CAPITAL REDUCTION: A tool to give back surplus assets to shareholders or for financial reengineering!

Such a petition may be served out of the jurisdiction of the Cayman Islands upon any shareholder, director or creditor of the company concerned, without leave of the Court. Upon the issue of the petition, the petitioner must at the same time take out a summons for directions, and both must simultaneously be served on the company. On hearing of the summons for directions, the Court may by order give such directions as to the proceedings to be taken before the hearing of the petition as it thinks fit, including in particular directions for the publication of notices and the making of any inquiry. This normally happens when the company has accumulated losses and/or partly paid-up shares. This is used by companies to strengthen their balance sheet by adjusting losses incurred till date against share capital/other reserves.

• The Tribunal, in deciding whether or not to confirm the reduction will take into consideration the minority shareholders and creditors.
• Reduction of capital is a sort of power which has been entrusted in the hands of the majority promoter shareholder.
• However, in most scenarios, there is minimal impact on shareholders.
• Advertise a notice of the SCR not later than 7 days from the date of the resolution in two widely circulated newspapers in Malaysia – one in Bahasa Malaysia and one in English.
• Therefore, companies planning to undertake capital reduction should consider all the tax and regulatory implications carefully before proceeding.
• A company can raise the required capital in multiple ways; It can issue bonds, acquire debt from a bank, borrow from a financial institution, or issue equity shares.

This saved time, money, and allowed the transaction to occur without Court involvement, thereby reducing execution risk. The solvency statement provision prevents shareholders from objecting to a capital reduction. In addition, auditor reports and public advertisements are mandatory for share buybacks; this way, shareholders have adequate time to object. Therefore, Section 50CA may not apply in case of capital reduction without any pay-out, as no consideration is received. However, in case of capital reduction with pay-out which is more than accumulated profits, section 50CA may apply. The question is whether the entire FMV of the shares shall be considered or only the FMV over and above the accumulated profits.

Things You Need To Know About Share Capital Reduction

Reduction of share capital under section 100 of the Companies Act, 1956, is used by companies to extinguish the shares of a group of shareholders. While the procedural requirements of undertaking a selective reduction of share capital are settled, the courts continue to differ on what constitutes a fair and equitable scheme of reduction. As such, the discretion available to courts while judging if the valuation of shares is fair and equitable is of particular interest.

It can also be used to distribute dividends to shareholders, increasing their value. It also allows for the elimination or reduction of accumulated losses. These include creating distributable reserves, so as to pay dividends in the future, returning surplus capital back to shareholders, when going through a de-merger, simplifying the capital structure to be more efficient, and reducing or eliminating paid-up or unpaid shares. Returning back capital allows a company to reduce its share capital without the consent of each individual shareholder. A share buyback reduces a company’s share capital by purchasing back shares from shareholders; however, unlike returning capital, a buyback requires the shareholders that have been offered buybacks to determine whether they want to sell back their shares or not. Through this process, the company will have greater flexibility in undertaking corporate restructuring exercises. In addition, the new regime eliminates the hurdles for capital reduction, such as the court exercising its discretion and refusing the proposed reduction.

Difference between buyback and capital reduction from Income Tax perspective:

To cancel paid up capital if the company has significant losses in business operations. A redemption of shares or a repurchase of shares by the company pursuant to Section 37 of the Companies Law will not amount to a reduction of authorised share capital. E) specify the creditors who sought to prove their debts or claims after having been notified so to do and state which of such debts or claims were allowed. B) as to the proceedings to be taken for settling the list of creditors entitled to object to the reduction and fixing the date by reference to which this list is to be made.

Tendam Retail has scheduled a special shareholders meeting in January 2023 to discuss a share capital reimbursement worth 17 million euros. The proposal aims to return shareholder contributions and reduce the nominal share value by 0.11 euros. She proposes a capital reduction scheme in front of the board members. Post 2006, firms do not need a court order to reimburse share capital.

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The Court will be concerned to ensure that the rights of the creditors are not prejudiced by a reduction and that the reduction is fair and equitable as between any different classes of shares in the capital of the company. Sections 64 to 68 of the Companies Law govern the Reduction of share capital in Cypriot companies. The decision to reduce share capital rests with a company’s shareholders, provided that this is also permitted by the company’s articles of association. Ultimately, the courts must approve the reduction of share capital by order following a petition filed by the company. Unless a special resolution, as authorised by the articles, is passed for reduction of share capital, a company cannot effect share capital reduction. A capital reduction is when a company reduces the amount of its share capital, which can be done by making payments to shareholders out of its capital equal to the amount of money paid by a shareholder to acquire the company’s shares or by a share buyback. A capital reduction can also be done when shares are cancelled for zero consideration.

Injecting more capital whenever required either by resorting to rights issue/ preferential issue or additional public issue. The capital reduction will only take effect when the resolution is being recorded by the registrar. Articles Learn more about how to start a business / company in Malaysia and how to operate it properly under the laws of Malaysia. If you’re starting up new, the articles are very useful for new business owners too.

Following a capital reduction, the number of shares in the company decreases by the set reduction amount. Keep in mind that the company’s market capitalization will not change as a result of such a move. On the other hand, the float, or the number of shares outstanding and available to trade, shall be reduced. Companies usually want to reduce share capital due to various changes in their business strategy. It often happens that companies have more issued share capital than what is required for its optimal functioning and growth, but there are many more reasons why companies would look to reduce share capital. Apart from reduction of capital under section 66, there is another circumstance, when share capital can be reduced. In the case of oppression and mismanagement, the Tribunal has been given powers under section 242 to pass an order as it thinks fit which may provide for purchase of shares of any members by the company and consequent reduction of the share capital.

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• 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.
• A uniform solvency test was designed for the new Companies Ordinance.
• Subject to that, a company may reduce its share capital under this section in any way.
• The second question and its solution shall be provided in the later part of the article.
• In March 2014, the Hong Kong government introduced Cap 622 of the Companies Ordinance of Hong Kong SAR (“CO”), to facilitate ease of conducting business.
• There is also ambiguity around whether capital reduction can be considered as buyback of shares.

Section 50CA provides for the fair market value of shares as the full value of consideration in case of transfer of unlisted shares irrespective of actual consideration paid. For the applicability of section 50CA, consideration is must if consideration is absent/no consideration, then section 50CA may not apply. Further, when the distribution does not exceed accumulated profits, relying on the principles of the Supreme Court of India in the case of G. Narasimhan , there should be no tax implications under section 50CA of IT Act as this section is only for the purpose of calculating capital gains under section 48 of the IT Act. The transaction must qualify as ‘transfer’ is one of them and it includes relinquishment of a capital asset or extinguishment of rights in the capital asset.

A uniform solvency test was designed for the new Companies Ordinance. This test is a prerequisite for all companies that wish to reduce their share capital relying on https://online-accounting.net/ the court-free procedures. It also applies to situations when a company wants to buy back its own shares and provide financial assistance to acquire its own shares.