Alternation of capital

A company limited by shares can alter the capital clause of its Memorandum in any of the following ways provided that such alteration is authorized by the articles of association of the company: -

1) Increase in share capital by such amount, as it thinks expedient by issuing new shares.

2) Consolidate and divide all or any of its share capital into shares of larger amount than its existing shares. e.g., if the company has 100 shares of Rs.10/- each (aggregating to Rs. 1000/-) it may consolidate those shares into 10 shares of Rs. 100/- each.

3) Convert all or any of its fully paid shares into stock and re-convert stock into fully paid shares of any denomination.

4) Subdivide shares or any of shares into smaller amounts fixed by the Memorandum so that in subdivision the proportion between the amount paid and the amount if any unpaid on each reduced shares shall be same as it was in case of from which the reduced share is derived.

5) Cancel shares which have been not been taken or agreed to be taken by any person and diminish the amount of share capital by the amount of the shares so cancelled.

The alteration of the capital of the company in any of the manner specified above can be done by passing a resolution at the general meeting of the company and does not require any confirmation by the court.

Reduction of the share capital can be effected only in the manners specified in Section 100-104 of the Act or by way of buy back under Section 77A and 77B of the Act. Notice of alteration to share capital is required to be filed with the registrar of the company in Form no 5 within 30 days of the alteration of the capital clause of the MA. The Registrar shall record the notice and make necessary alteration in Memorandum and Articles of Association of the company. Any default in giving notice to the registrar renders company and its officers in default liable to punishment with fine which may extend to the Rs. 50/- for each day of default.

Conversion of shares into stocks: Conversion of fully paid shares into stock may likewise be affected by the ordinary resolution of the company in the general meeting. Notice of the conversion must be given to the Registrar within 30 days of the conversion, the stock may be converted into fully paid shares following the same procedure and notice given to the Registrar in Form no 5. In this connection, the following provisions are important: -

1) Only fully paid shares can be converted into stocks

2) Direct issue of stock to members is not lawful and cannot be done.

3) The difference between shares and stock is that shares are transferable only in complete units so that transfer of half or any portion of share is not possible whereas stock is expressed in terms of any amount money and is transferable in any money fractions.

4) Articles may give the Board of Directors authority to fix minimum amount of stock transferable.

5) Since stock is not divided into different units it is not required to be numbered. Shares on the other hand must be numbered.

Reduction of share capital with sanction of the Court

A company limited by the shares or a company limited by guarantee and having share capital can if authorized by its articles, by special resolution and subject to confirmation by the court on petition reduce its share capital. It may effect reduction of its share capital in any of following circumstances:

1.Where the company is overcapitalized: -

a) It may extinguish or reduce the liability of member in respect of uncalled or unpaid capital. For example, where shares are of Rs.100/- each with Rs.60/- paid up, the company may reduce them to Rs.60/- fully paid and thus release the shareholder from the liability on uncalled capital of Rs.40/-.

b) Pay off or return part of the unpaid capital not wanted for the purpose of the company. For example, where the shares are fully paid of Rs. 100/- they may be reduced Rs.40/- each and Rs.60/- may be paid back to the shareholders.

c) Pay off part of the paid up share capital on the footing that it may be called up again. If shares are of Rs.100/- each the company may pay off Rs.25/- per share on condition that when desired the company may call it again without extinguishing the liability of shareholders to pay the uncalled share capital.

d) Reduce by a combination of the aforesaid methods

2.Where the company has suffered loss of capital, in such situation the company can write off or cancel the share capital which has been lost or is unrepresented by available assets.

Where the company has passed the resolution for reducing the share capital, it must, by petition, apply to the court in the prescribed form to the court for an order confirming the reduction. Where the proposed reduction of share capital involves the either diminution of liabilities in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital or in any other case if the court so directs the following provisions shall have effect: -

1.Every creditor of the company who on the date fixed by the court is entitled to debt from or any claim 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 for that purpose shall ascertain as far as possible without requiring an application from any of the creditors, the names of creditors and the nature and amount of debt or claims and publish notices fixing the day or days within which creditors not entered in the list are to be entered if they so desire.

3.Where a creditor entered on the list whose debt or claim is not discharged or has not been determined does not consent to the reduction, the court may, if it thinks fit, dispense with the consent of the creditors if the company secures payment of this debt or claim by appropriating the following amounts as the court may direct: -

a) The company admits the full amount claim or debt or though not admitting it is willing to provide for it, then the full amount of debt or claim

b) If the company does not admit and is not willing to provide for the full amount of debt or claim or if the amount is contingent or not ascertained, then amount fixed by the court after due enquiry.

4.Where the proposed reduction of share capital involves either diminution of any liability in respect of the unpaid share capital or payment of any shareholder of any paid share capital, the Court may, having regard to any special circumstances of the case as it thinks proper so to do, direct that the above provisions shall not apply to any class or classes of creditors.

5 If the court is satisfied with respect to every creditor of the company entitled to object to reduction that either his consent to the reduction has been obtained or his that debt or claim has been discharged or has been determined or has been secured, make an order confirming the reduction on such terms and conditions as it thinks fit.

6.Where the court makes such an order, it may, if for any special reasons thinks fit and proper to do so, make an order directing that the company shall during such period commencing on and any time after the date of the order as is specified in the order add to its name as the last words the words "& Reduced" and make an order requiring the company to publish the same along with the reasons for the reduction or such other information in regard thereto as the court may think expedient with view to giving proper information to the public and if the court thinks fit the causes which led to reduction.

7.Where the company is ordered to add to its name the words "& Reduced" those words shall until the expiry of period specified in the order shall be deemed to be part of the name of the company.

8.The registrar, on the production to him, of an order of the court confirming the reduction of the share capital of the company and on delivering to him the certified copy of the order and of minutes approved by the court showing with respect to the share capital of the company as altered by the order register the reduction of share capital. On registration of order and minutes, the reduction of share capital shall take effect.

9.Notice of the registration shall be published in such manner as the court may direct.

Reduction of capital without the sanction of the court

Reduction of capital can take place without the sanction of the court in the following cases

1) Buy back of shares in accordance to the provisions of Section 77A and 77B

2) Forfeiture of shares - A company may if authorized by its articles forfeit shares for non-payment of calls by the shareholders. Such proceedings amount to reduction of capital but the act does not require court sanction for this purpose.

3) Valid surrender of the shares - A company may accept the surrender of shares

4) Cancellation of capital - A company may cancel the shares, which has not been taken up or agreed to be taken by the person and diminish the amount of its share capital.

5) Purchase of shares of member by the company under Section 402B. The Company Law Board may, on application made under Section 397 or Section 398, order the purchase of shares or interest of any member of the company by the company. These provisions come in force when a prescribed number of members make a complaint to the CLB for mis-management or oppression of the minority shareholders in the company.

6) Redemption of redeemable preference shares. Where redeemable preference shares are redeemed, it actually amounts to reduction of the capital. However, this does not require the sanction of the court.