POWER OF LIMITED COMPANY TO ALTER ITS SHARE CAPITAL

Introduction:

To run a company, it needs huge funds for its operations in long/short term. Company has to raise and pool the money to do the business it has various sources through which company can raise money as a Public co (Limited Co here) can offer its shares to general public to subscribe through Prospectus (IPO/ FPO).  As per Companies Act 2013, Share means share in share in share capital of the company.

Before raising funds through public offers company need to take permission from the authorities. While incorporating a company, it makes memorandum of association wherein the Share Capital Clause is inserted, which states the total amount of equity capital company wants to raise at the par value of shares.

The maximum amount of share capital a company can raise is called its Authorised/ Registered Capital. This does not limit the issue of number of shares but puts a celling on total amount that can be raised by selling those shares.

Alteration of Share Capital:

As Company grows, it may consider the expanding in terms of operations, size, Scale or Structure. To make that ambition come into reality it may need to arrange and pool in more money to make it into reality. The amount of capital required may exceed the registered capital as per the Memorandum of Association and to fulfil the needs of capital and to raise money over and above the capital clause companies change the capital requirement by alternating its Authorised share capital in memorandum of association.

The process of amendment in Memorandum of Association is to be done by complying the Section 13 of Companies Act 2013 which is applicable to all companies. Section 13 of Companies Act, 2013 deals with alteration of all the clauses of Memorandum except Capital Clause, it mandates passing of special resolution. Provisions of Section 61 read with section 64 of Companies Act of 2013, Rule 15 of Companies (Share Capital and Debenture) Rules of 2014 Types of alteration of capital clause in the general meeting of a company limited by shares in accordance with section 61 (1) of the Companies Act,2013. 

  • increase its authorised share capital by such amount as it thinks expedient;
  • consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares.
  • convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares of any denomination;
  • sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum.
  • cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, Decrease the amount of share cancelled from the total amount of its share capital.

Considering these alterations in share capital, alteration concerning such consolidation and division which affected voting rights of such shareholders need the approval of Tribunal; except these two there is no confirmation needed from Tribunal.

In accordance with the section 64(1) of the Companies Act 2013, these alterations are required to be notified within 30 days of the passing of the resolution, a copy of the resolution along with an altered memorandum have to file with the Registrar in Form No. SH.7. Upon receipt of these documents ROC will record and make any alteration which may be necessary in the company’s memorandum or articles or both.

Process for alteration of Share Capital:

  1. Section 61 of the companies act 2013, Mandates pre condition that Articles of Association must authorise the alteration of Share Capital.

(If there is no such provision in AOA as per section 14 of companies act 2013 the company by altering its Articles of Association first have to insert such clause which will authorise the company to alter its share capital)

  • Call Boards meeting for which main agenda would be: [Issue notice in accordance with the provisions section 173 (3) for Convening a meeting of Board of Directors]
  • To approve alteration of Authorised share capital.
  • To call Extra Ordinary General Meeting to get approval from shareholders
  • To approve the notice of Extra Ordinary General meeting along with Explanatory Statement
  • To authorise the Director or Company Secretary to issue notice of EGM
  • Issue notice to all members and concerned person in accordance with the provisions of section 101 of Companies Act 2013.
  • Hold Extra Ordinary General Meeting and pass Ordinary Resolution authorising alteration of share capital. {Section 61 (1) (a)}
  • File form SH 7 within 30 days of passing ordinary resolution along with following attachments:
  • Notice of EGM
  • Certified copy of Resolution
  • Altered Memorandum of Association
  • Concerned Registrar of Companies will check and approve alteration
  • The company shall file notice in prescribed from and manner in specified period after alteration of its share capital along with altered MOA.
  • No need to pass Special Resolution for increasing authorised share capital.

(However, for alteration of Memorandum of Association company needs to alter its Article of Association then company Shall pass Special Resolution for altering its AOA and Form MGT 14 also be filed with registrar)

Judicial Pronouncement:

  • Members can exercise only those powers which has been authorized by the Articles of Association. [Re North Cheshire Brewery Co.]
  • The powers given under the statute should be exercised bona fide in the interest of the company and not for the benefits of any group. [Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd.]
  • The notice convening the shareholders meeting to pass the necessary resolution for increasing share capital must specify the amount of the proposed increase. [Mac Connell v. E. Prill & Co. Ltd.]
  • Consolidation and sub-division of share may be accomplished by the same resolution [Re. North Cheshire Borewery Co. Ltd.]
  •  In the said judgment the court has observed that, the function of the Court to interfere with the Company’s power to consider a resolution for cancelling the unissued portion of its share capital. The exercise of power by a company to cancel the unissued shares cannot be restrained by an injunction. [Re. Swindon Town Football Co. Ltd.]

When share capital stands automatically increased?

The share capital of a company stands automatically increased where any Government, by its orders or directs to company that any debentures issued to, or the loans obtained from the Government by a company or any part thereof shall be converted into shares in the company, on such terms and conditions as are considered by that Government to be reasonable in the circumstances.

Appeal against Govt. Order; However, where the terms and conditions of such conversion are not acceptable to the company, it may, within sixty days from the date of communication of such order, appeal to the Tribunal which shall after hearing the company and the Government pass such order as it deems fit.

Where appeal is dismissed or not preferred; Where the Government has, by an order, directed that any debenture or loan or any part thereof shall be converted into shares in a company, and no appeal has been preferred to the Tribunal or such appeal has been dismissed, the memorandum of such company shall implement it by increasing the authorized share capital of the company, such altered authorized share capital stand increased by an amount equal to the amount of the value of shares which such debentures or loans or part thereof has been converted into. [Section 62(6)].

[i] REFERENCE


[i] Companies Act 2013 Bare Act

ICSI Study Material SBEC and Company Law

https://www.mca.gov.in/MinistryV2/changecompanyinformation.html

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