Reduction of Share Capital of a Private Limited Company

13 April 2020 • Pulkit Agarwal


Reduction of Share Capital of a Private Limited Company

13 April 2020 • Pulkit Agarwal

For a company limited by shares, the creditors of the company rely on the capital invested by the shareholders or the net worth of the company. Whenever, a creditor gives loan to the company, he analyses the source of funds and application thereof. Any reduction of share capital diminishes the funds out of which the creditors are to be paid. A company limited by shares, therefore is not allowed to reduce the share capital. But, in certain cases, the law allows to reduce the share capital of the company after taking due care of the creditors of the company in case of any reduction of the funds.

The company can propose for reduction of share capital. Section 66 of the Companies Act read with applicable rules prescribes the procedure for the same.

The reduction of capital is generally done to:

    1. Extinguish or reduce the liability

To cancel any paid up capital (and share premium amount) that is lost or unrepresented by available assets. (Represented by Accumulated Losses). It helps the company to accurately and fairly reflect the liabilities & assets of the Company in its books of accounts; and better presentation of the financial position of the Company.

    1. Pay off any paid-up share capital

Company may reduce share capital by paying off fully paid up shares which is in excess of the wants of the company. This option is adopted when company has surplus funds and company do not want to use the funds for its business.

In case of over valuation of assets (due to accumulated losses of the company), to depict the real net worth of the company, the company opts for internal restructuring. The Company write-off the portion of the capital that is already lost due to accumulated losses. It presents a true and fair view of the state of the affairs of the company.

The company will set off its accumulated losses to the extent of reduction of its paid up share capital. There will be no payment made to the shareholders.

The face value of the shares will be reduced per share. Therefore, the shareholding holding pattern of the company will not be changed. The number of shares held by each shareholder would be same as before the reduction of share capital.

Further it will not affect the ability of the company to pay to its creditors as there is no cash outflow. So, creditors will not have issues for giving approval/no objection for capital reduction.

There can be another scenario. The company has more capital invested in the company than that it can profitably employ. In such a case, the company opts for paying the excess part of the capital (the capital which the company thinks it cannot employ profitably) to its shareholders. As, the company is paying funds to the shareholders, it is important that the source of the funds is such that it does not adversely affect the position of the creditors of the company. The company shall take the approval of the creditors.

Brief procedure in Companies Act 2013

An application to NCLT would be filed after taking care of interests of the stakeholders of the company (Approval from Shareholders and Creditors).

FEMA Compliances

In case of the over valuation of assets, the shareholding pattern remains unchanged and no payment is made to the shareholders, FEMA compliances would be minimal.

In case of excess capital in the company, the company shall pay funds to the shareholders and in such case the company shall report the transaction to Reserve Bank of India.

Tax Implications

In case, the share holding pattern of the company remains unchanged and no payment is made to the shareholders for reduction of share capital, the Income Tax department considers it a notional loss and the assesse cannot claim the loss as capital loss.

Where the company has made a payment to the shareholders and reduce the excess capital,

    • The amount distributed to the extent of accumulated profits is considered as “Deemed Dividend under Section 2 (22) 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.


Internal restructuring is required to adjust the relation between the capital and the assets of the company. The capital of the company should be valued same as the assets of the company. Both overvaluation and under valuation of the assets of the company does not present the true and fair view of the state of the affairs of the company.


  1. The article is very useful. And i want to know whether the words “and reduced” needs to be added with the name of the company after reduction of share capital.

    Thanks in advance.

    1. Dear Reader,

      Pursuant to section 66 of Companies Act, 2013 read with NCLT (Procedure for reduction of share capital of the company) Rules, 2016, it is to be inferred that a company pursuant to the approval of Tribunal can reduce its share capital for various reasons stated therein.

      NCLT (Procedure for reduction of share capital of the company) Rules, 2016 stipulates that where the Tribunal confirms the reduction subject to any terms and conditions, such terms and conditions should be set out, as well as any directions that the Tribunal may think fit to give regarding the use of the words ‘and reduced’ or the publication of the reasons for reduction, the order being suitably cast in such cases.

      Further, it is clarified that the words ‘and reduced’ are to be added only where the order so directs.

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