Introduction
Authorized share capital of the company is the maximum permissible limit set by the shareholders of the Company that allows the Company/Board to issue shares of the Company.
Shares are of two kinds: Equity and Preference. For any issue of shares whether Equity or Preference, Company needs to have authorized share capital first. Sometimes, Company has authorized share capital in the form of equity shares and it wants to issue preference shares. In this scenario, Company needs to reclassify its authorized share capital by converting unissued equity authorized share capital into fresh preference authorized share capital.
Regulatory provisions for reclassification of share capital
The Companies Act, 2013 does not expressly mention the words Reclassification of share capital. However, Section 61 provides powers of limited companies to alter its authorized share capital. It provides the following:
(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:
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.
Reclassification implies two actions on the part of the Company i.e first cancellation of one class of shares i.e equity and increase in another class of shares i.e preference. Cancellation of shares has to be done as per Section 61(1)(e) and increase in another class has to be done as per Section 61(1)(a).
Procedure for Reclassification of Authorized Share Capital
The following steps are required to be followed for the reclassification of the authorized share capital of a company:
1. Draft the notice and agenda for the board meeting for the following matters to seek board approval:
- Cancellation of unissued shares of one class and increase in shares of another class as per Section 61(1);
- Alteration of the Memorandum of Association;
- Fixing the place, date, day, and the hour of the Extra Ordinary General Meeting (EGM) and authorising a director or the company secretary for sending the notice.
2. Conduct Board Meeting and pass following resolutions:
- Cancellation of unissued shares of one class and increase in shares of another class as per Section 61(1);
- Alteration of the Memorandum of Association;
- Fixing the place, date, day, and the hour of the EGM and authorising a director or the company secretary for sending the notice.
3. Conduct EGM to pass the following resolution as an ‘Ordinary Resolution’:
- Cancellation of unissued shares of one class and increase in shares of another class as per Section 61(1); and
- Alteration of the Memorandum of Association.
4. Filing of requisite e-forms with the ROC:
E-Form SH-7 and INC-33 needs to be filled with the jurisdictional ROC through MCA portal by attaching the following documents:
- Certified true copy of ordinary resolution alongwith an explanatory statement;
- Memorandum of Association.
In case of Cancellation of unissued shares of one class and increase in shares of another class, form SH-7 is non STP mode and needs to be approved by the jurisdictional ROC. On approval of form, the reclassification of authorized share capital is effectual.
Draft Ordinary Resolutions
CANCELLATION OF UNISSUED SHARES OF ONE CLASS AND INCREASE IN SHARES OF ANOTHER CLASS AND CONSEQUENT ALTERATION IN MEMORANDUM OF ASSOCIATION
“RESOLVED THAT pursuant to the provisions of Section 61 and all other applicable provisions, if any, of the Companies Act, 2013, (including any amendment thereto or re-enactment thereof) and the Memorandum and Articles of Association of the Company, consent of the Members of the Company be and is hereby accorded to cancel 5,00,000 (Five Lacs) Unissued Equity Shares of the face value of Rs.10/- (Rupees Ten) each and issue new 5,00,000 (Five Lacs) Preference Shares of face value of Rs.10/- (Rupees Ten) each.”
“RESOLVED THAT pursuant to the provisions of Section 13 and other applicable provisions, if any, of the Companies Act, 2013, the existing Clause – V of the Memorandum of Association of the Company, be and is hereby substituted by the following new Clause – V :
Clause V: The Authorised Share Capital of the Company is Rs.1,00,00,000/- (Rupees One Crore) comprising of Rs.50,00,000/- (Rupees Fifty Lacs) divided into 5,00,000 (Five Lacs) Equity Shares of Rs.10/- (Rupees Ten) each and Rs.50,00,000 (Rupees Fifty Lacs) divided into 5,00,000 (Five Lacs) Preference Shares of Rs.10/- (Rupees Ten) each.
“RESOLVED FURTHER THAT any one director of the Company be and is hereby authorized to file e-Form SH-7 with the Registrar of Companies, Mumbai, Maharashtra and to do all such acts, deeds and things as may be required to give effect to the aforesaid resolution.”
Conclusion
Reclassification of Authorized Share Capital helps companies to have flexibility to convert one class of share into another class of share without payment of Roc fees and stamp duty. A Company can alter its authorized share capital by way of cancellation of one class and increase in another class by passing necessary board resolutions and seeking shareholders’ approval by way of an ordinary resolution.
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