by Alteration of share capital
Alteration of Share Capital refers to the changes in the existing capital structure of the firm. A company can alter its share capital only if it is authorized by its Articles of Association. An article of association is the document framed at the time of incorporation of the company to govern its internal affairs.
In case of public company, the shares are being subscribed from the public. So, the limited company has to make alteration of the memorandum of association clause also. There is a capital clause in the memorandum of association that contains the details regarding the amount of share capital that can be raised by the company during its lifetime. The capital clause has to be get altered by the registrar appointed under Companies Act 2013.
SECTION: 61 Way to Alter Share Capital
Section 61 of the Companies Act, 2013 states the five different ways to alter the share capital which are as follows:
Increase in Authorized Capital: Authorized Capital is also known as Registered or Nominal Capital. This is the capital with which company gets incorporated. The company can increase its share capital by altering its capital clause mentioned in the Memorandum of Association.
Consolidation of Shares: The Company can also alter its share capital by consolidating the smaller denominations shares into larger denominations. In case there is any change regarding voting rights of shareholders results out of the consolidation, the permission of the tribunal or court is compulsory. In case of consolidation of shares, the following journal entry is passed:
Share Capital (Old) A/c Dr.
To Share Capital (New) A/c
Variation of share-holder right
| This provision must be mentioned in the memorandum or articles of the company; and if not altered them accordingly: |
| If variation by one class of shareholders affects the rights of any other class of shareholders, the consent of three-fourths of such other class of shareholders shall also be obtained and the provisions of this section shall apply to such variation. |
| Where the holders of not less than 10% of issued class of shares did not consent in favour of Special Resolution, they may apply to the Tribunal to have the variation cancelled. |
| If such application is received by the Tribunal, the variation shall not effect unless and until it is confirmed by Tribunal. |
| Provided that an application under this section shall be made within 21 days after the date on which the consent was given or the resolution was passed, and may be made on behalf of the shareholders entitled to make the application by such one or more of their number as they may appoint in writing for the purpose. |
| The decision of the Tribunal on any application shall be binding on the shareholders. |
| The company shall, within thirty days of the date of the order of the Tribunal, file a copy thereof with the Registrar. |
Sub Division
A company can also alter its share capital by sub dividing the value of the shares held by the shareholders. Section 61 allows the company to sub-divide its shares of higher denominations into smaller denominations. The company can do so only if it is authorized by the memorandum of association. In case there is sub-division of partly paid-up shares, the condition to be fulfilled is that the difference between the paid-up amount and unpaid amount continues to be the same. This way of alteration of share capital results in the holding of a greater number of shares in the hands of the shareholders with low denomination. The journal entry to be passed in this method is as follows:
Share Capital (Old) A/c Dr.
To Share Capital (New) A/c
Consolidation
- Company can consolidate and divide its shares into shares of larger amount only if it is authorized by its Articles of Association and after obtaining approval of members by ordinary resolution. (Section 61(1)
- Company shall ensure that proposed consolidation and division of shares shall not result in change in the voting percentage of shareholders. Otherwise, Company shall be required to approach Tribunal (at present, Company Law Board) seeking permission for proposed consolidation and division of shares resulting in change in the voting percentage of shareholders (Proviso to Section 61(1)(b))
- A company may replace all the existing certificates by new certificates upon consolidation and division of shares subject to compliance with prescribed rules.
Surrender and Reissue/Cancellation
Cancel the unissued shares: the company can also cancel its unissued capital. But this does not leads to alteration of share capital. In this method, no journal entry is passed and no treatment is done in the books of the accounts.
Conversion of shares into stock: The Company can also alter its shares capital by converting the fully paid-up shares into the stock. Stock is the aggregate of fully paid-up shares. The company can do so only if it is authorized by its articles of association. Also, the company can re convert its stock into shares.
The journal entries to be passed are as follows:
A) Conversion of shares into stock
Equity share capital A/c Dr.
To Equity Capital Stock A/c
B) Conversion of stock into shares
Equity Capital Stock A/c Dr.
To Equity Share Capital A/c
