Power of Limited companies to alter its share capital

Introduction

Section 61 of Companies Act, 2013, has laid down the power of limited company to alter its share capital. Section 61 came into existence on 1st April 2014 excluding the proviso of sub-section 1 and the proviso was implemented on 1st June 2016. Limited company refers to a company in which the liability of members of that company is restricted to their share in that company.

The capital raised by the company by the issuance of shares to the general public is referred to as share capital. In plain terms, share capital means the cash provided to a company by its shareholders. Share capital is a kind of long-term capital in which the shareholders get a fraction of ownership of the company. Section 61 of the Companies Act 2013  provides the capacity to limited companies to alter the share capital, that is to say increase, divide and consolidate, transform into stock or the other way around, sub divide and cancel shares of the company.

The extent of control presented by Section 61 is large and improves the flexibility of the company. This assessment will offer a detailed understanding of Section 61 of Companies Act 2013 together with court decrees for superior insight.

Objectives of Section 61 of the Companies Act 2013 

Section 61 of Companies Act 2013 lays down the limited company’s power to alter the share capital of the company. Section 61 of the Companies Act 2013 is concise.

Company limited by shares might perhaps bound by the articles of association amend its memorandum of association in the general meeting of the company to:

  • Increase authorized share capital
  • Divide and consolidate the whole or some share capital into shares of higher sums than its current shares. An authorization of the Tribunal will be needed for the consolidation and the division of share capital in case the voting proportion of the shareholders changes consequential to such consolidation.
  • Convert fully paid shares in totality or partially into stock as well as reconvert the stock into fully paid shares.
  • Convert into a lesser quantity of shares by subdivision of the shares. 
  • The shares, that are not brought by anyone, the company can cancel such shares and reduce its share capital appropriately. Such termination of shares ought to not be regarded to be a reduction of the share capital under the Companies Act 2013.

The alteration of the share capital necessitates an ordinary resolution to be approved at a general meeting. Prior to engaging in passing an ordinary resolution to alter the capital, it ought to be confirmed that there is an explicit stipulation in the articles of association empowering the company to modify the articles of association.

Section 61 of the Companies Act 2013 is to be read out with section 64 of the Companies Act 2013 that dictates that any company making changes in the share capital as per section 61 of the Companies Act 2013  has to file in the prescribed form, a notice with the Registrar in 30 days of the alteration in the share capital of the company, together with the altered memorandum of association.

Section 61 of the Companies Act 2013  has to be read along with National Company Law Tribunal rules, 2016. National Company Law Tribunal rules, 2016 establish a single window system, that deals with company regulations associated concerns, is a significant step as it’s intended at delivering prompt clearance of issues in an effective way.

National Company Law Tribunal rules, 2016  set down the requirements for the application to National Company Law Tribunal for the consolidation and division of share capital of the company as follow:

  • Application to the National Company Law Tribunal for the consolidation and division can be made for procurement of the consent of the National Company Law Tribunal, for the consolidation or division of whole or any part of share capital into shares of a greater sum than the prevailing shares. In case variations are made in voting proportion of shareholders, the same has to be filed in form no. NCLT.1 as well as ought to be supplemented by such records as stated in the rules (Annexure B).
  • The application shall state:
    • provisions of articles of association permitting the consolidation or division
    • current capital structure of company
    • the new capital structure of company following the consolidation or division
    • class of the shares that are being consolidated or divided
    • face value of the shares before and after consolidation or division
    • reason for consolidation or division.
  • As a minimum 14 days before the hearing, in front of the National Company Law Tribunal, the company has to ensure:
    • advertise the petition, by a registered post, in agreement with Rule 35
    • and provide a notice accompanied by copy of application to the Registrar, Central Government and to the Securities and Exchange Board of India in case of listed companies and to other required governing body, governing the company.
  • If any oppositions are elevated by anyone who has interest in the proposed application, it shall serve a copy of the opposition to the Registrar, Central Government and to the Securities and Exchange Board of India in case of listed companies and to other required governing body, governing the company.
  • After the hearing of the application, the National Company Law Tribunal might give such order, conditional on such provisions and conditions, as it believes to be fitting.

Cases laws

Re North Cheshire Brewery Co.:

In this case, powers were granted to the members to alter the share capital on condition that the article of association permits it. This is to some degree, that is similar to what is followed by the Companies Act 2013  and had also been observed by the preceding the Companies Act 1956.

Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd.:

Power to alter the share capital cannot be exerted exclusive of caution and on an irrational or unpredictable idea or desire of the company, by a limited company. It is a unique power that is to be used following proper deliberation. In the present case court had held that power of alteration ought to be applied in the benefit of the company and not for benefit of a few specific members.

H. Fillunger Pvt. Ltd. v. Arjit Arvinf Marathe:

In this case the plaintiff was a shareholder in the company which had enhanced its share capital. The plaintiff contended that the terms of Section 61 of the Companies Act 2013   were not obeyed and consequently the act of the company is void. The court had held that section 61 of the Companies Act 2013 also authorizes the company to alter the memorandum however the process which has to be observed has to be as per section 13 of the Companies Act 2013. 

Conclusion

A limited company has to stick to the procedure as laid down under section 61 of the Companies Act 2013, for the alteration of its share capital. Section 61 of the Companies Act 2013  offers a path to provide flexibility to the companies as well as the procedural portion of section 61 of the Companies Act 2013, along with additional rules, offers protection to the shareholders of the companies. Overall power of limited company to alter its share capital  supports companies to prosper and stay away from pointless inferences.

References :

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