Alteration of Share Capital

Alteration of Share Capital CS Executive

ALTERATION OF SHARE CAPITAL

Contents

Power of limited company to alter its share capital (Section 61)

  1. A limited company having a share capital may, if so authorised by its articles, alter its memorandum in its general meeting to—
    1. increase its authorised share capital by such amount as it thinks expedient;
    2. consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares:
      Provided that no consolidation and division which results in changes in the voting percentage of shareholders shall take effect unless it is approved by the Tribunal on an application made in Rule 71 of NCLT Rules, 2016;
    3. convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares of any denomination;
    4. sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum, so, however, that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived;
    5. cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled.
  2. The cancellation of shares under sub-section (1) shall not be deemed to be a reduction of share capital.

Application under proviso to clause (b) of sub-section (1) of section 61.
Rule 71 of NCLT Rules, 2016

  1. An application shall be filed in Form No. NCLT. 1.
  2. The application shall, inter alia, set forth the following:-
    1. provision of articles authorising such consolidation or division;
    2. existing capital structure of the company;
    3. new capital structure of the company after the consolidation or division;
    4. class of shares being consolidated or divided;
    5. face value of shares pre and post consolidation or division;
    6. justification for such consolidation or division;
  3. The company shall at least 14 days before the date of hearing
    1. advertise the petition in accordance with rule 35; and
    2. serve, by registered post with acknowledgement due, a notice together with the copy of theapplication to the Central Government, ROC and to the SEBI, in the case of listed companies and to the regulatory body, if the company isregulated under any other Act.
  4. Where any objection of any person whose interest is likely to be affected by the proposed application has been received by the applicant company, it shall serve a copy thereof to the Central Government, ROC and the SEBI, in the case of listed companies and to any regulator, ifthe company is regulated under any other Act on or before the date of hearing.
  5. Upon hearing the application or any adjourned hearing thereof, the Tribunal may pass such order, subject to such terms and conditions, as it thinks fit.

Notice to be given to Registrar for alteration of share capital (Section 64)

  1. Where—
    1. a company alters its share capital in any manner specified in section 61(1);
    2. an order made by the Government under section 62(4) has the effect of increasing authorised capital of a company; or
    3. a company redeems any redeemable preference shares,
      the company shall file a notice in the Form No. SH. 7 with the Registrar within a period of 30 days of such alteration or increase or redemption, as the case may be, along with an altered memorandum.
  2. If a company and any officer of the company who is in default contravenes the provisions of sub-section (1), it or he shall be punishable with fine which may extend to
    • 1000 rupees for each day during which such default continues, or
    • lakh rupees,
      whichever is less.

Points to Note:

  • Where shares were issued beyond the authorised amount and a resolution was subsequentlypassed at a general meeting ratifying the issue, it was held that although the original issue was notin accordance with the articles, the ratification was effective and the allottees were bound
  • Consolidation and sub-division may be effected by the same resolution [North Cheshire Borewery Co. Ltd.]
  • Fee paid to the ROC for registering increase of capital is in the nature of capital expenditure irrespective of the fact whether an increased capital will lead to increase in profits. [Punjab State Industrial Development Corpn. Ltd. v. CIT]

Stock

According to Section 2(84) of Companies Act, 2013, share means a share in the share capital of a company and includes stock. Section 61 allows the company to convert its fully paid-up shares into stock. It means company can’t issue stock. It can only convert its fully paid-up shares into stock or it can re-convert its stock into shares.

A person holding stock of a company is known as stockholder not the shareholder. A stockholder has the same rights as to dividends as a shareholder.

Difference between share and stock

Share Stock
Shares in physical form bear distinct numbers Stocks are the consolidated value of share capital not having any distinct numbers
Shares may or may not be fully paid-up Stock is always fully paid-up
Shares have a nominal value Stock does not have any nominal value
All shares are of equal denomination Denomination of stocks varies
It is not possible to transfer shares into
Fraction
Stock is divisible into any amount required. Thus, it is possible to transfer even into fractions
Shares comes into existence before the stock and it is issued initially Stock comes into existence after conversion of shares into stock and on conversion of shares into stock, the provisions of the Act governing the shares shall cease to apply to the share capital as it is converted into stock

REDUCTION OF SHARE CAPITAL

Section 66 of Companies Act, 2013 deals with reduction of Share Capital. But Section 66 is not effective yet. Therefore, with respect to reduction of share capital, till date provisions of Companies Act, 1956 are applicable.

Reduction of share capital (Section 100 to 104 of Companies Act, 1956)

Special resolution for reduction of share capital (Section 100)

Subject to confirmation by the Court,

  • a company limited by shares or
  • a company limited by guarantee and having a share capital,
    • may,
      • if so authorised by its articles,
      • by special resolution,
        reduce its share capital in any way.

A company may reduce its share capital in following ways

  1. extinguish or reduce the liability on any of its shares in respect of share capital not paid up;
  2. cancel any paid-up share capital which is lost, or unrepresented by available assets; or
  3. pay off any paid-up share capital which is in excess of the wants of the company,

Note:

  • While giving the confirmation, court must consider the interest of creditors, shareholders and public.
  • This section is not applicable to unlimited companies. Therefore such company may reduce its capital in the way specified in its MOA & AOA.
  • Company should reduce or cancel same amount on all the shares of same kind.
  • A selective reduction is permissible within the frame work of law for any company limited by shares.

Note:

  • The Court must ensure that the reduction is fair and equitable. The Court shall consider the following, while sanctioning the reduction:
    1. The interests of creditors must be safeguarded;
    2. The interests of shareholders must be considered; and
    3. Lastly, the public interest must be considered as well.

Procedure for reduction of share capital

Application to Court for confirming order, objections by creditors, and settlement of list of objecting creditors (Section 101)

Subsection 1
Where a company has passed a resolution for reducing share capital, it may apply, by petition, to the court for an order confirming, the reduction.

Subsection 2
Where the proposed reduction of share capital involves

  • the diminution of liability in respect of unpaid share capital or
  • the payment to any shareholder of any paid-up share capital,
    1. every creditor of the company
      • who at the date fixed by the court is entitled to any debt or claim which, if that date were the commencement of the winding up of the company, would be admissible in proof against the company,
        shall be entitled to object to the reduction;
    2. the court shall settle a list of creditors so entitled to object, and shall ascertain
      • the names of those creditors and
      • the nature and amount of their debts or claims,
        and may publish notices fixing a day or days within which creditors not entered on the list are to claim to be so entered or are to be excluded from the right of objecting to the reduction;
    3. where a creditor entered on the list whose debt or claim is not discharged or has not determined does not consent to the reduction,
      • the court may dispense with the consent of that creditor, on the company securing payment of his debt or claim by appropriating the amount, as the court may direct.

Subsection 3

Where a proposed reduction of share capital involves

  • the diminution of any liability in respect of unpaid share capital or
  • the payment to any shareholder of any paid-up share capital,

the court may direct that the provisions of sub-section (2) shall not apply as regards any class or any classes of creditors.

Order confirming reduction and powers of Court on making such order (Section 102)

Subsection 1

The Court,

  • if satisfied with respect to every creditor of the company who under section 101 is entitled to object to the reduction,
    • that either his consent to the reduction has been obtained or his debt or claim has been discharged, or has determined, or has been secured,

may make an order confirming the reduction on such terms and conditions as it thinks fit.

Subsection 2

Where the Court makes any such order, it may—

  1. make an order directing that the company shall add to its name as the last words thereof the words “and reduced”; and
  2. make an order requiring the company to publish the reasons for reduction

Registration of order of court and minute of reduction (Section 103)

The Registrar (ROC)—

  1. on production to him of an order of the court confirming the reduction of the share capital of a company; and
  2. on the delivery to him of a certified copy of the order of court and of a minute approved by the Court in this regard,

shall register the order and minute.

The resolution for reducing share capital as confirmed by the order shall take effect only on the registration of the order and minute with ROC, and not before.

Certificate of ROC as conclusive evidence of reduction

The Registrar shall certify under his hand the registration of the order and minute, and his certificate shall be conclusive evidence that all the requirements of this Act with respect to reduction of share capital have been complied with, and that the share capital of the company is such as is stated in the minute.

Cases where diminution of share capital shall not be considered as reduction of share capital and no approval of court is required

  • cancellation of shares of company which have not been taken or agreed to be taken by any person
  • redemption of preference shares
  • forfeiture of shares for non-payment of calls
  • buy back of shares
  • surrender of shares by the shareholders
  • In any scheme of compromise and arrangement

Difference in Alteration of share capital and reduction of share capital

Alteration of share capital Reduction of share capital
Applicable Sections Alteration of share capital is governed by the provisions of section 61 of the Companies Act, 2013. Reduction of share capital is governed by the provisions of Section 66 of Companies Act, 2013 (section 100 of the Companies Act, 1956).
Kind of resolution Alteration of share capital is required to be done by ordinary resolution. Reduction of share capital is required to be done by special resolution.
confirmed by the court Alteration of share capital is not required to be confirmed by the tribunal (court as per CA, 1956). Reduction of share capital is to be confirmed by the tribunal (court as per CA, 1956).
Kind/Type Alteration of share capital may be done in the following manner

  1. Increasing its nominal capital by issuing new shares
  2. Consolidating and dividing all or any of its share capital into shares of large denomination
  3. Converting fully paid up shares into stock or vice versa
  4. Sub dividing its shares or any of them into shares of smaller amount
  5. Canceling shares which have not been taken up and diminishing the amount of share capital by the amount of the shares so cancelled.
Reduction of share capital may be done in the following manner

  1. Extinguishing or reducing the liability of members in respect of the capital not paid up
  2. Writing off or canceling any paid up capital which is in excess of the needs of the company
  3. Paying off any paid up share capital which is in excess of the needs of the company

BUY BACK OF SHARES

Restrictions on purchase by company or giving of loans by it for purchase of its shares [Section 67]

  1. Prohibition on buy back of shares
    No company limited by shares or by guarantee and having a share capital shall have power to buy its own shares unless the consequent reduction of share capital is effected under the provisions of this Act.
  2. Prohibition on providing financial assistance for buying its/holding company shares
    No public company shall give any financial assistance for the purpose of, or in connection with, a purchase or subscription made or to be made, by any person of or for any shares in the company or in its holding company.
  3. Exceptions of sub-section (2)
    Nothing in sub-section (2) shall apply to—

    1. the lending of money by a banking company in the ordinary course of its business;
    2. the provision by a company of money in accordance with any scheme approved by company through special resolution and in accordance with such requirements as may be prescribed, for the purchase of, or subscription for, fully paid-up shares in the company or its holding company, if the purchase of, or the subscription for, the shares held by trustees for the benefit of the employees or such shares held by the employee of the company;
    3. the giving of loans by a company to persons in the employment of the company other than its directors or key managerial personnel, for an amount not exceeding their salary or wages for a period of 6 months with a view to enabling them to purchase or subscribe for fully paid-up shares in the company or its holding company to be held by them by way of beneficial ownership.
  4. Non applicability of this section in case of redemptionof preference shares
    Nothing in this section shall affect the right of a company to redeem any preference shares issued by it under this Act or under any previous company law.
  5. Fine/punishment for default
    If a company contravenes the provisions of this section,

    • it shall be punishable with fine
      • which shall not be less than one lakh rupees
      • but which may extend to twenty-five lakh rupees
        and
    • every officer of the company who is in default shall be punishable with imprisonment for a term
      • which may extend to three years and
      • with fine
        • which shall not be less than one lakh rupees but
        •  which may extend to twenty-five lakh rupees.

Power of company to purchase its own securities (Section 68)

Source of funds [Section 68(1)]

A company may buy-back its securities out of—

  1. its free reserves;
  2. the securities premium account; or
  3. the proceeds of the issue of any shares or other specified securities:

No buy-back out of the proceeds of an earlier issue of the same kind

No buy-back of any kind of securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

Mode of buy-back [Section 68(5)]

The buy-back under sub-section (1) may be—

  1. from the existing shareholders or security holders on a proportionate basis;
  2. from the open market;
  3. by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

Types of buy-back

  1. Buy-back by passing Board’s Resolution
  2. Buy-back by passing Special Resolution

Conditions related to buy-back [Section 68(2)]

No company shall buy-back its securities, unless—

  1. the buy-back is authorised by its articles;
  2. a special resolution has been passed by the company in this regard
  3. the buy-back is 25% or less of the aggregate of paid-up capital and free reserves of the company (but in respect of the buy-back of equity shares in any financial year, the reference to 25% in this clause shall be construed with respect to its total paid-up equity capital in that financial year)
  4. the ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more than twice the paid-up capital and its free reserves. (Debt-equity ratio shall not be more than 2:1)
  5. all the shares or other specified securities for buy-back are fully paid-up;

Limit on buy-back by passing Board’s Resolution [Proviso to Section 68(2)(a)]

Where the buy-back has been authorised by the Board by means of a resolution passed at its meeting (not by special resolution passed by company)

  • company shall not buy-back more than 10% of the total paid-up equity capital and free reserves of the company
  • company is not required to pass special resolution in this case (Board’s resolution is sufficient)

Time gap between 2 buy-back [Proviso to Section 68(2)]

No offer of buy-back shall be made by company within a period of one year reckoned from the date of the closure of the preceding offer of buy-back, if any.

Matter of explanatory statement accompanied by the notice of special resolution [Section 68(3)]

Explanatory statement shall state —

  1. a full and complete disclosure of all material facts;
  2. the necessity for the buy-back;
  3. the class of shares or securities intended to be purchased under the buy-back;
  4. the amount to be invested under the buy-back; and
  5. the time-limit for completion of buy-back.

Further, Rule 17(1) of Companies (Share Capital and Debentures) Rules, 2014 states other matters to be prescribed in the Explanatory statement.

Time limit for completion of buyback (Section 68(4))

Every buy-back shall be completed within a period of one year from the date of passing of the special resolution, or as the case may be, the resolution passed by the Board.

Letter of Offer of buy-back

  • Letter of Offer to ROC in Form No. SH 8 (Rule 17(2))
    The company which has been authorized by a special resolution shall, before the buy-back of shares, file with the Registrar of Companies a letter of offer in Form No. SH 8. Such letter of offer shall be dated and signed on behalf of the Board of directors of the company by not less than two directors of the company, one of whom shall be the managing director, where there is one.
  • Letter of Offer to Shareholders(Rule 17(4))
    The letter of offer shall be dispatched to the shareholders or security holders immediately after filing the same with the Registrar of Companies but not later than 21 days from its filing with the Registrar of Companies.
  • Period of Offer to Shareholders(Rule 17(5))
    The offer for buy-back shall remain open for a period of not less than 15 days and not exceeding 30 days from the date of dispatch of the letter of offer.

Declaration of Solvency with SEBI/ROC [Section 68(6) read with Rule 17(3)]

Where a company proposes to buy-back its own shares or other specified securities under this section, it shall, before making such buy-back, file with

  • the Registrar and
  • the Securities and Exchange Board (only in case of listed company),

a declaration of solvency signed by at least two directors of the company, one of whom shall be the managing director, if any, in Form No. SH 9 and verified by an affidavit to the effect that

  • the Board of Directors of the company has made a full inquiry into the affairs of the company
    • as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of 1 year from the date of declaration adopted by the Board.

Time limit for verifications of the offers [Rule 17(7)]

The company shall complete the verifications of the offers received within 15 days from the date of closure of the offer and the shares or other securities lodged shall be deemed to be accepted unless a communication of rejection is made within 21 days from the date of closure of the offer.

Time limit for making payment of consideration or return of share certificate [Rule 17(9)]

The company shall within seven days of the time specified in sub-rule (7) (21 days from the date of closure) –

  1. make payment of consideration in cash to those shareholders or security holders whose securities have been accepted; or
  2. return the share certificates to the shareholders or security holders whose securities have not been accepted at all or the balance of securities in case of part acceptance .

Extinguishment and physical destruction of the shares or securities so bought back [Section 68(7)]

Company shall extinguish and physically destroy the shares or securities so bought back within 7 days of the last date of completion of buy-back.

Prohibition of further issue of shares or securities [Section 68(8)]

Where a company completes a buy-back of its shares or other specified securities under this section, it shall not make a further issue of the same kind of shares or other securities within a period of 6 months except by way of

  • a bonus issue or
  • in the discharge of subsisting obligations such as
    • conversion of warrants, stock option schemes, sweat equity shares or
    • conversion of preference shares or debentures into equity shares.

Further, according to Rule 17(10),

  • the company shall not issue any new shares including by way of bonus shares from the date of passing of special resolution authorizing the buy-back till the date of the closure of the offer under these rules, except those arising out of any outstanding convertible instruments;
  • company shall pay the consideration only by way of cash;
  • the company shall not withdraw the offer once it has announced the offer to the shareholders;
  • the company shall not utilize any money borrowed from banks or financial institutions for the purpose of buying back its shares; and
  • the company shall not utilize the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities for the buy-back.

Register of shares/securities bought back [Section 68 (9) read with Rule 17(12)]

Company shall maintain at its registered office a register (in Form No. SH 10) having following particular:

  • the shares or securities so bought,
  • the consideration paid for the shares or securities bought back,
  • the date of cancellation of shares or securities,
  • the date of extinguishing and physically destroying the shares or securities and
  • such other particulars as may be prescribed.
    The entries in the register shall be authenticated by the secretary of the company or by any other person authorized by the Board for the purpose.

Filing particulars of buy-back with ROC [Section 68(10) read with Rule 17(13)

Company shall, after the completion of the buy-back under this section, file with the

  • Registrar and
  • the SEBI (only in case of listed company)
    a return relating to the buy-back in Form No. SH 11 within 30 days of completion of buy-back.

Affidavit of completion of buy-back as the provisions of Company Laws [Rule 17(14)]

There shall be annexed to the return filed with the Registrar in Form No. SH.11, a certificate in Form No. SH.15 signed by two directors of the company including the managing director, if any, certifying that the buy-back of securities has been made in compliance with the provisions of the Act and the rules made thereunder.

Fine and punishment in case of default [Section 68(11)]

If a company makes any default in complying with the provisions of this section or any regulation made by the SEBI,

  • the company shall be punishable with fine
    • which shall not be less than one lakh rupees
    • but which may extend to three lakh rupees and
  • every officer of the company who is in default shall be punishable
    • with imprisonment for a term which may extend to three years or
    • with fine
      • which shall not be less than one lakh rupees but
      • which may extend to three lakh rupees, or
    • with both.

Reduction of Share Capital (Section 66 – Not enforceable yet)

  1. Subject to confirmation by the Tribunal on an application by the company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital in any manner and in particular, may—
    1. extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up; or
    2. either with or without extinguishing or reducing liability on any of its shares,—
      1. cancel any paid-up share capital which is lost or is unrepresented by available assets; or
      2. pay off any paid-up share capital which is in excess of the wants of the company,
        alter its memorandum by reducing the amount of its share capital and of its shares accordingly.
        Note:

        • No such reduction shall be made if the company is in arrears in the repayment of any deposits accepted by it, either before or after the commencement of this Act, or the interest payable thereon.
  2. The Tribunal shall give notice of every application made to it under sub-section (1) to the Central Government, Registrar and to the SEBI, in the case of listed companies, and the creditors of the company and shall take into consideration the representations, if any, made to it by that Government, Registrar, the SEBI and the creditors within a period of 3 months from the date of receipt of the notice.
    If no representation has been received from the Central Government, Registrar, the SEBI or the creditors within the said period, it shall be presumed that they have no objection to the reduction.
  3. The Tribunal may, if it is satisfied that the debt or claim of every creditor of the company has been discharged or determined or has been secured or his consent is obtained, make an order confirming the reduction of share capital on such terms and conditions as it deems fit.
  4. The order of confirmation of the reduction of share capital by the Tribunal under sub-section (3) shall be published by the company in such manner as the Tribunal may direct.
  5. The company shall deliver a certified copy of the order of the Tribunal under sub-section (3) and of a minute approved by the Tribunal showing—
    1. the amount of share capital;
    2. the number of shares into which it is to be divided;
    3. the amount of each share; and
    4. the amount, if any, at the date of registration deemed to be paid-up on each share,
      to the Registrar within thirty days of the receipt of the copy of the order, who shall register the same and issue a certificate to that effect.
  6. Nothing in this section shall apply to buy-back of its own securities by a company under section 68.
  7. A member of the company, past or present, shall not be liable to any call or contribution in respect of any share held by him exceeding the amount of difference, if any, between the amount paid on the share, or reduced amount, if any, which is to be deemed to have been paid thereon, as the case may be, and the amount of the share as fixed by the order of reduction.
  8. Where the name of any creditor entitled to object to the reduction of share capital under this section is, by reason of his ignorance of the proceedings for reduction or of their nature and effect with respect to his debt or claim, not entered on the list of creditors, and after such reduction, the company is unable, to pay the amount of his debt or claim,—
    1. every person, who was a member of the company on the date of the registration of the order for reduction by the Registrar, shall be liable to contribute to the payment of that debt or claim, an amount not exceeding the amount which he would have been liable to contribute if the company had commenced winding up on the day immediately before the said date; and
    2. if the company is wound up, the Tribunal may, on the application of any such creditor and proof of his ignorance as aforesaid, if it thinks fit, settle a list of persons so liable to contribute, and make and enforce calls and orders on the contributories settled on the list, as if they were ordinary contributories in a winding up.
  9. Nothing in sub-section (8) shall affect the rights of the contributories among themselves.
  10. If any officer of the company—
    1. knowingly conceals the name of any creditor entitled to object to the reduction;
    2. knowingly misrepresents the nature or amount of the debt or claim of any creditor; or
    3. abets or is privy to any such concealment or misrepresentation as aforesaid, he shall be liable under section 447.
  11. If a company fails to comply with the provisions of sub-section (4), it shall be punishable with fine which
    1. shall not be less than 5 lakh rupees
    2. but which may extend to 25 lakh rupees.
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