Introduction:
The need to reclassify the authorised share capital of a company in one or more classes may arise for various reasons. For example, if the company was incorporated with only one type or class of share capital, i.e., equity shares, it would be required to create a class of preference shares if it wishes to issue preference shares. In this article, I shall discuss how one can reclassify the authorised share capital consisting only of equity shares to both equity and preference shares. While doing so, I shall discuss whether reclassification of authorised share capital is permitted under the provisions of the Companies Act 2013, and the legal framework applicable to reclassification. Thereafter, I shall present the steps that are required to be taken for the reclassification.
Meaning of Reclassification:
As per Section 43 of the Companies Act 2013, the share capital of a company shall be of two kinds, equity share capital, and preference share capital. As per the case of Protrans Supply Chain Management Private Limited (C.P. (CAA) 996/MB-II/2020) (Protrans Supply Chain), equity and preference and a combination of two depict the total share capital of a company. The case also states that when shares of one class are converted into another class (for instance, equity shares into preference and vice versa), the subscribed and paid-up share capital do not undergo any change and that only the nomenclature of shares changes. Accordingly, reclassification of the authorised share capital is nothing but the act of changing the nomenclature so that post the change, if the company had one class of shares, e.g., equity shares, it shall have two classes of shares, namely equity and preference shares.
Permissibility:
In the case of Protrans Supply Chain, the Hon’ble NCLT, Mumbai Bench, accepted the submission of the Petitioner Companies that:
“the conversion of shares from one type to another, for example from Equity shares to Preference Shares, is not barred by any provision of the law, and in fact and in law, such conversion only amounts to reorganization of the Share Capital of the Companies which is permissible under section 61 of the Companies Act 2013. Therefore, the conversion of equity shares into preference shares as sought by the Petitioners under the Scheme cannot be deemed to be impermissible.”
Therefore, reclassification of the share capital from equity to preference and vice versa is permitted under the provisions of the Companies Act 2013.
Legal Framework:
Section 13: For the changes to be made to the MOA.
Section 61: For the purpose of reclassification
Section 64: for intimation to the ROC.
As per Rule 15 of the Companies (Share Capital and Debentures) Rules, 2014, the notice of such alteration shall be filed by the company with the Registrar in Form No. SH-7 along with the fee.
In addition to these provisions, the provisions related to the board meeting, the EGM, and the Secretarial Standards would also be applicable.
Steps Involved:
Based on the above legal provisions, the following steps are required to be followed for the reclassification of the authorised share capital of a company:
1. Check the Articles of Association of the Company to ensure that the articles contain the necessary provisions in this regard. In the event the articles do not contain the necessary provisions, the company would be required to alter its article of association first.
2. Draft the notice and agenda for the board meeting and the resolutions to be passed. These resolutions shall seek the approval:
a. of the members through special resolution under Sections 13 and 61 of the Companies Act 2013 for the reclassification of the authorised share capital by way of cancellation of unissued shares of one class and increase in shares of another class;
b. for alteration of the Memorandum of Association;
c. for fixing the place, date, day, and the hour of the meeting of the EGM and authorising a director or the company secretary for sending the notice;
d. for the issuance of the notice of EGM; and authorising a director and company secretary to do all the acts necessary in relation to giving effect to the resolutions including the filing of the necessary forms (among others).
3. Issue a minimum 7 days’ notice of the Board Meeting along with an agenda mentioning therein the business to be transacted and the resolutions to be passed.
4. Call and hold the Board Meeting and pass the resolutions. Ensure compliance with the provisions of the Companies Act 2013 and the Secretarial Standard 1.
5. Issue a 21 days’ notice for the EGM, as per Section 101 of the Companies Act 2013. The notice shall be sent to the directors, the members, and the auditors of the company, as per Section 101(3) of the Companies Act 2013. It shall contain the details with respect to the place, date, day, and the hour of the meeting and the business to be transacted at the EGM, as per Section 101(2) of the Companies Act 2013. The notice may be issued through electronic mode.
6. Call and hold the EGM and ensure compliance with Secretarial Standard 2 in this regard. Ensure that the quorum is present as per Section 103 of the Companies Act 2013.
7. Alter the memorandum of association of the company and ensure that the alteration is reflected in every copy of the memorandum.
8. File SH-7 per the provisions of Section 64 of the Companies Act 2013 within 30 days of the alteration of the memorandum of association. The form shall be accompanied by certified true copies of the ordinary resolutions, a copy of the notice sent to the members of the company, the minutes of the meeting, and an altered Memorandum of Association.
9. In the event, a company is required to edit its articles, it would also be required to file MGT-14 within 30 days of passing the necessary resolution as per the provisions of Section 117 of the Companies Act. Otherwise, the aforementioned eight steps shall be adequate compliance for the purpose of reclassification.
Conclusion:
In conclusion, a company can reclassify its authorised share capital by changing the nomenclature so that post the change, if the company had one class of shares, e.g., equity shares, it shall have two classes of shares, namely equity and preference shares. The same is permitted under the provisions of the Companies Act 2013, as per the case of Protrans Supply Chain. A company desirous of reclassifying its authorised share capital may do so by passing necessary board resolutions and seeking shareholders’ approval by way of ordinary resolution. After the approval, the company shall alter the capital clause of its memorandum of association and file Form SH-7 with the ROC within 30 days of such alteration.
******
Disclaimer: This is not professional advice. You may not rely on the opinion expressed in this article to make a business or regulatory compliance-related decision. If you are looking for professional advice, please consult a company secretary. Any comments and/or suggestions concerning this article may be sent to shukla_ashutosh@outlook.com.
Author Bio
