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Considerations and Implication of Share Capital Reduction

Considerations and Implications of Share Capital Reduction

Reduction of share capital refers to the process of decreasing a company’s issued, subscribed, and paid-up capital. This is primarily done to create a more efficient capital structure. Companies may reduce their share capital for various reasons, such as accumulated business losses, assets of reduced or doubtful value, or utilizing reserves/share premium accounts against these losses.

Power of the Company for Reduction of Share Capital

For a company to reduce its share capital, it must have the power to do so under its Articles of Association. If the articles lack such a provision, they must be altered first to grant this power. Once altered, a special resolution for reducing capital must be passed. The reduction effected by this resolution must be confirmed by the National Company Law Tribunal (NCLT). Importantly, no reduction can be undertaken if the company is in arrears in the repayment of any deposits (including interest payable thereon) accepted by it as per Section 66 of the Companies Act 2013.

Modes of Reduction of Share Capital

The Act does not prescribe specific methods for the reduction of share capital nor limits the power of the NCLT to confirm the reduction, except that the Tribunal must be satisfied that every creditor has either consented to the reduction or has been paid off or their interests have been secured. Reduction of share capital may be carried out in one of the following ways:

  1. Extinguishing or Reducing the Liability on Unpaid Shares: For instance, if shares have a face value of INR 100 each, of which INR 80 has been paid, the company may reduce them to INR 80 fully paid-up shares, relieving shareholders from the uncalled capital liability of INR 20 per share.
  2. Cancelling Paid-Up Share Capital Not Represented by Assets: For example, if shares with a face value of INR 100 each fully paid-up are represented by INR 80 worth of assets, the reduction may be effected by cancelling INR 20 per share and writing off a similar amount of assets.
  3. Paying Off Excess Paid-Up Share Capital: This can be done either with or without extinguishing or reducing liability on any of its shares. For instance, shares of face value INR 100 each fully paid-up can be reduced to INR 80 each by paying back INR 20 per share.

These examples illustrate how companies can undertake capital reduction by adjusting paid-up share capital under different scenarios.

Paid-up share capital for the purpose of capital reduction includes securities premium and capital redemption reserve.

Procedural Aspects as per Companies Act, 2013

Special Resolution

A company cannot effect share capital reduction without passing a special resolution authorized by the articles. However, in the following cases, the process under Section 66 need not be followed:

  1. Redeemable preference shares redeemed under Section 55.
  2. Forfeiture of shares for non-payment of calls, though it amounts to a reduction of capital.
  3. Cancelation of unissued shares under Section 61.
  4. Purchase of its own shares under Section 68.

Tribunal Sanction

An application to the Tribunal is necessary for obtaining sanction for reduction. Before confirming the reduction, the Tribunal must give notice to the Central Government, Registrar, SEBI (in case of listed companies), and creditors, and consider their representations. If no objections are received within three months, it is presumed there are no objections.

The Tribunal will not sanction the reduction unless it is satisfied that every creditor has consented or their debt has been secured or discharged. Also, the proposed accounting treatment must conform to the accounting standards specified in Section 133, and a certificate to that effect by the company’s auditor must be filed with the Tribunal.

The order of confirmation must be published by the company as directed by the Tribunal. The company must deliver a certified copy of the order to the Registrar within 30 days, who will register it and issue a certificate to that effect.

Reduction of Capital under Section 242

Besides Section 66, share capital reduction can occur under Section 242 of the Companies Act, 2013 in cases of oppression and mismanagement. The Tribunal can order the purchase of shares from members, leading to capital reduction.

Implications under Income-Tax Act, 1961

The reduction of share capital is considered a transfer under Section 2(47) of the IT Act and is taxable. The income received is taxable as follows:

  1. Deemed Dividend: Amounts distributed up to the extent of accumulated profits are deemed dividends under Section 2(22)(d) and subject to dividend distribution tax.
  2. Capital Gains Tax: Distribution over accumulated profits, in excess of the original cost of shares, is chargeable to capital gains tax.

Frequently Asked Questions

  1. What is reduction of share capital with consideration?

A reduction of share capital involves a company returning to its shareholders a portion of the capital originally paid to acquire shares. This payment is made directly from the company’s capital reserves.

  • What is the difference between share capital reduction and buyback?

Capital reduction decreases the total number of shares available for trading, whereas share buyback involves the company repurchasing its own shares from the market. The legal provision for a solvency statement safeguards against legal challenges in capital reduction.

  • Is capital reduction taxable?

According to the Supreme Court in one of the landmark case, the reduction in the face value of shares is considered an extinguishment of shareholders’ rights, making the amount received taxable under ‘capital gains’.

  • How does capital reduction affect share price?

Capital reduction is significant for investors as it can impact the value of their shares in a company. It may also indicate the company’s financial strength, efficiency, or growth potential. The effects of capital reduction can vary.


The reduction of share capital is a significant mechanism for companies to restructure their capital. While it involves detailed procedures and requires various approvals, it helps in repatriating surplus cash, cleaning balance sheets, enabling minority exits, and achieving an efficient capital structure. The process is subject to stringent compliance under the Companies Act, 2013, and has specific tax implications under the Income-Tax Act, 1961. With InstaFiling’s assistance, companies can confidently manage their capital restructuring, repatriate surplus cash, and achieve a streamlined and compliant capital structure. InstaFiling’s expertise ensures companies navigate legal and financial intricacies with ease, facilitating effective management of capital reduction strategies while maintaining regulatory compliance.

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