Alteration of Share Capital: A Guide to the Process and Legal Requirements

What is Alteration of Share Capital?

Alteration of share capital refers to the process of changing the capital structure of a company by increasing or decreasing the number of shares, or by modifying the rights attached to existing shares. It can be done for various reasons, such as to raise capital, to consolidate shares, to convert shares from one class to another, or to cancel shares. Alteration of share capital is a complex process and involves compliance with legal and regulatory requirements.

In this blog, we will discuss the various aspects of alteration of share capital, including the reasons for alteration, the types of alteration, the legal requirements, and the procedure for alteration.

Reasons for Alteration of Share Capital

There can be several reasons for altering the share capital of a company. Some of the common reasons are:

1. To raise capital: Companies may need to raise additional capital to fund their expansion plans or to meet their working capital requirements. Alteration of share capital allows them to issue new shares and raise capital from the market.
2. To consolidate shares: Companies may have a large number of small denomination shares, which may make it difficult to manage their share capital. Alteration of share capital allows them to consolidate their shares into larger denominations, which makes it easier to manage.
3. To convert shares from one class to another: Companies may have different classes of shares with different rights attached to them. Alteration of share capital allows them to convert shares from one class to another.
4. To cancel shares: Companies may have unissued or cancelled shares on their balance sheet, which may affect their financial statements. Alteration of share capital allows them to cancel these shares and improve their financial statements.

Types of Alteration of Share Capital

There are several types of alteration of share capital, which include:

1. Increase of share capital: This involves increasing the authorised share capital of the company, which allows the company to issue more shares.
2. Decrease of share capital: This involves reducing the authorised share capital of the company, which may be done to reduce the company’s capital or to cancel unissued shares.
3. Consolidation of shares: This involves consolidating several shares into one share of larger denomination.
4. Sub-division of shares: This involves dividing one share into several shares of smaller denomination.
5. Conversion of shares: This involves converting one class of shares into another class of shares, such as converting preference shares into equity shares.

Legal Requirements for Alteration of Share Capital

Alteration of share capital is governed by various legal and regulatory requirements. Some of the key legal requirements are:

1. Approval of shareholders: Any alteration of share capital must be approved by the shareholders of the company through a special resolution passed at a general meeting.
2. Approval of regulatory authorities: Certain types of alterations may require approval from regulatory authorities such as the Registrar of Companies, Securities and Exchange Board of India (SEBI), and Reserve Bank of India (RBI).
3. Filing of documents: After the approval of the shareholders and regulatory authorities, the company must file the necessary documents with the Registrar of Companies, such as the altered memorandum and articles of association, and obtain a certificate of registration.

Procedure for Alteration of Share Capital

The procedure for alteration of share capital involves several steps, which include:

1. Board resolution: The first step is to pass a board resolution proposing the alteration of share capital and convening a general meeting of shareholders.
2. Notice of general meeting: The company must issue a notice of the general meeting to all shareholders, specifying the date, time, and place of the meeting and the proposed resolution.
3. General meeting: The shareholders must approve the proposed resolution by a special resolution passed by a majority of not less than three-fourths of the members present and voting.

4. Approval of regulatory authorities: If the proposed alteration requires regulatory approval, the company must obtain the necessary approvals from the relevant regulatory authorities.
5. Filing of documents: After obtaining the necessary approvals, the company must file the necessary documents with the Registrar of Companies, such as the altered memorandum and articles of association, and obtain a certificate of registration.
6. Share certificates: If the alteration involves the issue of new shares, the company must issue new share certificates to the shareholders.
7. Update of records: The company must update its records to reflect the altered share capital, and inform relevant parties such as stock exchanges, depositories, and banks.

Conclusion

Alteration of share capital is a crucial process for companies, as it allows them to adjust their capital structure to meet their business needs. However, it is a complex process that requires compliance with legal and regulatory requirements. Companies must carefully consider the reasons for alteration, the type of alteration, and the legal requirements before proceeding with the process. By following the proper procedure and obtaining the necessary approvals, companies can successfully alter their share capital and achieve their business objectives.

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