Power of Limited Companies to Alter Its Share Capital

Section 61 Limited companies’ ability to change their share capital

 (1) A limited company with a share capital may change its memorandum in its general meeting to—if permitted by its articles.

(a) Raise the amount of its authorized share capital that it deems necessary;

(b) Combine and divide all or a portion of its share capital into shares larger than its current shares: Provided, however, that no combination and division that alters the voting percentage of shareholders shall be effective unless it has received the Tribunal’s approval following an application submitted in the manner specified;

(c) change all or a portion of its fully paid-up shares into stock, then change that stock back into fully paid-up shares of any denomination;

(d) divide its shares, or any of them, into shares of a smaller amount than that specified by the memorandum; provided, however, that the ratio between the amount paid and the amount, if any, unpaid on each reduced share shall remain the same as it was in the case of the share from which the reduced share is derived.

(e) Cancel shares that, as of the resolution’s passage, no one had acquired or agreed to acquire as of that date, and reduce the share capital by the amount of the shares thus cancelled.

(2) There will not be any diminution of share capital as a result of the cancellation of shares under subsection (1).

Introduction

Chapter IV of the Companies Act of 2013 contains Section 61, which largely outlines and discusses the limited company’s ability to change its share capital. With the exception of sub-section 1’s proviso, this section becomes effective on April 1, 2014. The proviso went into effect on June 1st, 2016. A limited company is one in which each shareholder’s liability is capped at the value of their ownership interest. In layman’s terms, a company’s share capital is the capital raised by the issuance of shares. Limited corporations have the ability to adjust their share capital, which includes increasing, consolidating, dividing, converting into stock or vice versa, cancelling, and subdividing their shares, under Section 61 of the Companies Act of 2013. Section 61’s broad range of authority contributes to the business world’s increased flexibility. For a better understanding of this dynamic power under the 2013 act, this analysis will provide in-depth knowledge on this section together with any judicial pronouncements that may have been made.

Objectivity of Section 61

  • In accordance with the Articles of Association, a corporation limited by shares may amend its Memorandum of Association as follows:
  • Boost the share capital that is authorized
  • Combine and divide all or a portion of the share capital into shares with greater par value than the current shares. With the caveat that a consolidation and division of share capital will only require the Tribunal’s permission if the voting proportion of shareholders changes as a result of the consolidation.
  • Completely or partially convert the fully paid-up shares into stock, then convert the stock back into fully paid-up shares.
  • Subdivide the shares to create a lesser number of shares.
  • The corporation has the right to cancel any unclaimed shares and reduce its share capital as a result. According to the 2013 statute, such cancellation of shares cannot be interpreted as a decrease in share capital.

The change needs to be approved by an ordinary resolution, not a special resolution, at a general meeting. Before moving forward with a resolution to change the capital, it is important to confirm that the company is expressly given permission to do so in the articles. This section must be read in conjunction with Section 64 of the Act of 2013, which requires any business changing its share capital under Section 61 to file a notification with the registrar in the required form within 30 days of the change in share capital, together with an updated memorandum.

It is necessary to understand this section in light of the 2016 National Company Law Tribunal rules. This outstanding action, which establishes a single window method for dealing with company law-related issues, aims to provide prompt, effective resolution of issues. The following conditions must be met in order to file an application with the Tribunal for the consolidation and division of share capital:

  • If the voting percentage of shareholders changes, an application for consolidation and division must be filed using form NCLT.1 and must be accompanied by the documents specified in the rules in order for the tribunal to approve the consolidation and division of all or any of the share capital into shares with a larger amount than the existing shares (annexure B).
  • The application must include, among other things, the following: (a) the articles allowing the merger or division; (b) the company’s current capital structure; and (c) the company’s new capital structure following the merger or division. (d) The class of shares that are being combined or divided. (e) the face value of the shares before and after a merger or split. f) the rationale behind the consolidation or division.
  • The following must be completed by the company at least 14 days prior to the tribunal hearing: (a) notify the central government, the registrar, the SEBI in the case of listed firms, and any other necessary regulatory agency, regulating the company, of the petition and a copy of the application. This is done in line with rule 35(b).
  • The central government, the registrar, the SEBI in the case of listed firms, and any regulator, if the company is regulated by any other necessary regulatory entity, must get a copy of any objections submitted by any person with an interest in the proposed proposal.
  • The tribunal may issue such an order after hearing the application, subject to whatever terms and conditions it deems appropriate.

The quick actions that a limited company must take to ensure that it complies with Section 61 correctly are as follows:

  • Check the Articles of Association for a clause that permits changing the memorandum. It is crucial that the articles permit a corporation to change its share capital in the same way. If there isn’t one, you can change the rules using Section 14 of the 2013 Companies Act.
  • Fill up an application and submit it to the relevant stock exchange as well as any other stock exchange where the company plans to list its consolidated shares.
  • Call a Board Meeting, conduct it, and adopt a resolution approving the proposed consolidation of the Company’s shares. You should also set a date, time, and location for a general Company meeting to adopt a special resolution, if that is required by the article. Additionally, pass a resolution permitting a CS or CA to enter appearance in accordance with Rule 45 of the National Company Law Tribunal rules from 2016. Also approve the notice, agenda, and explanatory statement that will be attached to the notice of the general meeting.
  • Send information about this change in the company’s share capital to the relevant Stock Exchange as soon as possible following the board meeting in the event of a listed entity.
  • Announce the general meeting and include an explanation in the notification.
  • Hold the general assembly and ensure that the necessary resolution is adopted.
  • Within thirty days of the resolution’s passage, submit Form-MGT-14 to the registrar along with a certified copy of the resolution, notice of the general meeting at which the resolution was passed, the explanatory statement attached to the notice, and a copy of the Memorandum of Association and Articles of Association.
  • Provide notification to the registrar in form SH-7 in accordance with rule 15 of the Companies (Share Capital & Debentures) Rules, 2014 and Section 64 of the Companies Act, 2013 within thirty days of the resolution’s passage.

Section 61 application

This section essentially applies if the share capital of a limited company is altered in any way in accordance with the various provisions of Section 61 of the Act of 2013, in general. This section comes into play when a corporation feels the need to alter its share capital structure in order to maximize the company’s efficiency and profit.

Procedure for Changing Share Capital

Sending Notice of Board Meeting; a notice of board meeting must be sent to each director at least seven days before the meeting; shorter notice is possible if certain conditions are met.

2. Board Meeting: A board meeting will be called in order to call a general meeting. The Board of Directors will determine the date, day, time, and location of the general meeting. Section 102 requires that a notice of general meeting be accompanied by an explanatory statement.

3. Notice of general meeting: At least 21 clear days’ notice is required, but shorter notice may be given if the given condition is met. Notice shall be given in accordance with Section 101 to each director, auditor of the company, and member of the company. The notice must include the date, day, time, and location of the meeting, as well as the business to be transacted. Because capital conversion is a unique business, notice must be accompanied by an explanation.

4. General Meeting: The Company will pass an ordinary resolution to change the share capital at the general meeting.

The Unlimited Corporation

As previously discussed, Section 61 only applies to limited companies; can unlimited companies change their share capital?

Section 65, which deals with the “Reserve of share capital on conversion to a limited company,” provides the answer to the question of changing the share capital of an unlimited company. To change its share capital, the unlimited company must first convert itself, and then it can change its share capital in the following ways:

  1. It may increase the nominal amount of share capital by increasing the nominal amount of each share, subject to the condition that no part of the increased capital may be called up unless the company is wound up.

 This means that the company’s share capital can be increased without increasing the number of shares. They can increase the nominal value of existing shares to increase share capital rather than the number of shares, subject to the condition that such amount can be called up only during the company’s liquidation to meet its liabilities.

2. Reserving uncalled-up share capital for the company’s liquidation. The Company may provide that any uncalled share capital may be called only in the event of the company’s insolvency to meet the company’s liabilities.

There are two important points here. First, under the Companies Act of 2013, there is no concept of reserve capital for limited companies; however, reserve capital exists for unlimited companies. The second conversion into a limited company under this section is limited to these two actions and should not be considered in conjunction with the conversion under section 18.

A Brief Overview of the Cases

  • Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [5]: A limited company’s ability to change share capital must be exercised with caution and not based on the company’s whims and fancies. It is a unique ability that should only be used after careful consideration. In this case, the court ruled that the power to alter must be exercised in the best interests of the company, not the welfare of some specific members.
  • Pixel Mercantiles Pvt. Ltd. & Co. In this case, the petitioner company has applied to the board for approval of a scheme of amalgamation. Petitioners issued shares at a premium based on the underlying value of the companies’ net assets at the time the shares were issued. Companies keep the share premium because there has been no use of securities premium in any form, including capital reduction or bonus shares. This premium was determined by taking into account the companies’ future earnings projections, and shareholders have not objected to it. The petitioner company’s scheme was met with a number of objections from the central government. One example is adherence to procedure under sections 61 and 64 of the Act of 2013. The board of directors ordered the company to comply with the aforementioned sections because their amalgamation resulted in a change in their share capital, which would be valid only if the company followed the provisions of sections 61 and 64.
  • Arjit Arvinf Marathe v. H. Fillunger Pvt. Ltd. [7]: Another intriguing case in this section. In this case, the appellant is a shareholder in the company that has increased its share capital. The appellant contended that the provisions of Section 61 were not followed, rendering the company’s action invalid. It is worth noting that the court held that section 61 also allows a company to change its memorandum, but the procedure must be followed in accordance with section 13 of the act.

Conclusion

To increase its overall benefits, a limited company can use the procedure outlined in this section to change its share capital. This section provides a way to make the business world more flexible, while the procedural aspect of this section, along with supplementary rules, provides security to shareholders and company members. This assists businesses in growing, avoiding unnecessary implications, and paving the way for them to do what is best for their business.

References

https://thecompany.ninja/section-61-power-of-limited-company-to-alter-its-share-capital/

https://incometaxindia.gov.in/Acts/Companies%20Act,%202013/102120000000029604.htm

https://taxguru.in/company-law/alteration-authorized-capital-companies-act-2013.html

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