As a business expands, it may consider growing in terms of operations, size, scope, or structure. To achieve this growth, it might be necessary to infuse more capital into the company, thereby increasing its share capital. Sometimes, the required capital may exceed the current allowable limit. Authorized capital is the maximum amount of capital a company is permitted to issue in shares to its shareholders. This article explores “What is Alteration of Share Capital?”, “Types of Alteration of Share Capital,” and “The Process for Alteration of Share Capital.”
What Does the Alteration of Share Capital Mean?
The term “alteration of share capital” refers to the act of changing the structure or composition of a company’s share capital. This can involve modifying the rights attached to existing share classes and altering the overall number of shares issued by the company. Changes can be made in several ways, such as dividing or consolidating current shares, changing the authorized share capital, or converting shares from one class to another. These alterations can be driven by various reasons, including raising capital, redistributing ownership, or adapting to evolving business needs. Approval from the Articles of Association (AOA) is required for such changes, ensuring that the decision is legally sound and complies with regulations to protect shareholder interests and maintain corporate transparency.
Various Types: Alteration of Share Capital
Section 61 of the Companies Act of 2013 outlines five different ways to alter share capital:
- Increase in Authorized Capital: Also known as nominal or registered capital, this is the sum required to establish a business. The company may increase its share capital by updating the capital clause in the Memorandum of Association.
- Consolidation of Shares: This involves combining multiple smaller denomination shares into a single share of a larger denomination.
- Subdivision of Shares: A company can split its existing shares into several smaller nominal-value shares. This increases the number of outstanding shares, each with a lower market value, without changing the total value of the company’s share capital.
- Conversion of Shares: This process unifies all fully paid-up shares into one indivisible share of stock, allowing for more flexibility in management and the transfer of ownership interests.
- Cancellation of Shares: This procedure permanently removes a company’s shares from circulation, thereby reducing its share capital. The canceled shares are not reissued or resold and can occur through buybacks or redemption of shares. This method can increase shareholder value by raising the ownership proportion of the remaining shareholders.
Understanding the Process for Alteration of Share Capital
Below are the steps involved in changing share capital:
1. Alteration in Articles of Association (AOA)
The Articles of Association contain the guidelines that govern the internal activities of the company. Before altering the authorized capital, it is necessary to check the AOA for a clause that permits such changes.
2. Arranging a Board Meeting
- A notice of the agenda must be sent to each director at their registered address at least seven days before the meeting.
- The agenda, date, time, and place of the meeting must be disclosed to the shareholders.
- An extraordinary general meeting (EGM) must be called, notifying all directors, shareholders, and auditors.
- A notice of the EGM must be sent out at least 21 days before the scheduled meeting. A shorter notice period can be granted with the consent of at least 95% of the members eligible to vote.
3. Conducting an Extraordinary General Meeting
During the EGM, the subject of increasing share capital is discussed. Voting occurs in a predetermined order to decide the matter. Once the resolution is passed, an appendix containing the explanation is added, and the authorized capital is increased.
4. Registrar of Companies
Within 30 days of passing the resolution, the company must file eForm SH-7 and, if applicable, eForm MGT-14 with the Registrar, along with the required payments.
Conclusion
The process for altering share capital is outlined in the Companies Act of 2013. To change a company’s share capital, both the AOA and the Memorandum of Association (MoA) must be altered. Increasing the total capital generally benefits investors in the company.
