Alterations in the capital clause of the Memorandum of Association may be of the following type:
1. Alteration of the share capital:
A limited company having a share capital may, alter its share capital as follows:
(a) Increase its share capital by the issue of new shares;
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(b) Consolidate or sub-divide its share capital into shares of larger or smaller denominations;
(c) Convert its fully paid-up shares into stock, and re-convert that stock into fully paid-up shares of any denomination;
(d) Cancel shares which 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.
A company can make these alterations by passing an ordinary resolution if it is authorised by the Articles of Association to do so. Such alterations must be notified and a copy of the resolution filed with the Registrar within 30 days of the date of the passing of the resolution.
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In the case of increase of capital by the issue of new shares, they must ordinarily be first offered to the existing equity shareholders in proportion to their holdings. They can be allotted to outsiders only when the existing shareholders or their nominees do not take them up or the company passes a special resolution excluding the existing equity shareholders from subscribing to such further issue of shares.
Where no such resolution is passed but the votes cast in favour of the proposal contained in the resolution exceed the votes cast against the proposal, the shares can be offered to any outsider only with the sanction of the Central Government. (Sec. 81)
A company may increase its authorised share capital or number of members beyond the registered number (in case of companies not limited by shares) by passing an ordinary resolution. Registrar must be informed of any such alteration within 30 days of the passing of the resolution.
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In case of conversion of shares into stock, such provisions of the Act which are applicable only to shares shall cease to apply as to so much of share capital as is converted into stock.
Cancellation of unissued shares is not treated as a reduction of share capital.
However, where increase in nominal share capital of a company is on account of order of the Central Government [in pursuance of section 81(4)] to convert a loan or debentures or part thereof into shares in the company, the nominal share capital of the company stands increased without any resolution passed by the company in this behalf. (Sec 94-A).
Within 30 days of passing the order, the Central Government shall send a copy of such order to the Registrar and to the Company. The company is also required to file return in the prescribed form to the Registrar who will register the same.
2. Reduction of the share capital:
To provide protection to interests of the investors especially creditors of companies, reduction of share capital is permissible with strict stipulation of the law. A company limited by shares or a company limited by guarantee and having a share capital, may, reduce its share capital by adopting any of the following methods of reduction:
(a) Extinguish or reduce the liability on any of its shares in respect of share capital not paid-up;
(b) Either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up share capital which is lost, or is unrepresented by available assets; or
(c) Either with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share capital which is in excess of the wants of the company.
Procedure of reduction:
(i) The articles of association of the company must authorize the company to reduce its share capital. (In case the article does not authorize the company to do so, an article of the company has to be altered to authorize the company for the same).
(ii) The company must pass a special resolution referred to as “a resolution for reducing share capital”.
(iii) The company has to apply, by petition to the Tribunal (at present to the Court since the Tribunal has not yet been constituted) for an order confirming the reduction.
Where the proposed reduction of share capital involves either the diminution of liability in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital, every creditor of the company entitled to any debt or claim against the company shall be entitled to object to the reduction.
In that case the company will have to satisfy the Tribunal (the Court, at present) that either the consent of the creditor to the reduction has been obtained or his debt or claim has been discharged, or has determined, or has been secured.
The Tribunal (the Court, at present) may make an order confirming the reduction on such terms and conditions as it thinks fit. It has power to direct the company to add to its name as the last words thereof the words “and reduced” for the period specified in the order and/ or require the company to publish reasons for reduction to give proper information to the public.
(iv) The company has to file with the Registrar a copy of the order of the Tribunal (the Court, at present) along with minutes of the share capital so reduced. The Registrar shall register the same and issue a certificate of registration.
Liability of members in respect of reduced shares. The liability of a member in respect of reduced shares will not exceed the difference between the amount deemed to have been paid on his shares and the nominal value of the reduced shares. However, a member can be made liable on the basis of original value of the shares held by him only in one case.
This happens when a creditor entitled to object to the reduction has been left out of the list of the creditors on account of his ignorance of the proceedings or their effects on his interest and the company has become subsequently unable to pay its debts.
In such a case, in order to meet the claim of such a creditor, the court may order the members to pay that amount on their shares which they would have been liable to contribute before the reduction. (Sec. 104)
In the following cases reduction of share capital does not require sanction of the Tribunal/Court.
(i) Forfeiture of shares
(ii) Surrender of shares
(iii) Cancellation of unissued capital (also known as diminution of share capital)
(iv) Buy-back of shares by the company
(v) Redemption of preference shares, and
(vi) Purchase by the company of shares of a member under an order of the Tribunal (Company Law Board, at present) for prevention of oppression and mismanagement. (Sec. 402)
3. Alteration of rights of shareholders (Section 106):
Where the share capital of a company is divided into different classes of shares, the rights attached to the shares of any class may be varied with the consent in writing of the holders of not less than three-fourths of the issued shares of that class or with the sanction of a special resolution passed at a separate meeting of the holders of the issued shares of that class:
(a) If provision with respect to such variation is contained in the memorandum or articles of the company, or
(b) In the absence of any such provision in the memorandum or articles, if such variation is not prohibited by the terms of issue of the shares of that class.
Dissenting members, holding not less than 10% of the issued shares of the class affected, may, within 21 days after the passing of the resolution or consent given, apply to the Tribunal (Court, at present) for the cancellation of the variation. If such an application is made, the variation will have no effect until it is confirmed by the Tribunal/Court. (Sec. 107)
4. Creation of reserve liability/capital:
Reserve capital is that portion of the company’s uncalled capital, which the company provides by special resolution, to be called up only in the event of and for the purposes of the company’s winding up. It cannot, by any other special resolution, be converted into ordinary capital. (Sec. 99)