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Is Share Capital Reduction the Same as Share Buyback? A CEO’s Guide to Strategic Share Management

Reduction of share capital essentially means the reduction of issued, subscribed and paid-up capital of a company. It is one of the ways to restructure the capital structure of a company. In this article, we shall take and look at different ways capital can be reduced and the meaning entailed by it. Furthermore, we shall ascertain the difference between the reduction of share capital and the buy-back of shares.

Concept

As per section 66 of the Companies Act 2013 (“Act”), the share capital of a company can be reduced in the following ways:

  • By extinguishing or reducing the liability on any of its shares in respect of the share capital not paid-up. For example - Where the shares of a company are of face value of INR 100 each in which INR 75 has been paid, the company may reduce them to fully paid-up shares worth INR 75 each and thus relieving the shareholders from liability on the uncalled capital of INR 25 per share.

  • 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; For example - Where the shares of face value of INR 100 each fully paid-up is represented by INR 75 worth of assets. In such a case, a company may be affected by a reduction of share capital by cancelling INR 25 per share and writing off a similar amount of assets.

  • Pay-off any paid-up share capital which is in excess of the wants of the company. For example - Shares of a company with 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 to the shareholders.

    • The Act has barred any reduction of capital if the company is in arrears in the repayment of any deposits accepted by it or the interest payable thereon.

    Further formalities and compliances

  • It is pertinent to note that the reduction of capital in any of the above-mentioned ways is subject to confirmation by the National Company Law Tribunal (“NCLT”).

  • Any proposed capital reduction by the company shall conform with the accounting standards specified in section 133 of the Act for the application to be sanctioned by NCLT.

  • A special resolution needs to be passed by the shareholders of the company in the general meeting.

    • After-effects of reduction of share capital

    Post sanctioning of reduction of share capital by NCLT, a member of a company shall not be liable to any call or contribution in respect of any share held by him exceeding the amount of return 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 orders of reduction.

    Other modes of reduction of share capital

    There are other modes of reduction of share capital which does not require the Tribunal’s approval, which are listed below:

  • Where the shares are forfeited for non-payment of call money;

  • Buy-back of share shares by the company under section 68 of the Act;

  • Where redeemable preference shares are redeemed in accordance with section 55 of the Act

    • Buyback of Shares vs. Reduction of Share Capital

    one question that remains to be answered is the difference between the buy-back of shares and the reduction of share capital as prescribed under section 66 of the Act. Much to the suspense, the buy-back of shares is just an alternate means for reducing share capital, which does not require the involvement of NCLT. Section 66(6) of the Act further provides an exception for the applicability of section 66 of the Act for buy-back of shares.

    Authors: Anuroop Omkar and Aditya Raj

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