Capital reduction is the process of decreasing a company’s shareholder equity through share cancellations and share repurchases, also known as share buybacks. The reduction of capital is done by companies for numerous reasons, including increasing shareholder value and producing a more efficient capital structure.
As per Section 66 of Companies Act of 2013, there are almost three ways of reducing share capital for a company limited by shares or guarantee, subject to such confirmation from the Tribunal: firstly reducing or extinguishing liability on such unpaid shares of the company, secondly either with or without extinguishing …
A share capital reduction can be achieved by a variety of methods:
- cancelling share capital no longer supported by the company’s assets;
- repaying share capital no longer required and then cancelling the shares;
- reducing the nominal value of a share class where the capital is no longer supported by the company’s assets;
One of the reasons is when you want to compensate losses, and it occurs when the amount of net worth is less than that of the share capital, it is at this time that the company can reduce the share capital in order to restore balance and that the net assets continue to be a patrimonial guarantee of the company against …
What is the benefit of capital reduction?
Capital reduction with pay-out:
Advantages of capital reduction with payout for the company are: Easy to distribute surplus cash to shareholders. No limit for distribution like in buyback or dividend. As a consideration, Company may give assets to the shareholders which were not allowed in the buyback.
How do you calculate capital reduction?
For e.g: if the shares of face value of INR 100 each fully paid-up is represented by Rs. 75 worth of assets. In such a case, reduction of share capital may be effected by cancelling Rs. 25 per share and writing off similar amount of assets.
Under a share capital reduction, any money paid to a company in respect of a member’s share is returned to the member. … A share buy-back, on the other hand, is when a company acquires shares in itself from existing shareholders, and then cancels these shares.
Buybacks reduce the number of shares outstanding and a company’s total assets, which can affect the company and its investors in many different ways. When looking at key ratios such as earnings per share and P/E, a share decrease boosts EPS and lowers the P/E for more attractive value.
Understanding Capital Reduction
After a capital reduction, the number of shares in the company will decrease by the reduction amount. While the company’s market capitalization will not change as a result of such a move, the float, or number of shares outstanding and available to trade, will be reduced.
Who approved the scheme of capital reduction?
Escorts announced that the Hon’ble NCLT Bench, Chandigarh (NCLT) has approved the Scheme of Capital reduction vide its order dated 23 December 2021 (Order), as uploaded on the website of the Hon’ble NCLT on 23 December 2021.
Is capital reduction taxable?
However, where the reduction is greater than the accumulated profits, then it is a case of genuine reduction of capital. Any capital so returned is genuinely a capital receipt in the hands of the shareholders and is accordingly exempt from tax.