Diminution of Share Capital vs Reduction of Share Capital

Meaning of Diminution

Diminution as defined in the Oxford Dictionary means "a reduction in the size, extent, or importance of something".

What is Diminution of Capital?

Diminution of capital of a company means cancellation of a portion or whole of the unsubscribed part of the authorised share capital.

Relevant Provision: Section 61(1)(e) of the Companies Act, 2013.

Example

The authorised share capital of ABC Limited is Rs. 1,000,000 divided into 100,000 equity shares of face value of Rs. 10 each.

The paid up share capital is Rs. 400,000 divided into 40,000 equity shares of Rs. 10 each.

Hence, the unpaid / unissued capital becomes Rs. 600,000 divided into 60,000 equity shares of Rs. 10 each.

Out of these 60,000 unissued share capital, the company decides to cancel 10,000 equity shares of Rs. 10 each. Total value is Rs. 100,000.

After cancellation, the paid up capital will remain the same at Rs. 400,000 but unissued capital will become Rs. 500,000.

Hence, after cancellation the total authorised share capital will become Rs. 900,000 divided into 90,000 equity shares of Rs. 10 each.

Board & Members Approval

If authorised by the Articles of Association of a company, Diminution of capital can be done by passing an ordinary resolution in the general meeting of shareholders. Before that board of directors approval has to be obtained.

If the articles do not authorise for the same then at first the articles have to be amended by passing a special resolution to include provisions regarding diminution of share capital.

Diminution of capital vs Reduction of capital

Diminution of capital should not be confused with the reduction of capital which is done as per section 66 of the Companies Act, 2013.

In case of reduction of share capital as per section 66, a company reduces the capital by-

(a) extinguishing or reducing the liability on any of its shares in respect of the share capital not paid-up; or

(b) either with or without extinguishing or reducing liability on any of its shares,—

  (i) cancels any paid-up share capital which is lost or is unrepresented by available assets; or

  (ii) pays off any paid-up share capital which is in excess of the wants of the company.

Special Resolution & NCLT Approval

While reduction of capital in accordance with section 66 requires members approval by a special resolution and the confirmation of the same by the Tribunal, in case of diminution of capital as per section 61(1)(e) such confirmation by the Tribunal is not required, only an ordinary resolution is required to be passed.

Alteration of Memorandum

In both the cases, the memorandum of association of the company has to be altered to effect the changes in the share capital.