Procedure for Reduction of Share Capital

Capital structure is the foundation of a company’s financial strength. Over time, businesses may realize that their existing share capital no longer reflects operational realities. Whether due to accumulated losses, restructuring or surplus funds, companies often need to legally reduce their share capital.

Under Section 66 of the Companies Act, 2013, a company can reduce its share capital, but only by following a detailed, transparent process that protects shareholders, creditors and public interest. 

This blog provides a fully aligned and step-by-step guide to the Procedure for Reduction of Share Capital in India, incorporating statutory requirements, NCLT rules, SEBI guidelines (for listed companies) and practical nuances.

What is Reduction of Share Capital?

Reduction of share capital means decreasing the issued, subscribed or paid-up capital of a company. It is governed by:

• Section 66, Companies Act, 2013
• Section 52 (Securities Premium)
• NCLT (Procedure for Reduction of Share Capital of Company) Rules, 2016

It requires approval of:

• Board of Directors
• Shareholders (Special Resolution)
• NCLT
• Stock Exchanges + SEBI (for listed entities)

When Do Companies Opt for Reduction of Share Capital?

Companies undertake capital reduction for reasons such as:

• Adjusting accumulated losses by cancelling capital not represented by assets.
• Paying off excess capital.
• Extinguishing / reducing liability on partly-paid shares.
• Restructuring post-merger/demerger.
• Correcting capital structure for better investor ratios.
• Eliminating non-recoverable receivables.
• Returning surplus funds to shareholders.

Legal Provisions Governing Capital Reduction

Capital reduction must comply with: -

• Section 66 – Reduction of share capital
• Section 52 – Utilization of securities premium
• NCLT Rules, 2016 (Rules 2–6)
• SEBI Regulations (for listed companies)
• Stock Exchange Requirements
• Company must NOT be in arrears in payment of deposits and interest.

Methods of Capital Reduction

The Companies Act permits reduction through:

(A) Extinguishing or Reducing Liability on Shares

For partly-paid shares — cancel the unpaid portion.

(B) Cancelling Paid-up Capital Not Represented by Assets

Used for wiping out accumulated losses (e.g., ₹10 face value reduced to ₹5).

(C) Paying Off Excess Capital

If the company has surplus funds, capital is returned to shareholders.

(D) Selective Capital Reduction

Only certain shareholders are affected. Must be fair and non-prejudicial.

Step-by-Step Procedure for Reduction of Share Capital 

This incorporates all official requirements and additional steps for listed companies.

Step 1: Check Articles of Association

Ensure AOA contains the power to reduce capital.

If not → pass special resolution to amend AOA.

Step 2: Decide the Mode of Capital Reduction

Choose from:

• Extinguishing liability
• Cancelling capital lost/unrepresented
• Paying off excess capital

If payout is involved → appointment of Registered Valuer is mandatory.

Step 3: Appoint a Registered Valuer

(Board Meeting / Circular Resolution)

Valuer determines payout amount for reduction scheme.

Step 4: Notice for Board Meeting

Issue notice at least 7 days in advance (unless shorter notice with consent).

Step 5: Prior Intimation to Stock Exchanges (Listed Companies Only)

At least 2 working days before the Board Meeting.

(Private companies → Not applicable)

Step 6: Closing of Trading Window (Listed Companies Only)

Step 7: Board Meeting

Approve:

• Draft Capital Reduction Scheme
• Appointment of professionals (CS/CA/CMA/Advocate)
• Notice of General Meeting with Explanatory Statement
• Filing requirements

Step 8: Intimate Stock Exchanges (Listed Companies Only)

Outcome must be informed within 30 minutes of Board Meeting.

Step 9: Issue General Meeting Notice

Serve to all shareholders. Postal ballot permissible.

Step 10: File MGT-14 for Board Resolution (Listed Companies Only)

Step 11: File Draft Scheme with Stock Exchanges for NOC

Before filing RSC-1 with NCLT.

Step 12: Hold General Meeting

Pass Special Resolution approving capital reduction.

Step 13–14: Stock Exchange Disclosures (Listed Companies)

• Outcome of General Meeting (within 12 hours)
• Voting results (within 2 working days)

Step 15: File MGT-14 for Special Resolution (All Companies)

Step 16: File NCLT Application – Form RSC-1

Along with:

• Affidavit verifying petition
• List of creditors (certified by MD / 2 directors)
• Auditor’s certificate verifying list
• Certificate: No default in deposits
• Auditor certificate: accounting treatment compliant with AS
• MOA & AOA
• Last 3 years audited financial statements
• Valuation report
• Updated financial statements (not older than 15 days)

Step 17: Keep List of Creditors at Registered Office

Inspection allowed during business hours.

Step 18: NCLT Admission Hearing

Step 19: NCLT Issues Notices (Form RSC-2 / RSC-3)

To:

• RD (Central Government delegate)
• ROC
• SEBI (for listed companies)
• Creditors

Step 20: Company Issues Creditor Notices (Within 7 Days)

Includes:

• Details of reduction
• Estimated debt amount
• Objection timeline

Step 21: Newspaper Advertisement (Form RSC-4)

English + Vernacular + Website publication.

Step 22: Filing Affidavit of Dispatch & Publication (Form RSC-5)

Within 7 days.

Step 23: NCLT May Dispense Notices

If debts are secured, settled or creditors consent.

Step 24: Objection Window

Creditors/Govt may file objections within 3 months of publication.

Step 25: Company Submits All Objections + Replies

Within 7 days after objection period ends.

Step 26: NCLT Hearing & Directions

Step 27: NCLT Decision

NCLT may order:

• Enquiry
• Adjudication of claims
• Securing dissenting creditors

Step 28: NCLT Order Confirming Reduction (Form RSC-6)

With terms and conditions.

Step 29–30: Stock Exchange Disclosures (Listed Companies)

Step 31: File NCLT Order with ROC – Form INC-28

Step 32: ROC Issues Certificate – Form RSC-7

Step 33: Give Effect to Reduction

• Payoff to shareholders (if applicable)
• Pass accounting entries
• Adjust securities premium / losses

Step 34: Fix Record Date (Listed Companies)

Minimum 7 working days’ notice.

Step 35–36: Update Share Certificates / Corporate Actions

• Issue new share certificates (Form SH-1)
• Corporate action for demat shares

Step 37: Update MOA (If Capital Clause Changes)

Special Resolution required.

Step 38: Submit Altered MOA to Stock Exchange (Listed Companies)

Step 39: Make Payment or Pass Accounting Entries

Depending on the nature of reduction.

Steps Not Applicable to Private Companies

5, 6, 8, 10, 11, 13, 14, 29, 30, 34, 38

Documents Required

• MOA & AOA.
• List of creditors.
• Auditor certificates.
• Valuation report.
• Financial statements (3 years)
• Updated balance sheet.
• Board & Special Resolutions.
• Affidavits, petitions, advertisements.
• Forms MGT-14, RSC-1, RSC-2, RSC-4, RSC-5, RSC-6, INC-28.

Timeline for Capital Reduction

Approx. 3 to 6 months, depending on following factors: -

• NCLT workload.
• Number of creditors.
• Objections.
• Listed-company additional procedures.

Key Compliance Points

• No arrears on deposits.
• Procedure must not defraud creditors.
• Selective reduction must be fair.
• Correct accounting treatment required.
• Mandatory disclosures for listed companies.
• ROC filings must be timely.

Benefits of Capital Reduction

• Cleans up Balance Sheet.
• Improves the Financial Ratios.
• Enables Return of Surplus Funds.
• Facilitates the process of Restructuring.
• Strengthen Investor Appeal.

Conclusion

Reduction of share capital is a powerful restructuring tool under the Companies Act, 2013, but it requires meticulous compliance with NCLT procedures, creditor protection, SEBI regulations and ROC filings. By following the complete statutory framework, companies can legally reorganize their equity, improve financial strength and return value to shareholders. If you require any professional help from CRSPL Business Consultants then do contact us, we will assist you with our experience.