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Changes In Share Capital

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Understanding Changes in Share Capital

When a company is in its early stages, deciding how much capital to invest is a crucial choice. As the business grows, it might want to expand in various ways, such as size or structure. To do this, it often needs to inject more funds, essentially changing its share capital. Sometimes, this required capital goes beyond the initial authorized limit.

The authorized capital is the maximum amount of capital a company can issue as shares to its shareholders. According to Section 2(8) of the Companies Act, 2013, this limit is mentioned in the Memorandum of Association under the Capital Clause. To issue more shares, a company can take steps to increase or change this authorized capital limit. However, it must never issue shares beyond this authorized limit under any circumstances.”

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Share Capital: What It Means and How It Works

Share capital refers to the ‘share capital’ of a company, which is a sum of money divided into a specific number of shares, each with a fixed value. Every company needs capital, represented by these shares, to operate and manage its business. This capital is essential for various purposes such as acquiring business premises and stock-in-trade.

When a company decides to increase its capital, it must first assess its current authorized share capital. This is because a company cannot issue shares beyond the limit set by its authorized share capital. To issue more shares, the company must officially increase its authorized share capital by amending the Memorandum of Association.

Companies with share capital, as permitted by their Articles of Association, can make changes to their share capital. However, this process must adhere to the guidelines outlined in the Companies Act of 2013. Any increase or alteration in share capital requires approval from the Registrar of Companies, which involves submitting the necessary forms for processing.”

Understanding Authorized Capital and Nominal Capital

In a company, the concept of authorized capital and nominal capital is regulted by Section 61, in conjunction with Sections 13 and 64 of the Companies Act 2013. According to Section 2(8) of the Companies Act, 2013, ‘authorized capital’ or ‘nominal capital’ refers to the maximum amount of share capital that a company’s memorandum permits.

In simple terms, this definition means that a company can expand its business up to the limit set by its authorized capital. If you plan to grow your business by infusing additional funds, the first step is to increase your authorized capital. This process involves several steps, which we will discuss in the following sections.

Understanding Share Capital and Its Characteristics

Share capital is a crucial aspect of a company’s structure. It represents the ownership rights and financial contributions of shareholders. Let’s dive into the key characteristics of change in share capital:

1. Definition of Share Capital:

Share capital signifies a specific value of shares in a company, each carrying its unique set of rights and responsibilities.

2. The Sale of Goods Act, 1930:

According to the Sale of Goods Act, 1930, the term “goods” generally refers to any movable property, excluding certain items like money and stock and shares.

3.Identification by Number:

Share capital is often identified by a specific number, although this might not significantly affect the ownership of shares held by individuals whose names are recorded as the shareholders in a depository.

4. Transferability of Shares:

Shares in a company are considered movable property and can be transferred as per the guidelines specified in the company’s articles of association.

These characteristics define the nature and flexibility of share capital within a company, outlining the rights and responsibilities of its shareholders.

Understanding Different Types of Share Capital Changes

Section 61 of the Companies Act, 2013 outlines various kinds of changes in share capital. Let’s explore these changes:

  1. Increase in ‘Authorized’ Share Capital: This refers to the process of boosting the maximum limit of shares a company is allowed to issue.
  2. Combination and Division of Share Capital: Companies can opt to merge or divide their existing share capital into shares with larger or smaller denominations.
  3. Conversion of Shares: It’s possible to convert fully paid-up shares into stock and then reconvert that stock into fully paid-up shares of any denomination.
  4. Sub-Division of Shares: This involves breaking down existing shares into smaller portions.
  5. Reduction of Shares: Sometimes, a company may choose to decrease its share capital.

These changes play a significant role in shaping a company’s financial structure and operations under the Companies Act, 2013.

Understanding Different Types of Share Capital Changes

In the context of the Companies Act of 2013, there are various categories of changes in share capital, and they include the following:

Issued Share Capital:

Issued share capital refers to the portion of the authorized share capital that a company offers to the public for subscription. This portion is typically registered at its nominal value.

So, in simpler terms, ‘issued share capital’ is the part of the company’s approved share capital that’s made available for the public to buy, and it’s sold at the value for which it’s officially registered.

Caps On Company’s Share Expansion

Share capital represents the slice of a company’s ownership divided into shares and traded to investors in exchange for investments, typically cash. The term ‘Authorized Share Capital’ denotes the initial capitalization of the company.

To ensure financial responsibility, the government imposes regulations on how companies can issue shares for raising funds. Authorized share capital defines the upper limit of shares a company can legally offer to its shareholders. If a company wishes to augment or alter its share capital, it must invoke the Change in Share Capital Clause as defined in the Memorandum of Association.

In plain terms, this means that there’s a set limit to how many shares a company can issue, and any changes in this limit must adhere to legal procedures.”

Share Capital Consolidation

In business, there’s a practice called “Share Capital Consolidation.” This essentially means that a company can make changes to its share capital structure by combining smaller categories of shares into larger ones. However, it’s crucial to note that if this change impacts how much voting power the shareholders have, it cannot take effect unless it gets a confirmation from the Tribunal.

To make this happen, a formal application needs to be submitted in a specific format, known as “Form No. NCLT-1,” along with the details outlined in Annexure-B. This application should contain the following information:

  • The company’s proposed changes to its share capital structure.
  • The reasons for making these changes.
  • Any supporting documents or evidence to validate the proposed alterations.

Remember that this is a legal process, and it must adhere to the regulations and approvals set forth by the Tribunal before it can be implemented.

Changing Share Capital: A Simple Guide

If you’re looking to alter your company’s share capital, you have options. You can convert fully paid-up shares into stocks, and the reverse, converting stocks into fully paid-up shares, is also possible. This conversion process can be a smart way to raise capital without needing to make direct investments. In India, especially, it’s a useful strategy to smoothly manage your business, as it allows you to change debt into share capital.

The Companies Act of 2013 brings in new provisions for this conversion of loans into equity shares. You can find these provisions in section 62(3) of the Act. To convert a loan into share capital, the company should initially take the loan with an agreement specifying that the loan will eventually become share capital.

It’s crucial to note that for this to work, the special resolution must be passed before taking the loan. If your company doesn’t pass a special resolution, the loan cannot be transformed into share capital. So, if you’re considering this financial move, remember to have your special resolution in place ahead of time for a smooth transition.

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Subdivision of Share Capital: What You Need to Know

In a company, when you hear about the “subdivision of share capital,” it’s all about making things more manageable for shareholders. This process involves breaking down existing shares into smaller units than what was originally outlined in the Memorandum of Association.

But what does this mean for shareholders? Well, it’s about giving them flexibility. Sometimes, a shareholder might want a smaller number of shares than they currently hold. This is where the concept of “subdivision of share certificates” comes into play. It’s essentially a separate document that allows a shareholder to request a reduced number of shares.

According to Rule 6(1) of the Companies (Share Capital and Debentures) Rules, 2014, companies can redistribute their capital by subdividing share certificates. When this happens, the company modifies the composition of its share capital by increasing the number of initially issued shares while reducing their individual par value. This results in a decrease in the value of each share, but an increase in the total number of shares available.

It’s important to note that throughout this process, the class of shares and the total number of shares available remain unchanged. This way, companies can adapt to the needs and preferences of their shareholders while maintaining a consistent framework for their shares.

What is Cancellation of Share Capital?

When someone decides not to buy or hold shares, or reduces the total amount of share capital, it’s referred to as the “Cancellation of Share Capital.” Reducing share capital involves lowering the total issued, subscribed, and paid-up share capital of a company. Previously, this reduction was governed by sections 100 to 104 of the Companies Act, 1956. However, it’s now regulated by section 66 of the Companies Act, 2013. Under the old Act, it required approval from the High Court, but under the new Act, this authority has shifted to the National Company Law Tribunal (NCLT).

Share Buyback and Preference Share Redemption

Share buyback and preference share redemption are also ways to reduce share capital. However, they are subject to specific rules outlined in the Act. Unlike other forms of reduction, such as the cancellation of shares, buyback, and redemption do not necessitate approval from the Tribunal (NCLT).

Reasons for Reducing Share Capital

A company can reduce its share capital by cancelling shares that are no longer valid or aren’t supported by available assets. For example, if shares with a face value of INR 100 each, and are fully paid-up, are backed by assets worth only Rs. 75, the company may decrease its share capital by cancelling Rs. 25 per share and adjusting the corresponding amount of assets.

This process provides flexibility to companies in managing their capital structures effectively.

If you have any further questions or need additional information, please feel free to ask.

Documents Needed for Making General Changes in Share Capital, Along with Annexure-B

To make general changes in share capital, you’ll need to provide the following documents:

  1. An announcement of the Extraordinary General Meeting (EGM) with a detailed explanation.
  2. A copy of the resolution passed during the general meeting of the company’s members.
  3. An updated Memorandum of Association (MOA).
  4. Modified Articles of Association (AOA).
  5. A valid, certified copy of the Board’s resolution for changing the AOA.
  6. A valid, certified copy of the Board’s resolution for changing the MOA.
  7. A valid, certified copy of the shareholders’ resolution.
  8. Copies of the audited balance sheets from the last three years.
  9. A resolution allowing the share consolidation or division, along with an explanation for the change.
  10. Documentation proving the new capital structure and the class of shares resulting from consolidation or division.
  11. An affidavit confirming the accuracy of the petition.
  12. A bank draft as proof of payment of the required fee.
  13. The executed Vakalatnama or Memorandum of Appearance, along with a copy of the Board’s Resolution, as necessary.
  14. Two extra copies of the application.
  15. Any other relevant documents.

These documents are essential for making changes to the company’s share capital.

Step-by-Step Guide for Changing Share Capital with BusinessBadhega Experts

At BusinessBadhega, our team of experts is here to guide you through the process of changing the share capital of your company. We’ve outlined the detailed steps to ensure a smooth and successful experience.

1. Authorization in the Articles of Association

Your company’s Articles of Association should include provisions for increasing the authorized share capital. If it doesn’t, don’t worry! BusinessBadhega can assist you in amending your Articles of Association in accordance with Section 14 of the Companies Act 2013.

2. Board Meeting

We’ll initiate a board meeting and send notices to all the board members as per the guidelines laid out in Section 173(3) of the Companies Act 2013. During this meeting, we’ll:

  • Seek approval from the board for increasing the authorized share capital.
  • Schedule an Extraordinary General Meeting (EGM) for the company.

3. Notice of EGM

We’ll send out notices for the EGM to all the company’s shareholders and board members.

4. General Meeting

On the chosen date, we’ll host the Extraordinary General Meeting to discuss and finalize the changes.

5. Intimation to the ROC (Registrar of Companies)

Following the approvals in the shareholder meetings, our team at BusinessBadhega will assist in drafting the revised Memorandum of Association (MOA) to reflect the change in share capital. The company is required to inform the Registrar of Companies by submitting Form SH-7 with the Ministry of Corporate Affairs (MCA). This form must be filed within 30 days from the date of passing the resolution.

6. Form Filing

BusinessBadhega will handle all your compliance needs, including filing Form MGT-14 within 30 days of passing the resolution in the general meeting. Form SH-7 also needs to be filed within 30 days of passing the resolutions.

We’re here to make this process hassle-free for you. If you have any questions or need assistance, please don’t hesitate to reach out. Your satisfaction and success are our top priorities.

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