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Reasons for alteration and reduction in share capital

Ankit Agrawal (chartered accountant ) (67 Points)

03 September 2013

Dear all members,

please tell what are the reasons for companies to alteration and reduction in their share capital.

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Ajay Mishra (Company Secretary) (74332 Points)
Replied 03 September 2013

A company may alter its share capital Clause by any of the following ways:—

(i) Increase in the authorised share capital;

(ii) Increase in the share capital in accordance with the orders of the Central Government;

(iii) Consolidation and division of share capitals;

(iv) Conversion of fully paid-up shares into stock;

(v) Re-conversion of stock into fully paid-up shares;

(vi) Sub-division of shares or any of them into smaller amount;

(vii) Cancellation or diminution of share capital;

(viii) Reduction in share capital;

(ix) Redemption of any redeemable preference shares.

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Ajay Mishra (Company Secretary) (74332 Points)
Replied 03 September 2013

Reduction of paid up share capital by the sanction of the High Court/Tribunal

Section 100 stipulates that a limited company having share capital or a company limited by guarantee and having share capital may if so authorised by its Articles of Association, reduce its paid up share capital by passing special resolution in general meeting subject to obtaining consent of the High Court [Powers being given to the Tribunal as per the Companies (Second Amendment) Act, 2002]. The Articles must provide the powers for reduction of share capital of the company otherwise these will have to be altered so as to vest power to the company. The resolution passed by a company to reduce its paid up share capital shall be subject to the confirmation of the High Court/Tribunal.

A company may reduce its share capital in the following circumstances:—

(a) Capital is in excess of its needs:—

(i) by reduction of liability of its members in respect of uncalled or unpaid share capital;

(ii) by extinguishments of liability of members in respect of uncalled or unpaid amount of share capital;

(iii) by paying back or reducing the paid up share capital;

(iv) by payment of part of the paid up share capital on the conditions that it may be called again.

(b) Suffering of loss of capital by company.

Surrender of shares amounts to reduction of capital; it is open neither to shareholder to surrender shares, nor to company to accept such surrender. [Collector of Moradabad v Equity Insurance Co. Ltd. (1948) 18 Comp Cas 309 (Oudh)].

Ajay Mishra (Company Secretary) (74332 Points)
Replied 03 September 2013

Reduction of paid up share capital without sanction of the High Court/Tribunal

All types of reduction of paid up share capital are not within the purview of the provisions of section 100 of the Companies Act, 1956. The following categories of reduction of paid up share capital are out of the ambit of the provisions of section 100 and need not follow the procedure therein and reduction may take place in such cases without obtaining sanction of the High Court/Tribunal:—

(a) Forfeiture of partly paid-up shares;

(b) Redemption of redeemable preference shares;

(d) Purchase of shares by a company on order of the High Court/Tribunal;

(e) Buy back of Securities from its members. [Section 77A]

If a company in voluntary liquidation, after repaying its preference and ordinary share capital is revived with fresh share capital, which is less than earlier capital, it does not amount to reduction of capital. [Mcleod & Co. v S.K. Ganguly (1975) 45 Comp Cas 563 (Cal)].

When the capital is reduced by canceling any paid-up share capital, which is lost or is otherwise unrepresented by available assets, it is not mandatory to follow the procedure prescribed in sub-section (2) of section 101 unless the Court so directs. [Maneckchowk & Ahmedabad Mfg. Co. Ltd., In re (1970) 40 Comp Cas 819 (Guj)].

If an amount received by a company was not towards share capital, but was wrongly shown as such in balance sheet, provisions of sections 100 to 103 are not attracted when that amount is repaid. [Rupak Ltd. v Registrar of Companies (1984) 56 Comp Cas 206 (Pat)].