The share capital clause of memorandum of association (SCC) of a Company can be altered as per the provisions of Section 61 of the Companies Act, 2013 (Act).

Section 61 provides that the articles of association (AOA) shall contain provisions for alteration of SCC of a Company, thereafter the company shall obtain an approval of its shareholders by passing an ordinary resolution in their general meeting.

Methods of alteration of SCC:

1. Increase of authorized share capital;

2. Consolidation of shares into the shares of larger amount;

But prior approval of the National Company Law Tribunal (“NCLT”) shall be obtained, for consolidation of shares which results in the change of voting percentage of the Shareholders of the company;

3. Conversion of fully paid-up share capital into stock or Vice versa;

4. Sub-division of shares into the shares of smaller denominations.

If in case, shares are partly paid-up, then the un-paid proportionate amount in sub-divided shares shall be the same as the un-paid amount in the shares prior to the sub-division.

E.g. A Ltd. have shares of Rs. 10/- Each, paid-up Rs. 8/- and unpaid Rs. 2/-. Company intends to subdivide the shares in two shares of Rs. 5/- each, therefore the un-paid amount per share shall be Rs. 1/- per shares.

5. Diminution of un-subscribed share capital.

Approvals required for alteration of SCC:

  • Board Approval;
  • Shareholders’ Approval; and
  • NCLT, if there is any consolidation of shares resulting in the change of voting percentage. (Rule 71 of NCLT Rules, 2016 prescribes the procedure to obtain approval of NCLT.)

Here is the brief procedure of alteration of SCC where the approval of NCLT is required, i.e. consolidation of shares results in the change of voting percentage.

Approvals required for alteration of SCC

Case study of ‘Chembra Peak Estate Limited’[1] (hereinafter referred to as “CPEL”), brief facts:

  • CPEL was listed on Madras Stock Exchange and Bangalore Stock Exchange.

Authorised Share capital= Rs. 75,00,000/- and paid-up share capital= 48,40,000/- divided into equity shares of Rs. 10/ share.

  • Securities and Exchange Board of India (hereinafter referred to as “SEBI”) vide its circular bearing no. CIR/MRD/DSA/14/2012 has provided for de-recognition of Regional Stock Exchange(“RSE”), in pursuant of which the companies listed on RSE shall be treated as Exclusively Listed Companies (“ELCs”), at that time the ELCs were transferred to the Dissemination Board of the stock exchanges having nation-wide trading terminal. ELCs have two options i.e. either to delist and provide exit opportunity to its shareholders; or to get list on the stock exchanges having nation-wide trading terminal.
  • SEBI vide its circular bearing no. SEBI/HO/MRD/DSA/CIR/P/2016/110, had issued procedure for providing exit- opportunity to the shareholders of ELCs.
  • In pursuant to the aforesaid circular CPEL had got ELC status and listed in Dissemination Board of National Stock Exchange (NSE), CPEL had given exit opportunity to its shareholders and NSE had relieved it form Dissemination Board.
  • CPEL had adopted to grant further exit opportunity to the shareholders, who had not tendered their shares to promoters of CPEL at the time of de-listing of shares as per the aforesaid SEBI circular, and in this view CPEL had proposed consolidation of share capital.
  • In 2018, CPEL had proposed to consolidate its share capital in the following manner:
Total no of shares (in Rs.) Face value per share (in Rs.)  Paid-up capital (in Rs.)
Existing position of share capital 4,84,400 10 48,44,000
Proposed position of share capital 80 60,550 48,44,000

Consolidation of 6055 equity share into one equity shares.

  • CPEL in its EGM dated 14th April, 2018, had passed a resolution whereby the aforesaid scheme of consolidation of share capital was approved, additionally it was decided that no shareholders would be entitled to get fractional shares, and these fractional shares would be consolidated and sell the shares and proceeds of such shares shall be distributed among the entitled shareholders proportionately.
Pre consol-idation Share-holding (4,84,400 shares) Pre cons-olidation voting rights   Post consol-idation Share-holding (80 shares) Post conso-lidation voting rights
Mr. A 10000 2.06% 10000/6055= 1.65 1 1.25
Mr. B 5000 1.03 5000/6055=.82 0 0

For the aforesaid fractions Mr. A and Mr. B would get proportionate money.

  • CPEL had adopted to grant exit opportunity to the shareholders, who had not tendered their shares to promoters of CPEL at the time of de-listing of shares as per aforesaid SEBI circular.
  • During hearing of the application, some shareholders had filed objections, and in preview of these objections NCLT had disapproved the said scheme of consolidation. CPEL had preferred an appeal to the Appellate Tribunal against the impugned order of NCLT, in which the Appellate Tribunal had found the scheme of consolidation is in the favor of the public shareholder of CPEL and the scheme was approved.

Conclusion

In the aforesaid case, Company had used the consolidation of shares as a mean of providing an exit opportunity to its public shareholders, however, there are other methodologies available under the Companies Act, 2013 for the same, such as reduction of share capital under section 66, buyback of shares under section 68 and compromise and arrangements under section 230 of the said Act. But the scheme of providing exit opportunity to the public shareholders of a company under section 61(1) (b) is very much convenient than other methodologies available

[1] CP No. 459/BB/2018 and Company Appeal No. 36 of 2019

Author Bio

Qualification: CS
Company: N/A
Location: Rohini, New Delhi, IN
Member Since: 11 Sep 2020 | Total Posts: 2

My Published Posts

More Under Company Law

2 Comments

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

October 2020
M T W T F S S
 1234
567891011
12131415161718
19202122232425
262728293031