Rules of capital maintenance

Pranjal Neupane
Minimum capital requirement
The minimum capital requirement for registration of a public
company is Rupees 10 million.
Such requirement is not applied in the case of private company.
Section 11 of the Company act states The paid up capital of a public
company shall be a minimum of ten million rupees, except as
provided in the in the prevailing law.
 Reduction of Share Capital
A company cannot simply reduce its share capital except in accordance
with section 57 and 58 of the act.
Section 57(1) of the act requires adopting a special resolution regarding
reduction of share capital at its general meeting and obtaining approval
of the court.
(2) After obtaining the approval of the court, the company may reduce its
share capital as follows:
a. By reducing the capital to such amount as has been paid up where calls
for payment of amount on shares are not fully paid.
b. Paying back any paid up share capital
c. Devaluating the face value of shares where the company has sustained a
big loss or suffered a natural calamity.
Procedures for obtaining approval of court to
reduce share capital (Section 58)
1. Special resolution for reducing share capital and a petition to the
court for an order confirming the reduction.(Subsection 1)
2. Publishing a public notice in a daily newspaper of national
circulation at least three times before the hearing, stating the venue
and date of hearing.(2)
3. Every person entitled to a debt/claim be entitled to submit claims
and objection to the reduction of share capital of the company.(3)
4. Submission of real and true list of creditors of the company to the
court by the director or company secretary.(4)
 Continue
5. If the company admits the full amount of debts or claims made by
creditors and agrees to make provision of moneys required to pay such
amount the court may issue order confirming reduction. (5)
6. If any false statement or omission is found in the list of creditors submitted
to court, the director who submits such list and the officer who signs such list
shall be liable to punishment. (7) and (12)
7. The court may make the order for the reduction of share capital if it is
satisfied that the creditors consent to the reduction have been obtained or
their debts have been discharged or have been secured. The court may
specify appropriate terms and conditions. (8)
8. Such order of court shall be deemed to have ipso facto been incorporated
in the MOA and AOA. (11)
9. When the share capital reduction is authorized, the director or company
secretary shall mention and authenticate that matter in each certificate
issued by the company.
Distribution of dividend is only out of profits
S 182 (5) states that A company shall not pay or distribute a dividend
in any other manner except out of the amounts of profits set aside for
the distribution of dividend.
A company shall fully deduct the pre operation expenses, any amount
required to be paid or set aside out of the profits under the prevailing
law, the amount required to be depreciated, the amount of
accumulated loss in previous financial years before paying or
declaring dividends out of profits. (6)
Allotting of shares at a discount
A company cannot issue or sell its shares at discount except in
following conditions:
1. Issuing shares pursuant to a capital restructuring scheme of the
company.
2. Converting loans borrowed by the company into shares with the
consent of the creditors.
3. Issuing shares pursuant to an employee share scheme.
4. Other conditions/purposes as approved by the office.
Section 64
Valuation of assets used to purchase shares
If shares are issued to any person or promoter for non- cash assets in
the case of public company such assets must be valuated by certified
engineer or accountant. (Section 18(3))
The criteria for valuation shall be as prescribed and if such criteria are
not prescribed the person evaluating such property shall mention the
criteria. (S18(4))
Financial Assistance to buy its own shares
Section 62 prohibits a company from providing any loan or financial
assistance to any person for purchasing its own shares or the shares
of its holding company.
However, a company can provide loans to any employees of the
company to purchase the fully paid up shares of that company under
a scheme of selling shares to its employees.
Right to pre-emption
Section 56(8) The existing shareholder shall have the first right to
subscribe to the new allotment of shares.
A time limit of at least thirty five days shall be given to the existing
shareholders to subscribe the shares. (Section 56(11))
Prohibition on purchase by company of its
own shares
Section 61 of the company act prevents company from purchasing its
own shares.
However the company can buy back its own shares out of its free
reserves available for being distributed as dividends in circumstances
such as:
1. If Shares issued by the company are fully paid up.
2. Buy back of shares is authorized by the AOA of the company.
3. Adoption of the special resolution at the general meeting authorizing
the buy back.