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Reduction of share capital is a type of change of conditions of Memorandum of a company. Here the liability of shareholder can also be reduced for the shares held by him. As a result the total share capital of the company is reduced. The financial strength, ability to do business, capacity to repay the creditors etc. of a company depends on its capital, which is of great significance. On reduction of share capital the interests of the creditors and lenders are affected. There are rigorous provisions in the Companies Act with regard to reduction of share capital for protection of creditors.

The common purpose of reduction of share capital is to cancel any paid up capital lost in accumulated losses of the company. It is also used to increase earnings or dividends per share on reduced capital base. Capital reduction is used to return surplus funds or capital to the shareholders when the company is overcapitalized. In times of slow down of According to Section 100 of the Companies Act, subject to confirmation by the Court, if permitted by its Articles a company can reduce its share capital either with or without reducing liability on any of its shares by canceling any paid up capital lost or not represented by available assets or by paying off any paid up share capital in excess of the needs of the company. A company may also reduce its share capital by reducing the liability of its members on any of its shares not fully paid up.

However, redemption of redeemable preference shares, surrender of shares, forfeiture of shares, acceptance by the company of shares as a gift and cancellation of unissued shares, purchase under an order of the Court in a scheme of arrangement or amalgamation under Sections 391-394 of the Companies Act, are not considered as reduction of share capital.

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https://books.google.co.in/books?id=MIE9fAyyPTIC&pg=PA127&dq=meaning+of+reduction+of+share+capital&hl=en&ei=H9WbTueWHtHMrQfar8CgBA&sa=X&oi=book_result&ct=result&resnum=2&ved=0CEAQ6AEwAQ#v=onepage&q=meaning%20of%20reduction%20of%20share%20capital&f=true

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