AK & Partners

Reduction of share capital essentially means the reduction of issued, subscribed and paid-up capital of a company.It is one of the ways to restructure the capital structure of a company. In this article, we shall take and look at different ways capital can be reduced and the meaning entailed by it. Furthermore, we shall ascertain the difference between the reduction of share capital and the buy-back of shares. Concept As per section 66 of the Companies Act 2013 (“Act”), the share capital of a company can be reduced in the following ways: By extinguishing or reducing the liability on any of its shares in respect of the share capital not paid-up. For example - Where the shares of a company are of face value of INR 100 each in which INR 75 has been paid, the company may reduce them to fully paid-up shares worth INR 75 each and thus relieving the shareholders from liability on the uncalled capital of INR 25 per share. Either with or without extinguishing or reducing liability on any of its shares: Cancel any paid-up share capital which is lost or is unrepresented by available assets; For example - Where the shares of face value of INR 100 each fully paid-up is represented by INR 75 worth of assets. In such a case, a company may be affected by a reduction of share capital by cancelling INR 25 per share and writing off a similar amount of assets. Pay-off any paid-up share capital which is in excess of the wants of the company. For example - Shares of a company with 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 to the shareholders. The Act has barred any reduction of capital if the company is in arrears in the repayment of any deposits accepted by it or the interest payable thereon. Further formalities and compliances It is pertinent to note that the reduction of capital in any of the above-mentioned ways is subject to confirmation by the National Company Law Tribunal (“NCLT”). Any proposed capital reduction by the company shall conform with the accounting standards specified in section 133 of the Act for the application to be sanctioned by NCLT. A special resolution needs to be passed by the shareholders of the company in the general meeting. After-effects of reduction of share capital Post sanctioning of reduction of share capital by NCLT, a member of a company shall not be liable to any call or contribution in respect of any share held by him exceeding the amount of return difference, if any, between the amount paid on the share, or reduced amount, if any, which is to be deemed to have been paid thereon, as the case may be, and the amount of the share as fixed by the orders of reduction. Other modes of reduction of share capital There are other modes of reduction of share capital which does not require the Tribunal’s approval, which are listed below: Where the shares are forfeited for non-payment of call money; Buy-back of share shares by the company under section 68 of the Act; Where redeemable preference shares are redeemed in accordance with section 55 of the Act Buyback of Shares vs. Reduction of Share Capital one question that remains to be answered is the difference between the buy-back of shares and the reduction of share capital as prescribed under section 66 of the Act. Much to the suspense, the buy-back of shares is just an alternate means for reducing share capital, which does not require the involvement of NCLT. Section 66(6) of the Act further provides an exception for the applicability of section 66 of the Act for buy-back of shares. Authors: Anuroop Omkar and Aditya Raj

The Union Budget 2024 has set a new course for the Gift City IFSC, attracting global fund managers to boost management and dispute resolution. Following the promises of the members of the Union Cabinet on various occasions and the entire vision for GIFT-IFSC, an expert committee dedicated to drafting institutional arbitral rules was constituted to set up the Alternative Dispute Resolution Centre (‘ADRC’). The arbitration centres in India are yet to scale up internationally. The global alternate dispute resolution services market is projected to be 14.5 billion by 2030. Existing International Institutional Structures for Alternative Dispute Resolution Centres, such as the London Court of International Arbitration (‘LCIA’) can be traced back to 1883 when the Court of Common Council set up a committee to formulate recommendations, creating a tribunal dedicated to domestic arbitration. Like most other centres, LCIA started as a government-controlled body and transitioned into its current private, not-for-profit company structure. Similarly, the Singapore International Arbitration Centre (‘SIAC’) was set up in 1991 as an independent and not-for-profit organisation to provide a neutral dispute resolution platform. Most prominent institutions for commercial arbitration observe this trend of transforming into a truly autonomous body. Consequently, the IFSCA framework will be facilitated by an internationally comparable regulatory framework under a special offshore status within India. After comprehensively scrutinising the extant ADR laws in India and best practices worldwide, the committee suggested amendments to the existing enactments to streamline ADR services offered at IFSC and align them with the standards upheld by other international dispute resolution centres and global financial hubs. Regulatory Architecture of ADRC  The ADRC envisions resolving disputes arising from contracts executed anywhere in the world and between parties from different nations under the jurisdiction of other laws. Arbitration at the centre ought to be of international character, and hence, arbitrations seated at GIFT City are to be considered international commercial arbitration. The committee opted for a (Section 8) Company Structure for the ADRC as a corporate body with perpetual succession, complying with the terms and conditions of the Companies Act 2013. For overarching governance, the ADRC is envisioned to have a four-tiered administrative structure consisting of a Board of Directors, an International Advisory Council, the Executive Council, and a Secretariat. Other issues for deliberations in the IFSCA Report that edge over the present court system include: One of the most lucrative aspects of the ADRC is the enhanced choice of governing law for the parties bringing disputes to the IFSC. This means that if a multinational decides to set up aircraft leasing at the GIFT City and continue its business activities, it should not be restricted in the choice of law and courts to enforce its contract. Moreover, after the union budget, the government provided relaxations in customs. In particular, the repair period for maintenance and overhaul of aircraft and ships has been increased to a year. All things coming together shall facilitate ease of doing business. A new ‘Documents-only’ procedure has been introduced under the Arbitration and Conciliation Act. It aims to allow parties to opt for a documents-only proceeding for the challenge and stay of the award passed by the arbitral tribunal. The committee extensively deliberated on whether the statutory right to appeal against orders by an adjudicating authority (under section 34) should be removed for arbitration seated at IFSC. The committee suggested removing the additional layer of appeal (under section 37) and providing IFSC with a competitive advantage. It was suggested that the parties may apply to set aside an arbitral award (under section 34); however, if dissatisfied with the decision, they can approach the Supreme Court directly with a Special Leave Petition. Presently, arbitration seated at IFSC does not necessarily fall under any category. Per the status of the parties, it may fall under purely domestic or international commercial arbitration. The Arbitration and Conciliation Act states that domestic arbitrations that do not fall under the category of international commercial arbitration are treated according to the substantive law of India. The first-ever legislative text for third-party funding has been proposed within the ADRC to facilitate adoption and ease of arbitration. Third-party arbitration funding is introduced to address the liquidity hamper businesses face during disputes. Owing to the rise of TPF, jurisdictions like Hong Kong, Singapore, and Ireland have brought legislation to regulate it. In India,  per the Apex Court, there appears to be no restriction on third parties, or non-lawyers, funding litigation and getting repaid after the outcome of such litigation. In an arrangement wherein third-party funding is received by either of the parties between whom an agreement is executed, the funder's liabilities would depend on the terms of the agreement between the funder and the funded party. The Expert Committee recommended a framework for ADRC that provides arbitration and mediation but is flexible enough to accommodate other alternate dispute resolution mechanisms, including those that may evolve. A testimony of the efforts, only so far, by the IFSCA and government has been the notable growth in the volume of business activities in the GIFT City across various sectors. Author: Anuroop Omkar