Reduction of Share Capital, Auditor's Duties in Regard to Reduction of Share Capital

 Reduction of Share Capital
Auditor's Duties in Regard to Reduction of Share Capital

Reduction of Capital

Reduction of share capital is regarded as one of the process of decreasing company’s share capital. The Reduction of Share Capital means reduction of issued, subscribed and paid up share capital of the company. In simple words it can be regarded as ‘Cancellation of Uncalled Capital’ i.e. part of subscribed share capital.

The need of reducing share capital may arise in various situations, few are listed below:

1)      Returning of surplus to shareholders;

2)      Eliminating losses, which may be preventing the payment of dividends;

3)      May be as part of scheme of compromise or arrangements;

4)      To simply capital structure;

This power is, given by Section 66 of the Companies Act, 2013, subject to the compliance of conditions. According to this, a company may,

(1) Extinguish or reduce the liability on any of its shares in respect of share capital not paid up

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

(3) pay off any paid-up share capital which is in excess of what is required by the company.

Duties of an Auditor Reduction of Capital

1.          Examine the Memorandum and Articles of Association and the resolution for the alteration of capital and see whether the resolution was passed according to law.

2.          Examine the confirmatory order of the court sanctioning the reduction of capital.

3.          Examine the Registrar’s certificate which is conclusive evidence that the legal requirements regarding the reorganization have been complied with.

4.          Verify the old share holdings and surrendered share certificates, if any, with the new holdings and certificates.

5.          Vouch Journal entries with other documentary evidence available.

6.          Examine the record in the register of members.

7.          See that the legal requirements have been complied with.

8.          See that the provisions of Sections 66 and 68 have been complied with according to which if the capital has been reduced, the court may order the company to use the words “and reduced” after its name.

Managerial remunerations and auditor’s duties

Managerial remunerations consist of remuneration paid by a company to its managerial personal such as managers, whole time directors, chief financial officer. Managerial remuneration can be fixed by board of director or shareholders of the company. According to Sec. 197 (1), the total managerial remuneration payable by a public company, to its directors, including managing director and whole-time director, and its manager in respect of any financial year shall not exceed eleven percent of the net profits of that company for that financial year.

Auditor’s duties:

1) He must ensure that the provisions of Sec. 196 to 202 regarding managerial remuneration are followed.

2) He must also ensure that managerial remuneration is paid as per the provisions of MOA and AOA.

3) If managerial remuneration is paid in the form of reimbursement of expenses, he must ensure that proper vouching of these expenses are done.