Reduction of Share Capital vs. Diminution of Share Capital :

Section 100 of the Companies Act, 1956 provides for the reduction of capital. For this, the articles must give the authority; it is not enough to provide for it in the memorandum. If the articles do not so authorise, then these must be altered by a special resolution first and thereafter a second special resolution will have to be passed to reduce the capital in the manner proposed. Reduction of capital may be a reduction in the nominal capital, reduction at the same time in issued capital, a reduction in the paid-up capital or in the capital that has been issued but not paid up (e.g. where an uncalled liability is cancelled).

The term “diminution” denotes a cancellation of that portion of the issued capital which has not been subscribed for Section 61 of the 2013 Act states it, the cancellation of “shares which at the date of the passing of the resolution in that behalf have not been taken or agreed to be taken by any person”.

Section 61 of the Companies Act, 2013 specifically states that diminution does not constitute a reduction within the meaning of the Companies Act. The expression “diminution of share capital” and “reduction of share capital” differ from each other in the following respects.

(1) Reduction may involve reduction inter alia of issued capital, whereas diminution may be in respect of authorised capital but not of issued capital.

(2) If the articles authorise the procedure, diminution can be effected by an ordinary resolution, while reduction (which also need authorisation by articles), can be effected only by a special resolution.

(3) Diminution needs no confirmation by the Court [Section 61 of the Companies Act, 2013)], but reduction needs such confirmation [Section 101 of the Companies Act, 1956].

(4) Where a company is ordered to add to its name the words “and reduced” these words shall until the expiry of the period specified in the order, be deemed to be part of the company’s name [Section 102(3) of the Companies Act, 1956], but such a provision does not exist in the case of diminution of the share capital as envisaged in Section 61.

(5) In the case of diminution, notice is to be given to the Registrar within 30 days from the date of cancellation whereupon the Registrar shall record the notice and make the necessary alteration in the memorandum or articles or both [Section 64 of the Companies Act, 2013]; whereas in the case of reduction more detailed procedure regarding notice to the Registrar has been prescribed by Section 103 of the Companies Act, 1956, though there is no such time limit as aforesaid (i.e. 30 days).