Mar 8, 2025
What is Right to Issue of Shares?
Right shares are offered to existing shareholders at a discounted price, helping companies raise capital while preserving ownership structure.
Cancelling shares isn’t something most companies think about—until they have to. Whether it’s cleaning up after a forfeiture, restructuring capital, or wrapping up a buyback, cancellation of shares is a common but often misunderstood process.
Knowing when and how to cancel shares can save you from costly mistakes if you’re a founder, finance lead, or someone handling compliance.
In this blog, we’ll explain share cancellation, when companies typically do it, and how the process works.
Cancellation of shares refers to the process where a company nullifies its issued or unissued shares, effectively reducing its share capital. When shares are cancelled, they cease to exist, and the rights associated with those shares are terminated. Cancellation of shares can occur due to various reasons such as share buybacks, capital restructuring, mergers, or regulatory compliance.
1. Reduction of Share Capital: Under corporate laws, a company may cancel shares to restructure its capital by extinguishing shares that are lost, unrepresented by assets, or no longer required.
2. Buyback of Shares: When a company buys back its own shares, it often cancels them to lower the number of outstanding shares in the market.
3. Forfeiture or Surrender: If shareholders default on payment obligations or voluntarily surrender their shares, companies may cancel these shares following due process.
Companies may decide to cancel shares in several scenarios:
1. Share Buybacks: When a company repurchases its own shares from the market, it is generally required to cancel these shares to reduce the issued share capital. This is common when companies want to return surplus cash to shareholders or reduce dilution from stock options.
2. Reduction of Paid-up Capital: Companies may cancel shares to reduce their paid-up capital, often as part of financial restructuring to improve financial ratios like Earnings per Share (EPS) or Return on Equity (ROE). This requires approval from the National Company Law Tribunal (NCLT) in India.
3. Mergers and Acquisitions: In mergers, the absorbed company’s shares are canceled and replaced with shares of the surviving entity to consolidate capital structures.
4. Cancellation of Unissued Shares: Authorized but unissued shares can be canceled to reduce the company’s authorized capital, which does not affect issued share capital but limits future share issuance.
5. Winding Up: When a company is winding up, all shares may be canceled as part of the liquidation process to distribute accrued profits back to shareholders.
The procedure for share cancellation in India involves several steps:
1. Authorization: Ensure that the company's Articles of Association permit share cancellation.
2. Board Resolution: Conduct a board meeting to approve the cancellation and call for a general meeting.
3. Shareholder Approval: Buybacks exceeding 10% of share capital must obtain shareholder approval through a special resolution in a general meeting.
4. Regulatory Filings: File the necessary forms with the Registrar of Companies (ROC) within the stipulated time frame.
5. Application to NCLT (if applicable): For capital reduction involving cancellation of shares, the company must apply to the NCLT with the necessary documents, including creditor lists and auditor certificates. The NCLT issues notices and considers objections before approval.
6. Cancel & Update Records: Cancel the relevant share certificates and update the company's register of members and other statutory records.
Cancellation of shares plays a critical role in corporate finance and governance:
1. Capital Structure Management: By reducing the number of shares, companies can streamline their capital structure, remove excess or obsolete shares, and improve financial health.
2. Enhancing Shareholder Value: Fewer shares in circulation can increase earnings per share (EPS) and potentially raise the market value of remaining shares, benefiting shareholders.
3. Strategic Corporate Actions: Cancellation is essential during mergers, acquisitions, or corporate restructuring to consolidate ownership and simplify equity distribution.
4. Regulatory Compliance: Cancellation ensures that companies comply with legal requirements regarding share capital, especially during buybacks or capital reductions.
5. Preventing Dilution: It helps manage dilution caused by employee stock options or convertible securities by removing shares that would otherwise decrease existing shareholders’ ownership percentages.
Cancellation of shares is a significant corporate action involving the permanent removal of shares from a company’s capital structure. It is employed for various reasons including share buybacks, capital restructuring, mergers, and winding up. The process is governed by strict legal and regulatory frameworks, requiring board and shareholder approvals, regulatory filings, and proper cancellation of share certificates. Understanding the cancellation of shares is essential for companies to manage their capital efficiently and for shareholders to comprehend the impact on their investments.
