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What do you mean by Reduction of Share Capital?

Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 kruthika asked over 2 years ago

Hi I am Studying for CA exam. Can I know, What do you mean by Reduction of Share Capital?

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4 Answers
Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 veeru answered over 2 years ago

Section 100 of Companies Act, provides for a company limited by shares or a company limited by guarantee and having a share capital subject to confirmation by the Tribunal, may, if so authorized by its articles, by special resolution, reduce its share capital in any way, and in particular and without prejudice to the generality of the foregoing power, may (a) extinguish or reduce the liability on any of its shares in respect of share capital not paid-up; (b) either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up share capital which is lost, or is unrepresented by available assets;

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 shalu answered over 2 years ago

Section 66. (1) Subject to confirmation by the Tribunal on an application by the company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital in any manner and in particular, may— (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,— (i) cancel any paid-up share capital which is lost or is unrepresented by available assets; or (ii) pay off any paid-up share capital which is in excess of the wants of the company, alter its memorandum by reducing the amount of its share capital and of its shares accordingly: Provided that no such reduction shall be made if the company is in arrears in the repayment of any deposits accepted by it, either before or after the commencement of this Act, or the interest payable thereon. (2) The Tribunal shall give notice of every application made to it under sub-section (1) 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: Provided that where no representation has been received from the Central Government, Registrar, the Securities and Exchange Board or the creditors within the said period, it shall be presumed that they have no objection to the reduction. (3) The Tribunal may, if 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, make an order confirming the reduction of share capital on such terms and conditions as it deems fit: Provided that no application for reduction of share capital shall be sanctioned by the Tribunal unless the accounting treatment, proposed by the company for such reduction is in conformity with the accounting standards specified in section 133 or any other provision of this Act and a certificate to that effect by the company’s auditor has been filed with the Tribunal. (4) The order of confirmation of the reduction of share capital by the Tribunal under sub-section (3) shall be published by the company in such manner as the Tribunal may direct. (5) The company shall deliver a certified copy of the order of the Tribunal under subsection (3) and of a minute approved by the Tribunal showing— (a) the amount of share capital; (b) the number of shares into which it is to be divided; (c) the amount of each share; and (d) the amount, if any, at the date of registration deemed to be paid-up on each share, to the Registrar within thirty days of the receipt of the copy of the order, who shall register the same and issue a certificate to that effect. (6) Nothing in this section shall apply to buy-back of its own securities by a company under section 68. (7) A member of the company, past or present, shall not be liable to any call or contribution in respect of any share held by him exceeding the amount of difference, if any, between the amount paid on the share, or reduced amount, if any, which is to be deemed to have been paid thereon, as the case may be, and the amount of the share as fixed by the order of reduction. (8) Where the name of any creditor entitled to object to the reduction of share capital under this section is, by reason of his ignorance of the proceedings for reduction or of their nature and effect with respect to his debt or claim, not entered on the list of creditors, and after such reduction, the company is unable, within the meaning of sub-section (2) of section 271, to pay the amount of his debt or claim,— (a) every person, who was a member of the company on the date of the registration of the order for reduction by the Registrar, shall be liable to contribute to the payment of that debt or claim, an amount not exceeding the amount which he would have been liable to contribute if the company had commenced winding up on the day immediately before the said date; and (b) if the company is wound up, the Tribunal may, on the application of any such creditor and proof of his ignorance as aforesaid, if it thinks fit, settle a list of persons so liable to contribute, and make and enforce calls and orders on the contributories settled on the list, as if they were ordinary contributories in a winding up. (9) Nothing in sub-section (8) shall affect the rights of the contributories among themselves. (10) 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. (11) If a company fails to comply with the provisions of sub-section (4), it shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees.

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 CA Sandeep Bohra answered over 2 years ago

> Reduction of Share Capital **Definition** --The process of decreasing a company's shareholder equity through share cancellations and share repurchases. The reduction of capital is done by companies for numerous reasons including increasing shareholder value and producing a more efficient capital structure. --After a capital reduction, the number of shares in the company will decrease by the reduction amount. In some capital reductions, shareholders will receive a cash payment for shares cancelled - but, in other situations, there is minimal impact on shareholders --A reduction of share capital occurs when any money paid to a company in respect of a member's share is returned to the member. **--The most common reasons why a company may want to reduce its capital are:** --To increase or to create distributable reserves to enable future dividends to be paid to shareholders --To return surplus capital to shareholders --To facilitate a share buyback or redemption of shares, or --As part of a scheme of arrangement Comparative Analysis: Reduction of Share Capital without sanction of the Tribunal: 1. Surrender of Shares – It means the surrender of shares already issued to the company by the registered holder of shares. Where shares are surrendered to the company, whether by way of settlement of a dispute or for any other reason, it will have the same effect as a transfer in favour of the company and the amount to a reduction of capital. The Companies Act contains no provision for Surrender of Shares. Thus surrender of shares is valid only when Articles of Association provide for the same and: A. Where forfeiture of such shares is justified B. When shares are surrendered in exchange for new shares of same nominal value. **2. Forfeiture of Shares** – A company may if authorized by its articles, forfeit shares for non-payment of calls and the same will not require confirmation of the court. Where power is given in the Articles, it must be exercised strictly in accordance with the regulations regarding notice, procedure and manner stated therein; otherwise the forfeiture will be void. Forfeiture will be affected by means of Board resolution. **3. Diminution of Capital –** Where the company cancels shares which have not been taken or agreed to be taken by any person.[Section 94(1)(3) ] 4. Redemption of redeemable preference shares 5. Purchase of shares of a member by the company under Section 402 6. Buy back of its own shares under Section 77A of companies Act.

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Open uri20170510 32134 1uwcnoc?1494421631 Shubhangi Jain answered over 2 years ago

Reduction of Share Capital -------------------------- It means reduction of issued, subscribed and paid – up capital of the company. Section 100 of Companies Act, provides for a company limited by shares or a company limited by guarantee and having a share capital subject to confirmation by the Tribunal, may, if so authorized by its articles, by special resolution, reduce its share capital in any way, and in particular and without prejudice to the generality of the foregoing power, may (a) extinguish or reduce the liability on any of its shares in respect of share capital not paid-up; (b) either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up share capital which is lost, or is unrepresented by available assets; or (c) either with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share capital which is in excess of the wants of the company; and may, if and so far as is necessary alter its memorandum by reducing the amount of its share capital and of its shares accordingly. **Reduction of Share Capital without sanction of the Tribunal:** ---------------------------------------------------------------- **1. Surrender of Shares** – It means the surrender of shares already issued to the company by the registered holder of shares. Where shares are surrendered to the company, whether by way of settlement of a dispute or for any other reason, it will have the same effect as a transfer in favour of the company and the amount to a reduction of capital. The Companies Act contains no provision for Surrender of Shares. Thus surrender of shares is valid only when Articles of Association provide for the same and: A. Where forfeiture of such shares is justified B. When shares are surrendered in exchange for new shares of same nominal value. **2. Forfeiture of Shares** – A company may if authorized by its articles, forfeit shares for non-payment of calls and the same will not require confirmation of the court. Where power is given in the Articles, it must be exercised strictly in accordance with the regulations regarding notice, procedure and manner stated therein; otherwise the forfeiture will be void. Forfeiture will be affected by means of Board resolution. **3. Diminution of Capital** – Where the company cancels shares which have not been taken or agreed to be taken by any person.[Section 94(1)(3) ] **4. Redemption of redeemable preference shares** **5. Purchase of shares of a member by the company under Section 402** **6. Buy back of its own shares under Section 77A of companies Act.** Reduction of Capital when the Company is defunct ------------------------------------------------ The Registrar of Companies has been empowered under Section 560 of Companies Act to strike off the name of defunct company from its register where he has reasonable cause to believe that a company is not carrying on business or in operation. Reduction of Capital of Unlimited Company ----------------------------------------- An unlimited company to which Section 100 of Companies Act does not apply can reduce its capital in any manner that its MOA and AOA allow. It is not governed by Section 94 and 100 of Companies Act. Creditors’ Right to obtain to Reduction --------------------------------------- The creditors having a debt or claim admissible in winding up are entitled to object. To enable them to do so, the Court will settle a list of creditors entitled to object. If any creditor objects, then either his consent to the proposed reduction should be obtained or he should be paid off or his payment be secured. The Tribunal, in deciding whether or not to confirm the reduction will take into consideration the minority shareholders and creditors.(Section 101 of Companies Act)

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