Reduction of Share Capital – An Overview & Check-list
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1. INTRODUCTION
The need of reducing share capital may arise in various
circumstances, for example, accumulated business losses, assets of reduced or
doubtful value, etc. As a result, the original capital may either have become
lost or a company may find that it has more resources that it can profitably
employ. In either of these cases, the need may arise to reduce the share
capital.
2. COMPANIES ACT, 2013
While the new Companies Act, 2013 has come into force,
some of the sections including those governing reduction of share capital are
yet to be notified. Till then the provisions under the Companies Act, 1956
shall continue to apply.
The provisions relating to capital reduction under the
new Companies Act, 2013 are as under:
2.1 Power of the company for
reduction of share capital
For a company to reduce its share capital, it should have
the power under its Articles of Association to do so. If the articles do not
contain any provision for reduction of capital, the articles must first be
altered so as to give such power and then the special resolution for reducing
capital must be passed. The reduction effected by such resolution must be
confirmed by the National Company Law Tribunal (‘Tribunal’). No capital
reduction can be undertaken if the company is in arrears in the repayment of
any deposits (including interest payable thereon) accepted by it. [Section 66]
2.2 Modes of reduction of
share capital
The Act does not prescribe the manner in which the
reduction of capital is to be effected nor is there any limitation on the power
of the Tribunal to confirm the reduction, except that it must be satisfied that
every creditor of the company has either consented to the said reduction or
they have been paid off or their interest has been secured.
Reduction of share capital may
be effected in one of the following ways:
1. In respect of share capital
not paid-up, extinguishing or reducing the liability on any of its shares. (For
example, if the shares are of face value of INR 100 each of which INR 75 has
been paid, the company may reduce them to INR 75 fully paid-up shares and thus
relieve the shareholders from liability on the uncalled capital of INR 25 per
share); or
2. Cancel any paid-up share
capital, which is lost, or is not represented by available assets. This may be
done either with or without extinguishing or reducing liability on any of its
shares (For example, if the shares of face value of INR 100 each fully paid-up
is represented by INR 75 worth of assets. In such a case, reduction of share
capital may be effected by cancelling INR 25 per share and writing off similar
amount of assets); or
3. Pay off the paid-up share
capital, which is in excess of the needs of the company. This may be achieved
either with or without extinguishing or reducing liability on any of its
shares. (For example, shares of face value of INR 100 each fully paid-up can be
reduced to face value of INR 75 each by paying back INR 25 per share.)
Paid-up share capital for the purpose of capital
reduction would include securities premium and capital redemption reserve.
3. PROCEDURAL ASPECTS AS PER
COMPANIES ACT, 2013
3.1 Special Resolution
Unless a special resolution, as authorised by the
articles, is passed for reduction of share capital, a company cannot effect
share capital reduction.
However, in the following cases there is no need to
follow the process as provided in section 66,
1. Where redeemable preference
shares are redeemed in accordance with the provisions of sections 55.
2. Where any shares are forfeited
for non-payment of calls, though the forfeiture as a fact amounts to a
reduction of capital.
3. Where the nominal share
capital of a company is reduced by cancelling any shares, which have not been
taken or agreed to be taken by any person. (Section 61)
4. Where company purchases its
own shares in accordance with provisions of section 68.
3.2 Tribunal Sanction
5. Next step would be to make an
application to the Tribunal for obtaining the sanction to reduction. Before
confirming the reduction the Tribunal shall give notice of the application to
the Central Government, Registrar and SEBI (in case of listed companies) and
creditors of the company and take into consideration their representations.
6. If no representation is
received from the Central Government, Registrar, SEBI or the creditors within
the period of 3 months, it would be presumed that they have no objection to the
reduction.
7. The Tribunal will not sanction
the scheme unless :
8. It is satisfied that every
creditor of the company has either consented to the said reduction or their
debt/claim has been secured or discharged.
9. The accounting treatment,
proposed by the company for such reduction is in conformity with the accounting
standards specified in section 133 or any other provision of this Act and a
certificate to that effect by the company’s auditor has been filed with the
Tribunal
10.
The order of
confirmation of the reduction of share capital by the Tribunal is to be
published by the company in such manner as the Tribunal may direct.
- The company has to
deliver the certified copy of the order of the Tribunal to the Registrar
within 30 days of the receipt of the copy of the order, who shall register
the same and issue a certificate to that effect.
4. REDUCTION OF CAPITAL UNDER
SECTION 242
Apart from reduction of capital under section 66, there
is another circumstance, when share capital can be reduced. In the case of
oppression and mismanagement, the Tribunal has been given powers under section
242 to pass an order as it thinks fit which may provide for purchase of shares
of any members by the company and consequent reduction of the share capital.
5. IMPLICATIONS UNDER
INCOME-TAX ACT, 1961 (‘IT Act’)
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 shareholder to the extent of reduction of
share capital. Therefore it is regarded as transfer under section 2(47) of the
IT Act and would be chargeable to tax.
The income received on capital reduction would be taxable
as under:
- Amounts distributed by
the company on capital reduction to the extent of its accumulated profits
will be considered as deemed dividend under section 2(22)(d) and the
company will have to pay dividend distribution tax on the same,
- Distribution over and
above the accumulated profits, in excess of original cost of acquisition
of shares would be chargeable to capital gains tax in the hands of the
shareholders.
Slump Sale
Meaning of REDUCTION OF CAPITAL UNDER SECTION 242
In simple words, ‘slump sale’ is nothing but transfer of
a whole or part of business concern as a going concern; lock, stock and barrel.
As per section 2(42C) of Income -tax Act 1961, ‘slump sale’ means the transfer
of one or more undertakings as a result of the sale for a lump sum
consideration without values being assigned to the individual assets and
liabilities in such sales.
‘Undertaking’ has the same meaning as in Explanation 1 to
section 2(19AA) defining ‘demerger’. As per Explanation 1 to section 2(19AA),
‘undertaking’ shall include any part of an undertaking or a unit or division of
an undertaking or a business activity taken as a whole, but does not include
individual assets or liabilities or any combination thereof not constituting a
business activity.
Explanation 2 to section 2(42C) clarifies that the
determination of value of an asset or liability for the payment of stamp duty,
registration fees, similar taxes, etc. shall not be regarded as assignment of
values to individual assets and liabilities. Thus, if value is assigned to land
for stamp duty purposes, the transaction will be a qualifying slump sale under
section 2(42C)
A sale in order to constitute a slump sale must satisfy
the following quick test:
1. Business is sold off as a
whole and as a going concern
2. Sale for a lump sum
consideration
3. Materials available on record
do not indicate item-wise value of the assets transferred
Analysis of the above definitions
1. The subject matter of slump
sale shall be an undertaking of an Assessee.
2. An ‘undertaking’ may be owned
by a corporate entity or a non-corporate entity, including a professional firm.
3. Slump sale may be of a single
undertaking or even more than one undertaking.
4. The undertaking has to be
transferred as a result of sale.
5. The consideration for transfer
is a lump sum consideration. This consideration should be arrived at without
assigning values to individual assets and liabilities. The consideration may be
discharged in cash or by issuing shares of Transferor Company.
6. Possibility of identification
of price attributable to individual items (plant, machinery and dead stock)
which are sold as part of slump sale, may not entitle a transaction to be
qualified as slump sale — CIT
vs. Artex Manufacturing Co., [227 ITR 260 (SC)]. However, in case of
slump sale which includes land/building where separate value is assigned to it
under the relevant stamp duty legislation, the slump sale will not be adversely
affected in the light of Explanation 2 to section 2(42C).
7. Transfer of assets without
transfer of liabilities is not a slump sale
Taxability of gains arising on slump sale
Section 50B of the Income-tax Act, 1961 provides the
mechanism for computation of capital gains arising on slump sale. On a plain
reading of the Section, some basic points which arise are:
1. Section 50B reads as ‘Special
provision for computation of capital gains in case of slump sale’. Since slump
sale is governed by a ‘special provision’, this section overrides all other
provisions of the Act.
2. Capital gains arising on
transfer of an undertaking are deemed to be long-term capital gains. However,
if the undertaking is ‘owned and held’ for not more than 36 months immediately
before the date of transfer, gains shall be treated as short-term capital
gains.
3. Taxability arises in the year
of transfer of the undertaking.
4. Capital gains arising on slump
sale are calculated as the difference between sale consideration and the net
worth of the undertaking. Net worth is deemed to be the cost of acquisition and
cost of improvement for section 48 and section 49 of the Act.
5. As per section 50B, no
indexation benefit is available on cost of acquisition, i.e., net worth.
6. In case of slump sale of more
than one undertaking, the computation should be done separately for each
undertaking.
‘Net Worth’
Net worth is defined in Explanation 1 to section 50B as
the difference between ‘the aggregate value of total assets of the undertaking
or division’ and ‘the value of its liabilities as appearing in books of
account’. This amendment has made it clear that the slump sale provisions apply
to a non-corporate entity also.
The ‘aggregate value of total assets of the undertaking
or division’ is the sum total of:
1. WDV as determined u/s.43
(6)(c)(i)(C) in case of depreciable assets.
2. The book value in case of
other assets.
Companies Act implications
Section
180 of the Companies Act, 2013 imposes restrictions on the powers of the Board. One of the
restrictions is ‘to sell, lease or otherwise dispose of the whole or
substantially the whole of the undertaking of the company or where the company
owns more than one undertaking, of the whole or substantially the whole of any
of such undertakings.’
Therefore, in case of slump sale, section 180 shall get attracted and a
special resolution of the members shall be required.
For the purpose of this section, ‘undertaking’ shall mean
an undertaking in which investment of the company exceeds 20% of its net worth
or which generates 20% of the total income.
‘Substantially the whole of the undertaking’ shall mean
20% or more of the value of undertaking.
Courtesy -Bombay Chartered Accountants’ Society
