In this article, Rahul Kumar, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the rules regarding the alteration of the share capital of a company
Increase or decrease of authorized share capital of a company is known as alteration of share capital.
There two type of share capital of a company:- equity share capital and preference share capital. Power of a company to alter its share capital is defined and explained in section 61 of the Companies Act, 2013. It can be done by ordinary resolution of the company, thus it is not necessary to confirm the alteration of the share capital of the company from the tribunal.
The Companies Act 2013 allows the companies to alter and make some changes in its authorized share capital with certain specified procedures for alteration of share capital is specifically mentioned in the Companies Act, 2013.
Alteration in the share capital can be done only if it is so authorized by its Articles of Association to alter the capital clause of its Memorandum of Association.
Basic and Mandatory Rules Necessary to Follow
First step: It is important for a company to check and evaluate whether the company on the first face is authorized by the Articles of Association to increase the share capital if company’s Article of Association does not permit or authorize, then it is to be done with the objective of altering them.
Second step: The company has to take the confidence of other individuals. The board meeting has to be conducted for enabling the board to call for the extraordinary general meeting, it is mandatorily required to get approval from the shareholders for increasing the authorized share capital.
Third step: The company then calls for an extraordinary general meeting of the shareholders of the company by sending them a notice with clear agenda and proper explanatory statements, explanation, with a proper reasoning along with the resolutions to be passed to alter the Memorandum of Association and Articles of Association which are to be altered for the purpose of increasing the authorized share capital.
Fourth Step: Thereafter, resolutions for increasing the authorized share capital of the company and corresponding alterations in the Memorandum of Association and Articles of Association by resolution. After completing the whole procedural part, the company authorizes the board to file necessary forms and resolutions with ROC having jurisdiction.
The company, if thinks necessary and suitable for the growth, can increase its share capital by issuing new shares. A company may consolidate and divide all or part of its share capital into shares of a large amount. A company may also sub-divide its shares of lower denomination. It may cancel those shares which have not been taken by any person and reduce its share capital.
Thus, the right to alter share capital must be given in the article of association of the company.
Procedure for alteration of share capital:
- Authorized by article
- By resolution
- Notice to registrar
Notice To Registrar
Notice of alteration is required to be given from the hands of the company to the registrar within a period of 30 days, if the company fails to do there are provisions for a hefty penalty under the statute.
Alteration of Share Capital with Different ways of Journal Entries
Increase in share capital by making a fresh issue of shares, if a company wants to increase the share capital beyond the amount of share capital, it must increase its authorized capital by the number of new shares. The company can convert all or any of fully paid up shares into stock or reconvert stock into fully paid up shares of any denomination.
Provisions Relating to Alteration
The capital clause can be altered if the Article of Association contains the provision for such alteration otherwise, the first basic step is to alter Article of Association by passing a special resolution. The basic principle for alteration is that the alteration of share capital be bonafide & in the interest of the company.
Generally, ordinary resolution is enough to alter the capital clause, thus notice of alteration to be given to the ROC, when share capital automatically stands increased. Loan taken from central government also increases the capital of a company.
Condition for Alteration of Share Capital
The company should be limited by shares, the company limited by guarantee having a share capital, the Article of Association must permit the company for alteration of share capital.
Alteration of Share Capital can be done by
Alteration of share capital can be done by issuing new shares of the company in the market, by consolidating the shares, the company can do the alteration in its capital by the conversion of previous shares, the company can subdivide its share in the market, the company can cancel its unused shares from the market.
Share Capital may Automatically be Increased
When government by its order states that any debenture issued to any government by a company or any part under such circumstances, the debenture be converted into shares on the transfer of capital issued by the company.
Reduction of Share Capital
After confirmation by the tribunal on an application by the Company, limited by shares and guarantee, having a share capital and share capital of a company can be reduced by special resolution. The reduction of share capital is governed by Section 66 of the Companies Act, 2013. It is necessary to confirm it by the decision of the tribunal in writing.
For reduction of share capital, the company is required to conduct the board meeting, a notice for the general meeting is necessarily required to be given to every shareholder and concerned person
Every notice of a meeting shall specified by mentioning the place, date, day and the hour of the meeting and shall contain a statement of the business to be transacted at such meeting. A notice is required to be proper and elaborate, the material facts concerning each item of special business to be transacted at a general meeting, such as the nature of concern or interest, financial or otherwise to every director and the manager every other key managerial personnel and their relatives.
A notice which is given to the concerned person should itself be self-explanatory
After the notice, the Extraordinary General meeting is called and the concerned members vote in favor or against of the authorized share capital of the company. The votes of the members play a crucial role in taking appropriate decision. Thus, during the course of meeting the members decide the alteration in the memorandum of association. Thus, after considering all the facts in the welfare of company, the board members by utilizing their powers pass an ordinary resolution.
Reduction in Share Capital Not Allowed
Reduction in share capital is not allowed in the case where there are arrears in the repayment of interest and thereon. The creditor of a company has a right to object against the reduction in its share capital. For reduction in the share capital of the company, the registrar shall issue a certificate to the company for reduction.
Reason for Reduction in Share Capital of a Company
There are many reasons for the reduction of share capital of a company some are as follows.
- If there is a returning of surplus capital of a company.
- The company wants to smooth its capital structure by simplifying it.
- Sufficient reserve is also one of the reasons for the reduction in share capital.
Assets of the company also play a vital role in the variation of the share capital of the company.
Altering the Memorandum of Association and Articles of Association
Section 61 of the Companies Act, 2013 states about Power of limited company to alter its share capital, sub-clause further states that (1) A limited company having a share capital may, if so authorised by its articles, alter its memorandum in its general meeting to— increase its authorised share capital by such amount as it thinks expedient. A company can increase its authorised share capital by altering the memorandum of association. Section 13 of the Companies Act deals with altering the memorandum of association and section 14 of the above-said act deals with altering the articles of association.
Section 13 of the Act states that as provided in Section 61, a company may, by a special resolution and after complying with the procedure specified in this section, alter the provisions of its memorandum.
If there is no provision to alter the provision of section 14 of the companies act, 2013, then the company is required to make suitable application to the concerned stock exchange, where the company is listed in a prescribed form.
Precedents in Regard to the Alteration of Share Capital of a Company
In Re North Cheshire Brewery Co., 1920 WN 149. Re Metropolitan Cementry Co., (1934) SC 65
In this case law, powers are given to the members to alter its share capital only if it is authorized by its article of association
In [Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. (1981) 1 Com Cases 743 (SC)].
Powers to alteration must be exercised in the interest of the company and not for the welfare of some particular members
The company is bind to follow each and every part of the procedure as explained and mentioned in the statute failing which, the company shall be punishable with a hefty penalty. The procedural part mention in the statute for alteration of share capital also give security to its shareholder.
However, the increase in capital of the company, in the long run, benefit its investors in the form of increased return on equity through capital gains, an increase in dividend payouts or both.
Bank also usually prefer to give a loan to the company depending upon the authorized capital. Thus, authorized capital is also helpful for a company in growth. It is helpful in avoiding unnecessarily implications.