Share capital is the total amount of capital raised by a company through the issuance of shares. It represents the funds that the company can use for its business operations and investments.
Reduction in Share capital
Reduction in share capital refers to the process of decreasing the total amount of a company’s authorized share capital. This is typically done by either canceling or retiring existing shares or by reducing the par value of each share.
The most common reasons for reducing share capital are to eliminate accumulated losses, repay capital to shareholders, or simplify the company’s capital structure. Reductions in share capital can be either voluntary or compulsory.
Voluntary reduction is initiated by the company’s board of directors and approved by shareholders. This typically involves buying back shares or retiring them. In some cases, the company may also convert shares into a different class of shares or pay off shareholders in cash or other assets.
Compulsory reduction occurs when a company’s share capital has become excessive or when it is required by law. For example, if a company’s share capital is no longer justified by its assets, operations, or prospects, it may be required to reduce its capital. Compulsory reduction may also occur when a company has accumulated losses that exceed its share capital, which can impair its ability to continue operating.
Reduction in Share capital Reasons
There can be several reasons for a company to opt for a reduction in its share capital. Some of the common reasons are:
- To write off accumulated losses: If a company has accumulated losses, it may choose to reduce its share capital to write off the losses from its books and improve its financial position.
- To return excess capital to shareholders: Sometimes, a company may have more capital than it needs for its operations. In such cases, the company may opt for a reduction in share capital to return the excess capital to its shareholders.
- To adjust the capital structure: A company may also opt for a reduction in share capital to adjust its capital structure. For example, it may reduce its share capital to bring down its debt-equity ratio.
- To simplify the capital structure: A company may also choose to reduce its share capital to simplify its capital structure. This may be done by consolidating shares or reducing the number of shares outstanding.
- To facilitate a takeover: In some cases, a company may reduce its share capital to make it more attractive to potential acquirers.
Reduction in Share capital Types
There are different types of reduction in share capital that a company may undertake. The types of reduction in share capital include:
- Ordinary Reduction: This type of reduction is voluntary and is done to cancel or retire some of the existing shares. The objective of an ordinary reduction is to eliminate the accumulated losses of the company or to return capital to shareholders. This type of reduction does not affect the rights of the remaining shareholders.
- Special Reduction: A special reduction in share capital is a reduction that requires a special resolution and is done for a specific reason. This type of reduction may involve the cancellation or retirement of shares, a reduction in the nominal value of the shares, or a return of capital to shareholders. A special reduction can only be carried out with the approval of the court or other regulatory authorities.
- Capital Reduction by Writing Off: In this type of reduction, the company writes off the losses or debts that it has incurred. The reduction is done by cancelling the liability that the company has towards its shareholders. The company can then reduce the share capital by the amount of the liability cancelled.
- Purchase of Own Shares: This type of reduction involves the purchase of the company’s own shares in the market. The company can then cancel or hold the shares in treasury. This type of reduction can be used to return capital to shareholders or to reduce the number of shares outstanding.
- Court-ordered Reduction: A court-ordered reduction may be necessary if the company has an excessive share capital or if it has incurred losses that exceed its share capital. The court may order the company to reduce its share capital to a level that is appropriate for the company’s assets, operations, and prospects.