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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.
(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.
In case of a capital reduction, shareholders whose shares are being cancelled will be taxed. Such taxation is not only as capital gains. The shareholders are first taxed on the amount paid out by way of capital reduction as dividend, to the extent that the company possesses accumulated profits.
Capital reduction takes place when a company decides to decrease the amount of its share capital. This is done either by paying the amount to shareholders or by canceling a certain number of shares. This process can be repeated at the discretion of the company, offering a strategic avenue for capital adjustment.
Section 66 of the Companies Act, 2013 (as amended) governs the law for capital reduction which provides that, for a company to reduce its share capital, it should have the power under its Articles of Association (?AOA?) to do so by following the procedure laid down under such provisions.
Alter its memorandum by reducing the amount of its share capital and of its shares ingly: Provided that no such reduction shall be made if the company is in arrears in the repayment of any deposits accepted by it, either before or after the commencement of this Act, or the interest payable thereon.
(b) Action by consent. --Unless otherwise restricted in the bylaws, any action required or permitted to be approved at a meeting of the directors may be approved without a meeting by a consent or consents to the action in record form.
--An action taken pursuant to subsection (b) to approve a transaction under Chapter 3 (relating to entity transactions) shall not become effective until after at least ten days' notice of the action has been given to each shareholder entitled to vote thereon who has not consented thereto.