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Change in Share Capital

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Overview of Change in Share Capital

The amount of capital to invest in the Company is one of the most critical decisions that have to be made by the supporters when a company is in its incorporation stages. As the business begins to pick up, the Company may look to expand its operations, expand in size, scale, or structure. To make that dream a reality, it may require the driving of more funds into the Company, basically increasing/Changing the share capital of the Company. Sometimes, the amount of necessary capital might surpass the limit of the authorized capital at the time.

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.

Meaning of Share Capital

The word capital signifies 'Share Capital' of the organization where the rupees divided into a predetermined number of shares of a fixed amount. Every Company requires cash in the form of share capital to maintain the business. The organization utilizes cash to meet its necessity by the method of gaining business premises and stock-in-trade and so on.

The Company which has chosen for expanding its Capital, first it has to check the current Authorized Share Capital. It is because the Company can't give the shares past the authorized Share capital in any way, for issuing the shares it is required to increase the authorized share capital by changing the Memorandum of Association of the Company.

The Company having Share Capital if so authorized by the Article of Association, can modify the Share Capital. In this case, the Company needs to follow the technique as recommended under the Companies Act, 2013. For the increase/Change in share capital, it is required to acquire the approval of the registrar of companies by filing required forms.

Meaning of Authorized Capital & Nominal Capital

The provision of section 61 governs the Change in share capital in the organizations, read with section 13 and 64 of the Companies Act 2013. According to Section 2(8) of the Companies Act, 2013, 'authorized capital' or 'nominal capital' signifies such Capital as approved by the memorandum of a company to be the most considerable measure of the share capital of the organization.

In this way, it is clear that employing the previously mentioned definition, an organization can extend its business up-to the level of authorized Capital. If you need to expand your business by infusion of more funds, at that point first, you need to grow your approved Capital by following a couple of steps, as discussed ahead.

What are the Characteristics of Change in Share Capital?

Share Capital is a privilege to a predefined amount of the share capital, carrying with its specific rights and liabilities.

According to the Sale of Goods Act, 1930 – Goods implies any movable property other than exceptional cases, money and stock and shares.

Share Capital is recognized by its number, though this provision will not have any significant impact to a share held by an individual whose name is entered as the holder in the record of a depository.

As well, a share of any part in an organization is a movable property transferable in the way mentioned in the articles of association of the Company.

What are the Kinds associated with Change in Share Capital?

As provided in Section 61 of the Companies Act, 2013, different types of Change in Share Capital are associated.

Those Are As Follows:-

Increase in ‘Authorized’ Share Capital;
Combination and division all or any of the Share Capital into shares of bigger amount than existing Share;
Convert all or any of its completely settled up shares into the stock and re-convert that stock into the completely settled up portions of any division;
Sub-Division of its shares, into the portions.
The reduction of shares.

What are the Extensive Types under Change in Share Capital?

Kinds Of Change In Share Capital Under Section 61 Of The Companies Act, 2013 Are As Follows:-

Issued Share Capital

Increasing of Authorized Share Capital

The share capital is that portion of a company's equity, which has been established by issuing shares and exchanging them to stockholders in exchange for capital (cash or other events). Authorized Share Capital means the nominal capital, with which the company was consolidated.

To maintain financial dignity, the government specifies that no company can indiscriminately issue shares to raise capital. To that consequence, authorized share capital is the maximum value of share capital that the company is legitimately authorized to issue to shareholders.The company can increase/Changein share capital by executing Change in Share Capital Clause in the Memorandum of Association.

Consolidation of Share Capital

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 application must include the following:-

Conversion of Share Capital

The company can go for Change in Share Capital by transforming the fully paid-up shares into the Stock. The re-conversion of the stocks toward fully paid up shares can also be done additionally. The Conversion of loan into equity share capital is the standard & reliable model to raise capital without direct investments. In pursuant to take out a smooth business in India at times, in that case, the debt gets transformed into share capital.

The Companies Act, 2013 has emerged with new provisions for the conversion of loans into equity shares, and the same is included in section 62(3) of the said Act. According to provisions of section 62(3) of the Companies Act to convert the loan into share capital, the company has to take a loan on the terms that the loan will be transformed into share capital.

Moreover, if such an option has been approved by special resolution before perceiving the loan; in such case, subscribed capital can be raised.It must be observed, that it is at most valuable to pass the special resolution at the time of permission of the loan. Moreover, if the company is deprived of giving of a special resolution; in that case the loan cannot be transformed into share capital.

Sub-division of Share Capital

In this prototype, the company sub-divides its shares in a smaller amount than that of what established by the Memorandum of Association. "Subdivision of share certificates" means a separate document needed by a shareholder for a serving of his holding. This is where shareholder demands smaller number of shares than he holds. Considering the Rule 6(1) of Com (Share Capital and Debentures) Rules, 2014, Capital distributes by means of subdivision of share certificates.

Whenever there is a subdivision of shares, the company changes the composition of its share capital by Changing/increasing the number of shares issued initially and decreasing the par value, respectively. Consequently, the value of each share is decreased, and the number of total shares is developed. The class of shares and the full amount of shares announced remain consistent.

Cancellation of Share Capital

If any person does not take shares, and/or diminish the amount of share capital by the number of shares, it is so called Cancellation of Share Capital. The Reduction of Share Capital means reducing issued, subscribed, and paid-up share capital of the company. Earlier, the reduction of the share capital was administered by section 100 to 104 of the Companies Act, 1956. Now it is operated by section 66 of the Companies Act, 2013. As per the old Act, it was subordinated to the confirmation of high court, but under the new Act, the high court's said authorities had been transferred to National Company Law Tribunal (NCLT).

Buyback of shares and redemption of Preference Shares is also a reduction of share capital but governed by specific provisions prescribed under Act. Such decreases in the Form of buyback and recovery do not require sanction/approval from Tribunal (NCLT).

The company may reduce the share capital by cancelling any shares which are lost or are unrepresented by available assets. E.g., if the shares of the face value of INR 100, each fully paid-up is represented by Rs. 75 worth of assets. In such a case, reducing the share capital may be affected by cancelling Rs. 25 per share and writing off a similar amount of assets.

Documents required for General Changes in Share Capital including Annexure- B

Those Are As Follows:-

Announcement of EGM with the descriptive statement;
Duplicate of the resolution delivered at the general meeting of the associates;
Modified Memorandum of Association.
Modified Articles of Association
A valid certified copy of Board resolution for alteration in AOA
A valid certified copy of Board resolution for alteration in MOA
A valid certified copy of Shareholders resolution
Duplicates of audited balance sheets for the past three years;
Resolution for permitting such consolidation or division and providing explanation for the equivalent;
Credentials in proof of new capital arrangement and class of shares presented consolidated or divided;
Affidavit authenticating the petition.
Bank draft substantiating payment of request fee.
The implemented Vakalatnama or Memorandum of appearance with a copy of the Board's Resolution, whatever is available as per requirement
Two additional duplicates of the application
Any other applicable documents

What is the procedure accompanied for Change in Share Capital?

The Procedure Followed For The Change In Share Capital In Brief Is Follows:

Issue a Board notice with the agenda of the meeting at least seven days before the meeting date.
Hold a Board Meeting
Pass the Resolution for the Change in Share Capital in the Board meeting.
The Resolution passed is subject to the consent of the Shareholders Meeting.
For holding a Shareholders Meeting, fix the date, time, and venue for the meeting.
Director is allowed to send notice of the Shareholders meeting to the Shareholders of the Company.
The announcement for a Shareholders meeting should be published at least before 21 days of the meeting
Hold a Shareholders meeting
Pass the Resolution with the permission of the majority shareholders.
Following the passing of the Resolution, Registrar of the Companies (RoC) should get notified about the Change in Share Capital within 30 days of the passing of Resolution. If the Registrar is not implicated about the Alteration within 30 days, then the company or its officers will be responsible for paying a fine of up to 10,000 Rupees for each day of suspension and can be extended to 5 lakh Rupees.

The above forms should get filed with the designated fees by the Ministry of Corporate Affairs. If the Forms discussed above are not registered with the (ROC) Registrar of Companies, in those case (Section 117 of the Companies Act, 2013) the company must be liable for a fine which shall not fall below five lakh rupees and may reach up to 25 lakhs of rupees. Every officer who is in default will be liable to pay 1 lakh rupee and which can be increased to 5 lakhs of Rupees.

BIS Certification

Meaning of Authorized Capital & Nominal Capital

What are the Characteristics of Change in Share Capital?