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Methods of Reduction in Share Capital

(Methods of Reduction of Share Capital) With the permission of the Tribunal, the reduction in share capital can be done by any of the following methods:

1. By Extinguishing or Extinguishing the liability on the shares in respect of the paid-up capital, the liability on the shares can be abolished or reduced in respect of the paid-up capital to reduce the share capital.

 

Example- A company has Rs 8 per share paid up on its shares of face value of ₹ 10. The paid-up capital of this company is ₹2 per share. The company can liquidate the liability of ₹ 2 per share in respect of this paid up capital. By doing this the capital of the company will be reduced by ₹ 2 per share. If the company so desires, the unpaid capital liability may be reduced by ₹ one per share and the remaining ₹ one more.

 

2. By canceling the lost paid up capital, the company may also cancel or write off its lost paid up capital or the paid up capital which is unrepresented by the available assets to reduce its capital. Is. In this way the liability on the shares may or may not be abolished while reducing the capital.

 

Example- All the shares of a company with a face value of ₹ 10 are fully paid-up, but due to heavy losses in the company, 70% of its capital has been lost. In other words, there is no asset to represent 70% of capital. One option in such a situation is that the company can convert the fully paid-up shares of ₹10 into fully paid-up shares of ₹3. This will reduce the capital of the company and no additional liability of the shareholders will also arise. Another option is that the company may consider those shares to be ₹ 3 per share paid-up on those shares, keeping the face value of the shares at ₹ 10. In such a situation, the liability of the shareholders to pay ₹ 7 per share will remain. By doing this only there will be a reduction in the paid up share capital, there will be no reduction in the issued and paid up capital.

 

3. By paying off the excess paid-up capital, the company can also return the excess capital out of its paid-up capital to the shareholders to reduce its capital. While doing so, the company may or may not eliminate the liability on the shares. Example- A company has fully paid-up shares of face value of ₹ 10 in its capital. that company

 

It has earned a lot of profit, as a result, it has accumulated more money than it needs. Hence the company decides to return ₹ 5 per share to its shareholders. This will result in overpayment of capital. While doing so, if the company also reduces the face value of its shares to ₹ 5 per share, then the liability of the shareholders will be reduced forever and the issued and paid-up capital of the company will decrease, but if the company keeps the face value of the shares the same. the member will continue to be liable to pay ₹ 5 per share. This will not reduce the issued capital of the company but the paid-up capital will be less than ₹ 5 per share.

 

Process of Reduction in Share Capital- The following procedure is adopted for reduction in share capital.

(1) The Articles to have rights- A company may do so in the share capital only if the Articles have the right to do so.

(2) Passing of special resolution – To reduce the share capital, the company has to pass a special resolution. The share capital cannot be reduced without passing a special resolution.

(3) Application for the approval of the Tribunal For the reduction of share capital by the company, it is necessary to take the approval of the Tribunal. For this the company has to apply before the Tribunal.

 

(4) Intimation by the Tribunal- After receiving the application, the Tribunal shall see whether the public deposit amount and the interest due thereon have been paid by the company. Thereafter, the Tribunal shall inform the application received by- (i) the Central Government, (ii) the Registrar of Companies, (iii) SEBI (if the company is listed) and (iv) the creditors of the company.

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