# Reduction of Share Capital - Audit Procedures

## Modes of Capital Reduction

A company may reduce its capital by:

1. Reduction in unpaid capital

2. Cancellation of lost capital

3. Paying off excess paid-up capital

> Note: This section does NOT apply to buy-back of own securities under Section 68.

## Audit Procedures for Verifying Capital Reduction

### 1. Meeting and Notice

Verify that the meeting of shareholders was properly convened and proposal was circulated in advance.

### 2. Authorisation in AOA

Verify that Articles of Association authorise reduction of capital.

### 3. No Default on Deposits

Examine that there has been no default with respect to repayment of deposits.

### 4. Tribunal Order

Examine order of Tribunal (NCLT) confirming the reduction.

### 5. Registrar's Certificate

Check Registrar's Certificate for reduction of capital.

### 6. Accounting Entries

Vouch accounting entries recorded to reduce capital.

### 7. Revaluation Disclosure

Confirm whether revaluation of assets has been properly disclosed in Balance Sheet.

### 8. Words "And Reduced"

Confirm whether the words "and reduced", if required by Tribunal order, have been added to the name of the company in the Balance Sheet.

### 9. Members' Register Adjustment

Verify adjustments made in members' accounts in the Register of Members.
Confirm that either:
Paid-up amount shown on old share certificates has been altered, OR
New certificates have been issued in lieu of old ones (and old ones cancelled).

### 10. Compliance with Tribunal Conditions

Check whether company complied with all terms and conditions imposed by Tribunal.

### 11. MoA Alteration

Verify that Memorandum of Association has been suitably altered.

Worked example

### Example 1

Example - Lost capital cancellation: ABC Ltd has Rs. 10 crore paid-up capital but accumulated losses of Rs. 4 crore have made assets worth only Rs. 6 crore. NCLT approves reduction by cancelling Rs. 4 crore lost capital. Auditor verifies: Tribunal order, Registrar's certificate, alteration of MoA, adjustment in Register of Members, and word 'and reduced' if directed.

### Example 2

Example - Paid-up capital refund: XYZ Ltd has surplus cash and decides to refund Rs. 20 per share to shareholders (paying off excess paid-up capital). Auditor verifies: AOA permits this, special resolution passed, NCLT confirmation obtained, share certificates altered to reflect reduced paid-up value, and no default on deposit repayment exists.

⚠️ Common exam mistakes

Forgetting that buy-back under Section 68 is NOT covered by capital reduction procedures
Not verifying that AOA authorises capital reduction - this is a fundamental check
Skipping verification of 'no default on deposits' - this is a prerequisite
Not checking whether Tribunal directed addition of words 'and reduced' to company name
Missing the alteration of Memorandum of Association as a final compliance step

Reference: Section 66 (Reduction of Share Capital) — Companies Act, 2013

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