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Change in Share Capital
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One of the most crucial decisions that supporters need to make during a company's early stages of incorporation is determining the amount of capital to invest in the company. As the business grows, the company may seek to expand its operations, scale, or structure. Achieving this goal may necessitate injecting additional funds into the company, essentially altering the share capital. At times, the required capital may exceed the authorized limit at that time. The authorized capital represents the maximum amount of capital that the company can issue in shares to its shareholders. According to Section 2(8) of the Companies Act, 2013, the authorized capital limit is specified in the Memorandum of Association under the Capital Clause. To issue more shares, a company can take the necessary steps to increase or modify the authorized capital limit. However, under no circumstances can shares be issued beyond the authorized capital limit.
Summary of Changes in Share Capital
The regulations in section 61, along with sections 13 and 64 of the Companies Act 2013, control changes in share capital within organizations. As per Section 2(8) of a company's memorandum, the share capital of the organization holds significant importance. Therefore, it is evident that based on this definition, a company can expand its business up to the authorized capital limit. If you intend to grow your business by injecting additional funds, you must first increase your authorized capital by following specific steps, as detailed further.
Meaning of Authorized Capital and Nominal Capital
A fixed number of shares with a set value is predetermined. All companies need share capital in cash to operate. This capital is used for various purposes such as acquiring business premises and inventory. Before increasing its capital, a company must verify its current authorized share capital. Shares cannot be issued beyond this limit without amending the Memorandum of Association. If allowed by the Articles of Association, a company can adjust its share capital, following the procedures outlined in the Companies Act, 2013. Approval from the registrar of companies is necessary by submitting the relevant forms for any changes or increases in share capital.
What Share Capital Means
Share Capital represents a set amount of the share capital, entailing specific rights and responsibilities.
Under the Sale of Goods Act, 1930, goods refer to any movable property except for certain cases involving money, stocks, and shares.
Share Capital is identified by its quantity, although this rule does not affect a share owned by an individual whose name is registered as the holder in a depository's records.
Furthermore, a share in a company signifies a movable asset that can be transferred as outlined in the company's articles of association.
Characteristics of Change in Share Capital
Section 61 of the Companies Act, 2013 outlines various types of changes in Share Capital. These include the following:-
Increasing the 'Authorized' Share Capital;
Combining and dividing all or any of the Share Capital into shares of a larger amount than the existing Share;
Converting all or any of its fully paid-up shares into stock and re-converting that stock into fully paid-up shares of any denomination;
Subdividing its shares into fractions.
Reducing the number of shares.
Types Associated with Change in Share Capital
The various types of changes in share capital under Section 61 of the Companies Act, 2013 are as follows:
A piece of approved share capital is the portion which an organization issues overall for membership. The organization issues 'Issued share capital' for public subscription, and the portion for which it is registered at the nominal worth.
Increasing Authorized Share Capital:
Share capital represents a company's equity established by issuing shares to stockholders in exchange for capital (cash or other forms). Authorized Share Capital refers to the nominal capital with which the company was incorporated. To ensure financial integrity, the government mandates that companies cannot haphazardly issue shares to raise capital. Authorized share capital is the maximum value of share capital that a company is legally permitted to issue to shareholders. The company can increase/change share capital by amending the Change in Share Capital Clause in the Memorandum of Association.
Consolidation of Share Capital:
The company can also effect changes in share capital by consolidating smaller classification shares into broader classifications. If consolidation and division affect the voting percentage of shareholders, it must not take effect unless approved by the Tribunal afterward. An application must be submitted in Form No. NCLT-1 along with the details in Annexure B. The application must include the following:-
Conversion of Share Capital:
The company can change share capital by converting fully paid-up shares into stock. Additionally, the re-conversion of stocks into fully paid-up shares can also be done. Converting loans into equity share capital is a common and reliable method to raise capital without direct investments. The Companies Act, 2013, has introduced new provisions for loan-to-equity share conversion, included in section 62(3) of the Act. According to section 62(3), to convert a loan into share capital, the company must take a loan with the condition that it will be converted into share capital. If approved by special resolution before obtaining the loan, the subscribed capital can be raised. It is crucial to pass the special resolution at the time of loan approval. Without a special resolution, the loan cannot be converted into share capital.
Sub-division of Share Capital:
In this scenario, the company subdivides its shares into smaller amounts than stated in the Memorandum of Association. "Subdivision of share certificates" refers to a separate document required by a shareholder for a portion of their holding. As per Rule 6(1) of Com (Share Capital and Debentures) Rules, 2014, capital is distributed by subdividing share certificates. When shares are subdivided, the company alters its share capital by increasing the number of shares issued initially and decreasing the par value while maintaining the total value of shares constant.
Cancellation of Share Capital:
If a person does not take shares or decreases the share capital by a certain number of shares, it is known as Cancellation of Share Capital. Reducing Share Capital involves decreasing the issued, subscribed, and paid-up share capital of the company. Previously governed by sections 100 to 104 of the Companies Act, 1956, it is now regulated by section 66 of the Companies Act, 2013. Under the new Act, the authority to approve such reductions has been transferred from the high court to the National Company Law Tribunal (NCLT). Buyback of shares and redemption of Preference Shares also constitute a reduction of share capital but are governed by specific provisions under the Act. These reductions, in the form of buyback and redemption, do not require approval from the Tribunal (NCLT). The company may reduce share capital by canceling any shares that are lost or not backed by available assets. For instance, if shares of INR 100 face value, each fully paid-up, are backed by assets worth only INR 75, the company may reduce the share capital by canceling INR 25 per share and writing off a corresponding amount of assets.
What Are the Various Types Associated with Change in Share Capital?
The process for changing the share capital can be summarized as follows:
1. Issue a Board notice with the meeting agenda at least seven days prior to the meeting.
2. Conduct a Board Meeting.
3. Pass the Resolution for the Change in Share Capital during the Board meeting.
4. The Resolution passed is contingent upon the approval of the Shareholders Meeting.
5. Set the date, time, and venue for the Shareholders Meeting.
6. The Director is responsible for notifying the Shareholders of the Shareholders meeting.
7. Publish the announcement for the Shareholders meeting at least 21 days before the meeting.
8. Hold the Shareholders meeting.
9. Pass the Resolution with the consent of the majority shareholders.
10. After passing the Resolution, notify the Registrar of Companies (RoC) about the Change in Share Capital within 30 days. Failure to do so may result in fines ranging from 10,000 Rupees per day up to 5 lakh Rupees.
11. The necessary forms must be filed with the appropriate fees at the Ministry of Corporate Affairs. Failure to register these forms with the Registrar of Companies (ROC) under Section 117 of the Companies Act, 2013, may lead to fines ranging from five lakh rupees to 25 lakhs of rupees. Each defaulting officer may be liable to pay fines from 1 lakh rupee up to 5 lakhs of Rupees.
What Is the Procedure for Changing Share Capital?
The following documents are required:-
Notice of Extraordinary General Meeting with accompanying details;
Copies of resolutions passed at the shareholders' meeting;
Amended Memorandum of Association;
Amended Articles of Association;
Certified Board resolution for changes in Articles of Association;
Certified Board resolution for changes in Memorandum of Association;
Certified Shareholders' resolution;
Audited balance sheets for the past three years;
Resolution authorizing consolidation or division with an explanation;
Evidence of new capital structure and share class for consolidation or division;
Sworn affidavit verifying the petition;
Bank draft for payment of required fee;
Vakalatnama or Memorandum of appearance along with Board's Resolution;
Two additional copies of the application;
Any other relevant documents.
Documents Required for General Changes in Share Capital, Including Annexure B
Deciding on the capital to invest in the Company is a crucial task for supporters during the incorporation stages. As the business grows, the Company may consider expanding its operations, size, scale, or structure. Achieving this goal may involve injecting more funds into the Company, essentially increasing or altering the share capital. At times, the required capital may exceed the authorized limit at that time. The term capital refers to the 'Share Capital' of the organization, where rupees are divided into a set number of shares of a fixed value. Every Company needs cash in the form of share capital to sustain its operations.
Summary
What is Change in Share Capital?
A modification in the number of shares
Can be paid-up capital be increased/Changed?
Can a company increase or reduce its share capital?
How is the capital recognized?
What is the difference between authorized capital and paid-up capital?
How does the initial market raise capital?
A company can raise share capital from the primary market by means of various methods. The methods may induce public issues, offer for sale, private placement, right Issue, and tender process. This is the most famous method of rising for long term capital. It expresses the raising funds directly from the public.