Alteration of Authorized Capital under Companies Act, 2013

In this write-up, I am going to discuss the Alteration of the share capital of the limited company. For this, we have to understand what is authorized capital and what is the alteration of share capital.

Article discusses What is Authorized Capital of the Company, What Is Alteration Of Authorized Share Capital Of The Company, Why To Alter Authorized Share Capital, How To Alter Authorized Share Capital, Extract of Section 61 of the Companies Act, 2013- Power of Limited Company to Alter its Share Capital, Procedure For Altering The Share Capital, Filing Of Form To Registrar Of Companies for Alteration Of Authorized Share Capital Of The Company, Penalty for filing form for Alteration of Authorized Capital under Companies Act, 2013.

What is Authorized Capital of the Company

Section 2(8) of c defines the Authorized share capital:-

“Authorised capital” or “Nominal capital” means such capital as is authorised by the memorandum of a company to be the maximum amount of share capital of the company.

What Is Alteration Of Authorized Share Capital Of The Company

In general, alteration means bringing change in the character of something, however, when we talk about the alteration of the share capital of the limited company having share capital we mean following.

a. Increase in the authorized share capital;

b. Consolidation and division of share into shares of larger value. However, such consolidation and division shall not impact the voting percentage of shareholders. In case it does then the approval of NCLT will be required;

c. Converting fully paid-up shares into stock and stock into fully paid-up shares;

d. Sub-division of shares or any class of shares or type of shares into smaller amount, however, such division should be in the same proportion as existing paid-up shares are;

For example, if any company has the current structure of 10 shares of 10 Rs. each out which 1 share is unpaid then when these shares are sub-divided into the 100 of shares of Re. 1 each then 90 shares will be fully paid-up remain 10 shares will be un-paid.

e. Cancellation of unsubscribed shares, shares which are not taken by anyone or agreed to be taken by anyone, may be cancelled and the share capital will be reduced by such cancelled shares and such reduction will not be deemed to be the reduction of share capital under section 66 of the Companies Act, 2013.

Why To Alter Authorized Share Capital

Since we already discussed that authorized share capital is the maximum amount of share capital of the company, so one of the most fundamental reasons to alter share capital is to increase the authorized share capital of the company so that company can receive more capital for its growth.

The other form of alteration of share capital is sub-division of shares i.e. 1 share of Rs. 10 each may be divided into 10 shares of Re. 1 each. There primary two-fold reason to do this kind of sub-division, first such division increase the liquidity of shares in the market and second it will increase the participation of small shareholders in the market since buying these shares does not need huge invest due to lower value without impacting the real value of the shares. Other two form of alteration is not that common.

How To Alter Authorized Share Capital

Alteration of the share capital involves alteration of the capital clause of Memorandum of Association, and alteration of Memorandum can be done under Section 13 of the Act, however, section 13 provides that share capital can be altered as provided under section 61 of the Companies Act, 2013.

For an easy understanding, I am producing Section 61 of the Companies Act, 2013.

Extract of Section 61 of the Companies Act, 2013- Power of Limited Company to Alter its Share Capital

“Power of Limited Company to Alter its Share Capital

61. (1) A limited company having a share capital may, if so authorised by its articles, alter its memorandum in its general meeting to—

(a) increase its authorised share capital by such amount as it thinks expedient;

(b) consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares:

*Provided that no consolidation and division which results in changes in the voting percentage of shareholders shall take effect unless it is approved by the Tribunal on an application made in the prescribed manner;

(c) convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares of any denomination;

(d) sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum, so, however, that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived;

(e) 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, and diminish the amount of its share capital by the amount of the shares so cancelled.

(2) The cancellation of shares under sub-section (1) shall not be deemed to be a reduction of share capital.”

Section 61 provides for the power of the limited liability company having share capital to alter its share capital.

So two thing are very amply clear that Section 61 only is for the limited liability company and it’s not only deal with authorized capital but any type of alteration to the share capital i.e. authorized capital, issued capital, paid-up capital and un-paid capital etc. however, it is pertinent to note that this section only provides alteration mechanism to limited liability company, so what about the unlimited company, we answer this issue later on first understand, how to alter the share capital of the limited company.

For the altering the share capital of the company, first, we have to check whether the Article of Association has such power, if such power is not there then we have to first amend the Article of the company.

Since I am focusing here on alteration in the share capital of the company so won’t go on detailing of the alteration of the Article, however, for altering the Article of the company we need to pass Special Resolution in the General Meeting.

Once we have power in Article, we can amend the share capital of the company by passing Ordinary Resolution. It is to be noted that amending capital clause is less cumbersome than altering other clauses since other clause required passing of Special Resolution and other approval for example if the company is moving its registered office from one state to another state.

About The Unlimited Company

As we discussed above, Section 61 deals with the only limited company so what about the unlimited company, can they alter their share capital.

For the answer to the question of alteration of the share capital of the unlimited company we have to go to Section 65, which deals with the “Reserve of the share capital on conversion to a limited company”. For the unlimited company to alter its share capital it first has to convert itself and then it can alter the share capital in the following ways;

1. It can increase the nominal amount of share capital by increasing nominal amount of each share, subject to the condition that no part of the increased capital shall be capable of being called-up except in the event the company being wound-up.

This means that the company can increase its share capital without increasing the number of shares. They can increase the nominal value of existing shares to increase the share capital, not the number of shares subject to the condition that such amount can be called-up only during the wound-up meeting the liability of the company.

2. Reserving the uncalled up share capital for the wound-up of the company. The Company may provide that any uncalled share capital may be called only in case of winding up of the company for meeting the liability of the company.

There are two important points are here, first, there is no concept of reserve capital for the limited company under Companies Act, 2013, however, reserve capital is there in case of the unlimited company. The second conversion into a limited company under this section is limited for only these two actions and should not be treated at part with the conversion of section 18.

Procedure For Altering The Share Capital

1. Sending Notice of Board Meeting; Notice of Board Meeting to be sent to every director at least 7 days before the meeting, shorter notice is possible subject to fulfilment of condition subject to which it can be issued.

2. Board Meeting: Board Meeting will be called for calling the general meeting. Board of Director will fix the date, day, time and place of the general meeting. Notice of general meeting to be accompanied by an explanatory statement as per section 102.

3. Notice of general meeting: At least 21 clear days’ notice to be given, however, shorter notice may be given subject to compliance of the given condition. Notice to be given as per section 101 and shall be given to every director, auditor of the company, members of the company. Notice shall provide the date, day, time and place of the meeting and also specify the business to be transacted. Since alteration of capital is a special business so notice to be accompanied by an explanatory statement.

4. General Meeting: In the general meeting, the company will pass an ordinary resolution to alter the share capital.

Filing Of Form To Registrar Of Companies

In the case where the company is already authorized by the Article of Association of the company, the company only need to file SH-7 under section 64 within 30 days of alteration of share capital. Following documents need to be attached with SH-7;

1. Certified True Copy of the Resolution altering the share capital of the company.

2. Altered  Memorandum of the company

3. In case the change in share capital is due to the order of the centre government or NCLT, then such order needs to be attached.

Penalty

Section 61 and 65 does not provide any specific penalty hence penalty will be imposed under section 450. In case of non-compliance, the Company and every officer in default shall be punishable with fine up to Rupees Ten Thousand (Rs. 10,000). In case of continuous default Rupees One thousand per day, till such default continues.

In case of default in filing SH-7 within 30 days, section 64 provides the following penalties. Penalty for the company and every officer in default;

Rupees one thousand per day till such default continues or Rupees Twenty Five Lakh (Rs. 25,00,000) whichever is less.

CS. Nishant Mishra | Associate Company Secretary |E-Mail: [email protected]