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Change in Share Capital

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Change in Share Capital - Overview

The allocation of investment used as initial capital to establish a company is a pivotal decision that demands careful consideration from its supporters. This decision holds significant importance during the company's registration phase. As the business gains momentum, there often emerges a strategic impetus for the company to broaden its operational horizons, expand its scope, scale, or organizational structure.

Transforming this aspiration into reality necessitates a commensurate infusion of additional funds and investments. This process is commonly referred to as augmenting or modifying the company's share capital. In certain instances, the requisite funds might surpass the threshold of the originally authorized capital.

The authorized capital denotes the critical quantum of investment that provides the company the prerogative to allocate shares to shareholders. In accordance with Section 2(8) of the Companies Act, 2013, the authorized capital threshold is delineated within the Capital Clause of the company's Memorandum of Association. At this juncture, the company is required to take proactive measures to escalate or revise the authorized capital limit, thereby enabling the issuance of more shares. However, it is imperative to note that the company is legally barred from issuing shares in excess of the stipulated authorized limit.

In summary, the quantum of investment allocated as initial capital to launch a company is a decision of paramount significance. As the company progresses, the aspiration to expand may necessitate additional funds. This process, known as augmenting or altering the share capital, mandates a meticulous approach, adhering to legal parameters and the company's governing documents. The authorized capital, which dictates the permissible share issuance, is specified in the Memorandum of Association's Capital Clause as per Section 2(8) of the Companies Act, 2013. While the company can increase this authorized limit to issue more shares, it is imperative to avoid surpassing this threshold to ensure legal compliance.

Definition of Share Capital: The term "Share Capital" refers to the aggregate value of shares that a company is authorized to issue. This value is divided into a predetermined number of shares, each representing a fixed monetary amount. Share capital serves as a vital financial resource for companies to sustain and conduct their business operations. This capital is utilized for various essential activities, including acquiring business premises, stocking inventory, and more.

When a company decides to expand its financial capacity, the initial step is to assess the existing Authorized Share Capital. This is crucial because a company is legally prohibited from issuing shares that exceed the limit of its authorized share capital. If the company intends to issue more shares, it must undertake the process of increasing the authorized share capital, which involves amending the Memorandum of Association.

A company with Share Capital can alter its Share Capital if permitted by its Articles of Association. In such cases, the company must adhere to the procedures stipulated by the Companies Act, 2013. To effect an increase or alteration in share capital, the company must obtain regulatory approval by submitting the requisite forms to the registrar of companies.

Key Characteristics of Changes in Share Capital:

  1. Inclusion in the Definition of Goods: According to the Sale of Goods Act, 1930, goods encompass movable property, excluding money, stocks, and shares.

  2. Distinctive Rights and Obligations: Share capital confers distinct rights and financial responsibilities associated with the predetermined amount of capital. Each share represents a specific ownership stake.

  3. Numerical Identity: Share capital is identified by its numerical value. However, this rule does not significantly impact the ownership status of an individual whose name is recorded as the holder of a share in a depository's register.

  4. Transferability: Shares, as movable property, are transferable in accordance with the provisions outlined in the company's Articles of Association.

Types of Changes in Share Capital According to Section 61 of the Companies Act, 2013:

  1. Increase in Authorized Share Capital: This involves enhancing the total value of shares that the company is authorized to issue.

  2. Consolidation and Division of Shares: Companies can merge or divide existing shares into larger or smaller denominations than their current value.

  3. Conversion of Shares into Stock: Companies can convert fully paid-up shares into stock and subsequently reconvert the stock into fully paid-up shares of any denomination.

  4. Sub-Division of Shares: Companies can divide their shares into smaller denominations.

  5. Reduction of Share Capital: This pertains to the reduction in the nominal value of a company's share capital through various legal processes.

Documents needed for General Changes in Share Capital

The steps and documents involved in effecting changes in share capital include:

  1. Declaration of Extraordinary General Meeting (EGM) with Descriptive Report: Notify shareholders about the intention to hold an EGM to discuss and approve the proposed changes in share capital. Provide a comprehensive report outlining the reasons and implications of the change.

  2. Altered Memorandum of Association (MOA): Prepare an updated version of the MOA reflecting the modifications to the authorized share capital, in accordance with the Companies Act and other relevant regulations.

  3. Duplicate of EGM Resolution: Provide a copy of the resolution passed during the EGM, indicating shareholders' approval for the proposed changes in share capital.

  4. Modified Articles of Association (AOA): Amend the AOA to align it with the changes in share capital, including any provisions related to consolidation, division, or other alterations.

  5. Certificate of New Capital Arrangement: Present a certificate confirming the new capital arrangement, detailing the classes of shares introduced as a result of consolidation or division.

  6. Copy of Board Resolution for AOA Modification: Include a copy of the Board's resolution approving the changes in the Articles of Association.

  7. Copy of Board Resolution for MOA Modification: Attach a copy of the Board's resolution sanctioning the amendments to the Memorandum of Association.

  8. Resolution of Shareholders: Submit a certified copy of the resolution passed by the shareholders, authorizing the consolidation, division, or other changes in share capital.

  9. Application Documents: Provide two duplicate copies of the application for changes in share capital, as per the prescribed format.

  10. Audited Balance Sheets: Include copies of audited balance sheets for the preceding three years, demonstrating the financial standing of the company.

  11. Resolution Explanation: Furnish a resolution explaining the rationale behind allowing the consolidation or division, providing a clear understanding of the purpose and benefits of the proposed changes.

  12. Legal Document Verification: Provide legal documents validating the authenticity of the petition, supporting the legitimacy of the proposed changes.

  13. Payment Confirmation: Include a bank draft as proof of payment for the requisite application fee.

  14. Vakalatnama or Memorandum of Appearance: If applicable, present a Vakalatnama or Memorandum of Appearance, along with a copy of the Board's resolution, as required by legal procedures.

  15. Other Necessary Documents: Include any additional documents stipulated by the regulatory authorities for processing changes in share capital.

Procedure to Change the Authorised Capital

Review of Articles of Association: Before taking any steps to increase or reduce the authorized capital, it's imperative to carefully examine the Articles of Association (AOA). The AOA outlines the internal rules and regulations of the organization. This step is crucial to ascertain whether the AOA contains provisions that permit changes to the company's capital structure. If such provisions exist, the process becomes straightforward. However, if the AOA lacks these provisions, the company must first amend the AOA in accordance with Section 14 of the Companies Act, 2013, before proceeding with modifications to the authorized capital.

Conducting a Board Meeting: Initiate a formal notice to all directors, providing them with the agenda of the meeting at least 7 days before the meeting. During the Board Meeting, pass a Special Resolution to convene an Extraordinary General Meeting (EGM) and issue notices as per Section 101 of the Act. The altered object clause concerning authorized capital in the Memorandum of Association (MOA) can be presented for approval through an Ordinary Resolution. The proposed change should align with the provisions of Section 60 of the Act. Notify shareholders about the details of the board meeting, including the agenda, time, date, and venue. Specify the voting method to be used for passing the resolution at the EGM. Send the EGM notice to directors, shareholders, and auditors at least 21 days before the meeting.

Conducting the Extraordinary General Meeting: Present the matter of increasing the share capital during the EGM. Conduct the voting process according to the predefined manner. After obtaining approval and authorizing the resolution, attach an explanatory report and execute the increase in share capital.

Filing with the Registrar of Companies: Within 30 days of the authorized resolution, file eForm SH-7 and eForm MGT-14 (if applicable) along with the necessary documents and prescribed fees with the Registrar.

  1. Form MGT-14: Submit this form to the Registrar of Companies (RoC) within 30 days of passing the resolution to increase share capital.

  2. Form SH-7: This form must also be submitted to the RoC within 30 days of passing the resolution to increase share capital. Form SH-7 informs the Registrar about the increase in authorized capital. Filing these forms within the stipulated timeframe is essential to avoid penalties or legal consequences.

It's crucial to adhere to these steps and comply with the regulatory requirements of the Companies Act, 2013, and other relevant laws. Engaging legal professionals or experts familiar with corporate law can help ensure a smooth and compliant process when making changes to the company's share capital.

FAQ

Frequently Asked Questions

Change in Share Capital means modification in the number of shares.
Increase or change in Share Capital is a critical change to an organization's structure. Capital restyling or redesigning includes reducing or increasing share capital. This might be completed by combining shares, or by decreasing the par value of shares.
A company can raise capital investment from the primary market through various methods. Some of them induce public issues, private placement, offer for sale, right Issue, and tender process.
If authorized by its articles or AOA, a company may utilise its share premium account or capital redemption reserve to fund a business issue of wholly or partly paid-up bonus shares in ratio to their existing shareholdings.
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