Capital reduction is the process of decreasing a company’s shareholder equity through share cancellations and share repurchases, also known as share buybacks. The reduction of capital is done by companies for numerous reasons, including increasing shareholder value and producing a more efficient capital structure.
A company may want to reduce its share capital for various reasons, including to create distributable reserves to pay a dividend or to buy back or redeem its own shares; to reduce or eliminate accumulated realised losses in order to be able to make distributions in the future; to return surplus capital to shareholders; …
First, share buybacks reduce the number of shares outstanding. Once a company purchases its shares, it often cancels them or keeps them as treasury shares and reduces the number of shares outstanding in the process. Moreover, buybacks reduce the assets on the balance sheet, in this case, cash.
A company limited by shares or limited by guarantee and having a share capital may, reduce the share capital by passing a special resolution, subject to the confirmation by the Tribunal (NCLT) and alter its memorandum by reducing the amount of its share capital and of its shares accordingly.
Who approved the scheme of capital reduction?
14.3. The Scheme being approved by the creditors of the Company, as prescribed under the Act and / or as may be directed by the NCLT and / or any other Appropriate Authority as may be applicable.
What is the objective of capital reduction?
Capital reduction can be used as a tool to achieve various company objectives: Paying dividends: The most common objective is the payment of dividends. Capital reduction allows the elimination of accumulated losses, which would otherwise prevent the payment of dividends, to create distributable reserves.
How do you calculate capital reduction?
For e.g: if the shares of face value of INR 100 each fully paid-up is represented by Rs. 75 worth of assets. In such a case, reduction of share capital may be effected by cancelling Rs. 25 per share and writing off similar amount of assets.
The main reason for doing a share split is to improve the liquidity in the company’s shares. For instance, an owner of just 1 ordinary share with nominal value of £1 cannot sell half a share but if there were 100 ordinary shares with nominal value of 1p each the owner could choose to sell 50 shares.
A share buy-back, on the other hand, is when a company acquires shares in itself from existing shareholders, and then cancels these shares. A reduction in share capital occurs when any money paid to a company in respect of a member’s shares is returned to the member.
Unlike a share buyback, which any shareholder may choose not to accept, a capital reduction will, once passed by the requisite 75 percent shareholder majority, be binding on all shareholders and ensure a more definitive outcome for companies which are doing so primarily to improve their capital structure.
A company can reduce its share capital by: (1) reducing or extinguishing the liability on any of its shares not paid-up (2) with or without extinguishing or reducing liability on any of its shares (3) cancelling any paid up capital which is lost or is unrepresented by available assets (4) paying off any paid-up share …
When any company reduces the share capital as per the provisions of the Companies Act, 2013 by way of reducing the face value of shares or by way of paying off part of the share capital, it amounts to extinguishment of the rights of the share holder to the extent of reduction of share capital.