequate information to approve the special resolution in capital reduction process. The court-free process simplifies the procedures for reducing the company’s excess capital.

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Now, the business should be aware that any creditor or non-approving shareholder may apply to the court for cancellation of the resolution. Should this happen, the court will pass an order either confirming or canceling the resolution. A director must check the company’s state of affairs and prospects and consider all liabilities of Reduction of share capital the company in forming his opinion. Also, a director who makes a solvency statement with no reasonable grounds for the opinion expressed in it is committing a criminal offence. In addition, the new regime circumvents the obstacles for capital reduction, with the court exercising its discretion and refusing the proposed reduction.

Reduction of share capital

Based on the above arguments, one might possibly argue that section 56 should not apply to capital reduction. Also, there was no consideration received by the shareholder in lieu of reduction of share capital and hence, the Tribunal termed the shareholder’s claim as merely a notional loss which was not allowed.

Understanding Capital Reduction

The reduction of share capital is subject to any stipulations in the company’s articles that forbid or restrict a reduction. Should the company’s articles have such a rule, it is required for the company to change its articles prior to the reduction. To return excess capital to shareholders when company has issued capital more than required. In light of the above, it is therefore vital for the company to ensure that the constitution of the company authorizes the reduction of share capital. In the event where the constitution does not authorize the reduction of capital, then the procedure for amending the constitution shall first be carried out.

Reduction of share capital

Where the nominal share capital of a company is reduced by cancelling any shares, which have not been taken or agreed to be taken by any person. Where any shares are forfeited for non-payment of calls, though the forfeiture as a fact amounts to a reduction of capital. While the new Companies Act, 2013 has come into force, some of the sections including those governing are yet to be notified. Till then the provisions under the Companies Act, 1956 shall continue to apply. With 750,000 shares outstanding at a share price of $25, the company has a market capitalization of $18.75 million. The buyback program resulted in a decrease of the company’s market capitalization by $12.5 million. These reserves may be distributed to members as dividends or set off against future losses.

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