How to Cancel Shares in a Company in India

Share cancellation involves permanently removing shares from a company's capital structure.

In India, this process is governed by the Companies Act, 2013, and, for listed companies, it is further regulated by the Securities and Exchange Board of India (SEBI).

Companies may cancel shares for various reasons, such as share buybacks, capital restructuring, or mergers and acquisitions.

What is share cancellation?

When shares are canceled, they cease to exist and can no longer be traded, transferred, or held by shareholders.

The impact of share cancellation depends on whether the shares were issued or unissued:

If issued shares are canceled (e.g., through a buyback, or capital reduction), the company’s issued and outstanding shares decrease, reducing the total number of shares in circulation.

If unissued shares are canceled (i.e., authorized shares that were never allotted), it does not affect the issued share capital or outstanding shares, but reduces the company’s ability to issue those shares in the future.

When do companies cancel shares?

Companies cancel shares for various financial, strategic, or regulatory reasons, depending on the situation:

1. Share buyback

A share buyback occurs when a company repurchases its own shares from shareholders and, under Section 68 of the Companies Act, 2013, is required to cancel them.

Companies conduct buybacks to return surplus cash to investors or offset dilution caused by stock options and convertible securities.

As per regulations, the company must extinguish and physically destroy the repurchased shares within seven days of completing the buyback process.

2. Paid-up capital reduction

Capital reduction is the process of decreasing a company’s paid-up share capital, either by canceling shares or reducing their face value.

Companies typically undertake this for financial restructuring to improve financial ratios. By lowering the total capital base, the company can enhance profitability metrics like Return on Equity (ROE) and Earnings per Share (EPS).

Under Section 66 of the Companies Act, 2013, capital reduction requires National Company Law Tribunal (NCLT) approval. One common reason for this is when a company’s share capital exceeds its asset value.

For example, if shares have a face value of ₹100 but are backed by only ₹75 in assets, the company can:

- Reduce the face value from ₹100 to ₹75 to reflect actual worth, OR

- Cancel some shares to adjust total capital.

3. Mergers and Acquisition

In a merger or acquisition, shares are canceled to eliminate duplicate securities and consolidate the capital structure.

The absorbed company's shares are canceled and replaced with shares of the surviving entity.

For instance, when HDFC merged with HDFC Bank in 2023, HDFC’s shares were canceled, and its shareholders received HDFC Bank shares in exchange.

4. Cancellation of unissued shares

Under Section 61(1)(e) of the Companies Act, 2013, a company can cancel shares that were authorized but never issued. This does not reduce the company’s share capital but merely adjusts its authorized capital.

Step-by-step process for share cancellation in India

The process of share cancellation varies based on the reason for cancellation, but certain key steps remain consistent across all cases.

1. Obtain board approval

The board of directors must pass a resolution approving the share cancellation.

2. Secure shareholder approval (if required)‍

Certain types of share cancellations, such as capital reduction, mergers, or buybacks exceeding 10% of share capital, require a special resolution from shareholders.

‍3. Obtain regulatory approvals‍

Depending on the nature of the cancellation, approvals may be required from regulatory authorities. 

For example, capital reduction requires approval from the National Company Law Tribunal (NCLT), while listed companies must comply with Securities and Exchange Board of India (SEBI) regulations. 

Additionally, all cancellations must be reported to the Registrar of Companies (ROC) through the necessary filings.‍

4. Complete compliance filings‍

The company must submit the necessary forms and documents to the ROC or other relevant authorities. For example, form SH-7 is required for capital reduction, while forms SH-9 and SH-11 are required for buybacks.

‍5. Execute the cancellation

After obtaining all necessary approvals, the company removes the canceled shares from its records. It then updates its books of accounts, share registers, and financial statements to reflect the revised share capital structure.

How to cancel shares: Physical vs electronic

While the approval process and regulatory filings are similar for both physical and electronic shares, the method of cancellation differs.

Cancelling physical share certificates

When a shareholder surrenders physical share certificates to the company or its Registrar and Transfer Agent (RTA), they are first verified for authenticity. 

Once confirmed, the certificates are stamped as "CANCELLED" to prevent misuse. 

Regulatory guidelines mandate that these canceled certificates be retained for at least three years before destruction, with final disposal requiring board approval

Cancelling electronic (dematerialised) shares

For dematerialised shares, once all necessary approvals are obtained, the company instructs the depository (NSDL/CDSL) to deactivate them. Unlike physical shares, electronic shares are not physically destroyed but are simply removed from circulation within the depository system.

 FAQs

1. What is share cancellation?

Share cancellation is the process of permanently removing shares from circulation. This can occur for various reasons, such as share buybacks, capital restructuring or mergers.

Once canceled, these shares no longer hold any value, voting rights, or dividend entitlements, and they cannot be reissued unless new shares are created and issued separately.

2. What is the difference between cancelling physical and electronic shares?

Canceling physical and electronic shares follows different processes but requires the same approvals, regulatory filings, and updates to the company’s share register and financial statements.

For physical shares, shareholders must surrender their certificates, which are then verified, stamped as "CANCELLED," and retained for three years before being destroyed.

For electronic shares, the company instructs the depository (such as NSDL or CDSL) to deactivate them in the system, eliminating the need for physical destruction.

3. Why is dematerialisation important for share cancellation?

Dematerialisation simplifies share cancellation by removing the need for physical verification, stamping, and destruction. Instead, shares can be deactivated electronically, making the process faster.

4. Do I need shareholder approval to cancel shares?

Shareholder approval is required for certain types of share cancellations, such as capital reduction, buybacks exceeding 10% of paid-up capital, or mergers. However, routine cancellations, like forfeited shares or unissued share cancellations, may not always require shareholder consent. 

5. What happens to cancelled shares?

Once canceled, shares are permanently removed from circulation and lose all value. The company then updates its share register and financial statements to reflect the reduction in share capital.