How to participate in a capital reduction on Zerodha

From WebNotes, a public knowledge base. Last updated 12 May 2026. Reading time ~8 min.

A capital reduction is a corporate action in which a listed company reduces its paid-up share capital. Capital reductions are used for several purposes:

To return surplus cash to shareholders (return of capital).
To write off accumulated losses against capital (loss absorption, with no cash return).
To restructure the balance sheet before a merger, demerger, or restructuring.
To reduce the face value of shares (face value reduction without cash return).

Capital reductions are governed by Section 66 of the Companies Act, 2013, and require approval from both the shareholders (by special resolution) and the National Company Law Tribunal (NCLT). After NCLT sanction, the company reduces its share capital by cancelling or buying back a portion of paid-up capital, or by reducing the face value per share.

Unlike buybacks, which are governed by SEBI’s buyback regulations and require active shareholder tendering, capital reductions are largely automatic corporate actions: once the NCLT order is registered, shares are adjusted or cancelled without individual shareholder action. However, shareholders must understand the mechanics to manage their Zerodha holdings and tax obligations correctly.

Conflict-of-interest disclosure: WebNotes is an independent information publisher with no commercial arrangement with Zerodha.

Prerequisites

An active demat account with Zerodha at CDSL.
Holdings in the company undergoing capital reduction, settled in the Zerodha demat account on the record date.
No application, order, or payment is typically required (unless the capital reduction is structured as a selective buyback requiring a tender, in which case the buyback process applies).

Types of capital reduction

1. Return of capital (cash distribution)

The company returns a portion of paid-up capital to shareholders in cash. For example:

Face value reduced from Rs 10 to Rs 5 per share.
Shareholders receive Rs 5 per share in cash (the reduction amount).
The total number of shares remains the same; only the face value and the recorded capital are reduced.

This is conceptually similar to a special dividend but treated differently for tax purposes (see tax section below).

A portion of shares is cancelled, typically to:

Eliminate minority shareholders’ holdings in a group restructuring.
Consolidate shares (for example, 5 existing shares cancelled and 1 new share issued in exchange, economically similar to a 1:5 reverse split).

In selective capital reductions, only certain classes of shareholders’ shares are reduced or cancelled. This type often requires a court-approved scheme under Section 66 read with Section 230.

3. Loss absorption (no cash return)

The company cancels share capital to set off accumulated losses on the balance sheet. No cash is distributed to shareholders. The number of shares may remain the same (face value reduced) or shares may be cancelled and re-issued at lower face value. This is primarily a balance sheet clean-up and does not result in cash to shareholders.

4. Reduction combined with a bonus or rights issue

A capital reduction is sometimes paired with a simultaneous bonus issue or rights issue, restructuring the capital base. Each component is treated separately.

Step-by-step: what happens to your Zerodha holdings

Step 1: Monitor NCLT proceedings and announcements

Capital reduction is announced through:

A board resolution disclosed to NSE/BSE.
A special resolution notice sent to shareholders (voting by EGM or postal ballot).
NCLT hearing and final order (this can take months from the board resolution).
Exchange disclosures of the NCLT effective date.

Step 2: Check the record date

After the NCLT order is registered with the Registrar of Companies (RoC), the company sets a record date for the capital reduction. Shareholders on record on this date are affected by the reduction.

Hold shares settled in the Zerodha demat account before the record date if you wish to receive any cash distribution (for return-of-capital type reductions). Under T+1 settlement, purchase shares at least one trading day before the record date.

Step 3: Cash credit (for return-of-capital type)

If the reduction involves a cash payment to shareholders:

The cash is paid directly by the company’s RTA via NEFT/RTGS to the bank account registered with your Zerodha demat account at CDSL.
The payment timeline is typically within 30 days of the record date (similar to dividend payment timelines under Section 127, applied by analogy).
Zerodha does not process this payment; the RTA initiates it.
No corporate action fee is charged by Zerodha for cash receipts under capital reduction.

After the record date:

If shares are cancelled or the face value is reduced, CDSL adjusts the holding in your demat account.
If the total number of shares is unchanged (face value reduced, cash paid): Console will show the same quantity but the face value of the holding changes.
If shares are cancelled and fewer new shares are issued (consolidation): Console will reflect the new lower quantity.

These adjustments are processed by CDSL based on corporate action instructions from the RTA. Zerodha reflects the change after CDSL updates the records.

Step 5: Verify holdings on Console

After the CDSL update, verify the quantity and value of holdings in Console > Holdings. The average cost per share will need to be manually checked against your own tax records, as discussed in the tax section below.

What can go wrong

Extended NCLT timeline: Capital reductions can take 6 to 18 months from the board resolution to the NCLT effective date. During this period, the company’s financial position, share price, and your plans may change. Monitor the NCLT proceedings via the company’s stock exchange disclosures.

Cash credit delayed: If cash is not received within 45 days of the record date, contact the RTA (not Zerodha) with your demat account number and bank details. The RTA initiates NEFT/RTGS; Zerodha is not in the payment chain.

Incorrect share quantity in Console: If Console shows an incorrect quantity after the capital reduction, raise a support ticket with Zerodha. Zerodha will reconcile with CDSL.

Selective capital reduction: understanding your category: If the reduction affects only certain shareholders (for example, preference shareholders or shareholders in a specific holding company), check whether your holding category is affected.

Tax treatment

Return of capital (cash distribution)

The tax treatment of a capital reduction with cash payout is not straightforward and depends on the structure:

CBDT position and judicial precedents: Under the Income Tax Act, 1961, the tax treatment of capital reduction proceeds depends on whether:

The amount received exceeds the cost of shares (in which case the excess may be taxable as capital gains or, in some structures, as deemed dividend under Section 2(22), consult a chartered accountant).
The amount received is less than or equal to the cost of shares (in which case there may be no taxable gain; the cost of acquisition of the remaining shares is reduced by the amount received).

Post-2021 CBDT clarification: The Finance Act, 2021 inserted Section 46A to explicitly address capital reduction, clarifying that amounts received in excess of the cost of shares are taxable as capital gains. The sale consideration is the cash received; the cost is the proportionate original acquisition cost attributable to the cancelled shares.

Capital gains tax rates:

STCG (holding period up to 12 months): 15% under Section 111A (if settled via exchange with STT).
LTCG (holding period more than 12 months): 10% on gains above Rs 1 lakh under Section 112A.

Loss absorption (no cash distribution)

No tax event arises in the year of a loss-absorption capital reduction (no cash is received). However, the cost of acquisition of the remaining/new shares after the reduction must be recomputed for future capital gains calculation. The revised cost per share is the original total cost divided by the new number of shares.

If shares are cancelled and new shares issued (consolidation), this is treated as an exchange of old shares for new shares. Under Section 47, such exchanges are non-taxable if structured as qualifying schemes. If taxable, the proceeds are the fair market value of the new shares received.

Capital reduction tax can be complex. Consulting a chartered accountant before the record date of a capital reduction is advisable, particularly where a significant gain or unusual scheme structure is involved.

References

Companies Act, 2013, Section 66, reduction of share capital.
Companies Act, 2013, Sections 230-232, scheme of arrangement (for selective capital reductions).
Income Tax Act, 1961, Section 46A (inserted by Finance Act 2021), capital reduction proceeds taxed as capital gains.
Income Tax Act, 1961, Section 2(22), deemed dividend provisions (applicable in certain capital reduction structures).
Income Tax Act, 1961, Sections 111A and 112A, capital gains tax rates.
CBDT Circular and judicial precedents on Section 46A, tax treatment of capital reduction.
SEBI LODR Regulations, 2015, record date disclosure for capital reduction.
Zerodha support documentation, capital reduction adjustments on Console.

Reviewed and published by

WebNotes Editorial Team

The WebNotes Editorial Team covers Indian capital markets, payments infrastructure and retail investor procedures. Every article is fact-checked against primary sources, principally SEBI circulars and master directions, NPCI specifications and the official support documentation published by the intermediary in question. Drafts go through a second-pair-of-eyes review and a separate compliance read before publication, and revisions are tracked against the SEBI and NPCI rule changes referenced in the methodology section.

Last reviewed: 12 May 2026
Conflicts of interest: WebNotes is independent. No relationship with any broker, registrar or bank named in this article.