Section 66 of the Companies Act, 2013 speaks about the Capital reduction and capital reduction of the shares can be done only through a special resolution but tribunal approval is required i.e. NCLT for the purpose of Capital Reduction. A company can reduce its capital by cancelling or extinguishing the shares subject to the special resolution and approval of the National Company Law Tribunal. However, such cancellation is allowed only when issued shares remain unpaid even after the demand
A Company can not cancel its shares on account of the reason that it is paying or providing exit to the shareholders who stood unpaid on account of the delisting of Company. In a petition before the NCLT, Kolkata, Philip India moved a petition to reduce its capital by cancelling/extinguishing the shares of minority retail shareholder and company stated that since on delisting of the Company these shareholders had no opportunity to capitalize their shares therefore company is providing an exit opportunity to these shareholders and alongside administrative cost of these shareholders runs very high as company is not listed anymore. Honorable tribunals although observed many inconsistencies in the facts such as valuation given to existing shareholders is under dispute as pointed out by the respondents also and company has not effectively complied with the board resolution i.e. explanatory notice had no enough contents but without going further into the merits, court came to a conclusion that petition is not maintainable under law.
NCLT stated that Section 66 of the Companies act 2013 is in parlance to the Section 100 of the Companies Act, 1956, whereas, previous act had the provision of buy back as ground for capital reduction but section 66 of the Companies Act specifically excludes Buy-Back, therefore, legislative intent is clear and accordingly court dismissed the petition.
Therefore, Section 66 of the Companies Act, 2013, can’t be exercised for cancelling the shares via Buy Back of shares. It is to be noted Buy Back itself is a strategy when company has excess money in its balance sheet with no loans and borrowings, therefore, even to do that not only company has to be not only rich in cash but it must be debt free.
Example of Capital Reduction?
X Company has 100 thousand shares at a value of Rs.10 each i.e. issued and subscribed capital of ten lakh. Now 10 percent of these shareholders i.e. 10000 shareholders have not paid the complete amount due for their shares, therefore, Company X approached NCLT Delhi for the cancellation of these shares which shall result in the increase in the percentage of existing shareholders of the Company. Accordingly, new Capital structure will be 90 thousand shares having a value of Nine Lakh (Practically, revise share value will be higher from previous one as this 90 thousand shall represent the complete 100 percent share structure of the Company)
-Dixit Mehta, Partner, Ductus Legal
(Read NCLT KOLKATA Order: https://nclt.gov.in/gen_pdf.php?filepath=/Efile_Document/ncltdoc/casedoc/1908134078812023/04/Order-Challenge/04_order-Challange_004_172675180870465666666ec2440ed26d.pdf)
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