Change in Share Capital
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Determining the capital infusion for a company is a pivotal decision during its incorporation phase. As the business gains momentum, there may be aspirations to broaden operations, increase size, scale, or alter its structure. To materialize these aspirations, additional funds may be needed, necessitating an augmentation or alteration of the company's share capital. In certain instances, the required capital might surpass the limit of the authorized capital at that juncture.
The authorized capital is the greatest amount of Capital for which the Company can issue shares to the shareholders. As per the Section 2(8) of the Companies Act, 2013, the Authorised Capital limit is specified in the Memorandum of Association under the Capital Clause. A company may take the necessary steps required to Increase/Change the authorized capital limit to issue more shares. However, it cannot issue shares exceeding the authorized capital limit in any case.
The term "capital" refers to the 'Share Capital' of the organization, where rupees are divided into a predetermined number of shares of a fixed amount. Every company requires funds in the form of share capital to sustain its operations. This capital is utilized to fulfill various needs such as acquiring business premises and stock-in-trade.
When a company decides to augment its capital, the first step involves checking the current Authorized Share Capital. This is crucial because the company cannot issue shares beyond the authorized share capital. To issue additional shares, it is necessary to increase the authorized share capital by amending the Memorandum of Association of the company.
For companies with share capital, if authorized by the Articles of Association, modifications to the Share Capital can be made. In such cases, the company must adhere to the procedures outlined in the Companies Act, 2013. To effect an increase or change in share capital, approval must be obtained from the registrar of companies by filing the required forms.
The process of changing the share capital in organizations is governed by Section 61, in conjunction with Sections 13 and 64 of the Companies Act 2013. As per Section 2(8) of the Companies Act, 2013, 'authorized capital' or 'nominal capital' refers to the capital specified in the memorandum of a company as the maximum limit of its share capital.
Therefore, it is evident from the aforementioned definition that a company can expand its business up to the extent of its authorized capital. If there is a need to augment your business by injecting additional funds, the initial step involves expanding the authorized capital. This can be achieved by following a series of steps, as detailed below.
As provided in Section 61 of the Companies Act, 2013, different types of Change in Share Capital are associated.
Kinds of Change in Share Capital under Section 61 of the Companies Act, 2013 are as follows:-
Issued share capital is that piece of approved share capital, which organization issues in overall for the membership. The organization issues ‘Issued share capital’ for public subscription, and the portion for which it is registered at the nominal worth.
The share capital represents a crucial component of a company's equity, formed through the issuance of shares traded to investors in return for capital, be it in the form of cash or other valuable considerations. The Authorized Share Capital signifies the nominal capital with which the company was originally established.
To uphold financial integrity, governmental regulations dictate that companies cannot haphazardly issue shares to generate capital. Consequently, the authorized share capital serves as the upper limit of the share capital that a company is legally permitted to offer to shareholders. Any alteration or augmentation in share capital can be effectuated through the implementation of the Change in Share Capital Clause in the Memorandum of Association. This clause outlines the procedures and conditions under which modifications to the share capital structure can be undertaken, ensuring regulatory compliance and financial prudence.
The company can also fix Change in Share Capital by consolidating the smaller classifications shares into broader classifications.If consolidation and division appears in changes in the voting percentage of shareholders, it must not take effect except the Tribunal confirms it subsequently:
An application must be filled in Form No. NCLT-1 concurrently with the particulars included in Annexure-B.
The company has the option to initiate a Change in Share Capital by converting fully paid-up shares into stocks. Additionally, there is the flexibility to reconvert stocks into fully paid-up shares. A reliable method to raise capital without direct investments involves the conversion of loans into equity share capital. This strategic move is particularly useful for maintaining a smooth business operation in India, where debt can be transformed into share capital.
The Companies Act of 2013 has introduced new provisions regarding the conversion of loans into equity shares, outlined in Section 62(3) of the Act. According to this section, for the conversion of a loan into share capital, the company must obtain the loan with the understanding that it will be subsequently transformed into share capital.
Crucially, if this option has been endorsed by a special resolution before acquiring the loan, the subscribed capital can be increased. It is essential to note that passing the special resolution at the time of loan approval is highly advantageous. Failure to secure a special resolution means that the loan cannot be converted into share capital. This underscores the importance of careful planning and adherence to legal procedures in the financial strategies of the company.
In this prototype, the company undergoes a process of share subdivision, where it divides its shares into smaller units than initially specified in the Memorandum of Association. The "subdivision of share certificates" refers to a distinct document required by a shareholder when requesting a division of their holding into a smaller number of shares than originally held. This practice aligns with Rule 6(1) of the Companies (Share Capital and Debentures) Rules, 2014, which governs the distribution of capital through the subdivision of share certificates.
During a share subdivision, the company modifies the composition of its share capital by increasing the number of initially issued shares and concurrently reducing their par value. Consequently, the value of each share decreases, while the overall number of shares expands. It is important to note that the class of shares and the total authorized share capital remain unchanged throughout this process.
When an individual opts not to acquire shares or decreases the amount of share capital by a specific number of shares, it is termed as the Cancellation of Share Capital. The Reduction of Share Capital involves the reduction of the issued, subscribed, and paid-up share capital of the company. In the past, the reduction of share capital was governed by sections 100 to 104 of the Companies Act, 1956. However, it is now regulated by section 66 of the Companies Act, 2013. Under the old Act, approval from the high court was necessary, but with the new Act, this authority has been transferred to the National Company Law Tribunal (NCLT).
It's worth noting that the buyback of shares and the redemption of preference shares also constitute a reduction of share capital but are subject to specific provisions outlined in the Act. Unlike other forms of reduction, such as the cancellation mentioned earlier, the reduction through buyback and redemption doesn't require approval from the Tribunal (NCLT).
A company may choose to reduce its share capital by canceling any shares that are either lost or not represented by available assets. For instance, if shares with a face value of INR 100 each, fully paid-up, are represented by assets worth only Rs. 75 per share, the reduction of share capital can be achieved by canceling Rs. 25 per share and simultaneously writing off an equivalent amount of assets.
Those are as follows:-
The Procedure followed for the Change in Share Capital in brief is follows:
A modification in the number of shares.
If an organization wishes to expand its paid-up capital, it can expand it by offering the Right Issue of shares. The right Issue can be offered to current investors under a plan of workers' investment opportunity, subject to a special resolution passed by the organization.
The measure of share capital can be either expanded or decreased. In either case, the Companies Act manages the methods for such changes. The share capital can be changed via a share issue, Issue of alternative rights or other unique rights, an increment from reserves, or interest in share capital.
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