Reduction of Share Capital

In Indian company law, the reduction of share capital is a highly regulated process because it directly impacts the "capital cushion" that protects the company's creditors.

The general rule is that reduction of share capital cannot be made without the approval of the Tribunal (NCLT). This is governed by Section 66 of the Companies Act, 2013.

1. Reduction WITH Approval of the Tribunal (Section 66)

When a company intends to reduce its share capital in a way that involves paying back money to shareholders or reducing their liability, it must follow a strict statutory process involving the National Company Law Tribunal (NCLT).

The Procedure:

1. Articles Authorization: The company must be authorized by its Articles of Association (AoA) to reduce capital.

2. Special Resolution: A special resolution (75% majority) must be passed by the shareholders.

3. Application to NCLT: The company applies to the Tribunal for confirmation.

4. Notice to Stakeholders: The Tribunal gives notice to the Registrar of Companies (ROC), SEBI (for listed companies), and the Creditors. It seeks their objections.

5. Confirmation: If no objections are received or if the Tribunal is satisfied that the creditors' interests are secured, it issues an order confirming the reduction.

Ways of Reduction under Section 66:

• Reducing Liability: Extinguishing or reducing the liability on any shares not fully paid up (e.g., telling a shareholder they no longer need to pay the remaining ₹5 on a ₹10 share).

• Canceling Lost Capital: Writing off paid-up share capital which is lost or not represented by available assets.

• Paying off Excess Capital: Returning paid-up share capital which is in excess of the company's requirements.

2. Reductions WITHOUT Approval of the Tribunal (Exceptions)

While "Reduction of Capital" technically refers to the Section 66 process, there are specific instances where the share capital is reduced, but the approval of the Tribunal is not required. These are governed by other specific sections:

A. Buy-back of Shares (Section 68)

A company can purchase its own shares from the market. While this reduces the share capital, it does not require NCLT approval, provided the company follows the conditions under Section 68 (e.g., debt-equity ratio, authorization by AoA, and limit on percentage of capital).

B. Redemption of Preference Shares (Section 55)

When a company redeems (pays back) its redeemable preference shares in accordance with the terms of their issue, it is a reduction of capital that happens automatically by contract and statute. No NCLT intervention is needed.

C. Forfeiture of Shares

If a shareholder fails to pay "calls" on their shares, the company may forfeit those shares. This results in a reduction of the issued capital, but since it is a disciplinary action authorized by the Articles, it doesn't require the Tribunal's permission.

D. Surrender of Shares

When a shareholder voluntarily gives back their shares to the company to avoid forfeiture, it is treated similarly to forfeiture and does not require NCLT approval.

Conclusion: 

For a formal "Reduction of Share Capital" that alters the fundamental capital structure of the company, the Tribunal's approval is an absolute necessity to ensure that the company remains solvent enough to pay its debts and that the reduction is not a tool to defraud creditors.