Reduction of Share Capitals

Reduction of share capital is a process undertaken by a company to reduce the nominal value of its shares. It involves reducing the amount of share capital represented by each share without affecting the number of shares issued. Under the Foreign Exchange Management Act (FEMA) in India, companies that are involved in foreign exchange transactions or have non-resident shareholders need to comply with certain FEMA regulations when carrying out a reduction of share capital.

Key Aspects of Reduction of Share Capital under FEMA:

1- Approval of RBI: If a company is involved in foreign exchange transactions, including foreign direct investment (FDI), it needs to obtain prior approval from the Reserve Bank of India (RBI) before undertaking any reduction of share capital.

2- Reporting Requirements: Companies must report the reduction of share capital to the RBI through the authorized dealer (bank) within the prescribed timelines. The reporting should include details of the reduction, the revised share capital structure, and compliance with FEMA regulations.

3- Compliance with FEMA Guidelines: Companies must comply with the guidelines issued by the RBI under FEMA for the reduction of share capital. This includes ensuring adherence to sectoral caps, pricing guidelines, and other relevant FEMA regulations.

4- Valuation and Pricing: The valuation of shares and the pricing of the reduced share capital should be in compliance with the applicable FEMA guidelines. The company must follow the RBI’s prescribed methods for valuation.

5- Repatriation of Funds: If there is any repatriation of funds involved in the reduction of share capital, it must be carried out in accordance with FEMA regulations, including reporting and documentation requirements.

6- Approval of Shareholders and Creditors: Companies must obtain the approval of shareholders and creditors through a special resolution or consent mechanism, as per the provisions of the Companies Act, 2013.

The reduction of share capital is a significant financial decision for a company and must be carried out in compliance with FEMA regulations, especially when foreign exchange transactions or non-resident investors are involved. Companies should seek professional advice and follow the prescribed procedure under FEMA and the Companies Act to ensure legal compliance and smooth execution of the reduction process.

G Akshay Associates