Power of a Limited Company to Alter its Share Capital

Why? Because consolidation can be used as a squeeze. Turn every hundred ten rupee shares into one thousand rupee share, and a member holding sixty shares is left with a fraction, which the company then buys out. His votes vanish. The proviso puts any consolidation that shifts voting percentages in front of the Tribunal.

(c) Convert shares into stock, and back

Convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares of any denomination.

Note fully paid-up: partly paid shares cannot be converted, because stock is not divided into units on which calls can be made.

(d) Sub-divide

Sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum, so, however, that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived.

The condition preserves the company's claim for unpaid capital. A hundred rupee share with forty rupees paid, split into ten shares of ten rupees, must produce ten shares each with four rupees paid and six unpaid. A company cannot use sub-division to write off a liability.

(e) Cancel unsubscribed shares

Cancel shares which, at the date of the passing of the resolution in that behalf, 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.

Two conditions on the face of it. The shares must not have been taken or agreed to be taken by anybody, and the test is applied at the date of the resolution.

Section 61(2): and it is not a reduction.

The cancellation of shares under sub-section (1) shall not be deemed to be a reduction of share capital.

That single sentence is the whole reason section 61 does not need the Tribunal for clause (e). Nobody ever subscribed for those shares, so no capital ever existed to be returned.

What resolution is needed

Section 61(1) says "alter its memorandum in its general meeting" and does not itself name a resolution. Section 13(1) opens with "save as provided in section 61", which takes an alteration of the capital clause out of the special resolution requirement that governs the rest of the memorandum.

So the resolution is an ordinary resolution unless the articles require more, and the two threshold conditions are that the company must be authorised by its articles and must act in general meeting. A company whose articles do not authorise it must first alter its articles under section 14, by special resolution.

This is a favourite comparison question: the memorandum generally needs a special resolution under section 13(1), but the capital clause is altered under section 61 by ordinary resolution, and reduction of capital needs a special resolution plus the Tribunal under section 66.

Notice to the Registrar: section 64

Where a company alters its share capital in any manner specified in section 61(1), or an order of the Government increasing the authorised capital takes effect under section 62(4), or a company redeems any redeemable preference shares, the company shall file a notice with the Registrar in the prescribed form and manner within thirty days, together with an altered memorandum, and the Registrar shall record the notice and make the necessary alteration in the memorandum and articles.

On default, the company and every officer in default shall be liable to a penalty of one thousand rupees for each day during which the default continues, or five lakh rupees, whichever is less.

So the pattern is: resolution in general meeting, then notice to the Registrar within thirty days with the altered memorandum.

Reserve capital: section 65

An unlimited company having a share capital may, by a resolution passed in that behalf, if so provided by its articles, on conversion into a limited company, increase the nominal amount of its share capital by increasing the nominal amount of each of its shares, subject to the condition that no part of the increased capital shall be capable of being called up except in the event and for the purposes of the company being wound up; or provide that a specified portion of its uncalled share capital shall not be capable of being called up except in the event and for the purposes of the company being wound up.

This is reserve capital, and it is a small but favourite short note. An unlimited company converting into a limited one may set aside part of its capital so that it can be called only in a winding up and for the purposes of the winding up. The effect is to create a guaranteed fund for creditors that the directors cannot touch while the company is a going concern.

Distinguish reserve capital from capital reserve. Reserve capital is uncalled share capital locked away for a winding up under section 65. A capital reserve is an accounting reserve of a capital nature. They are not related and the similarity of the names is a trap.

A worked example

Amravati Textiles Limited has an authorised capital of five crore rupees divided into fifty lakh shares of ten rupees each, of which forty lakh have been issued.

Increase. It wants to issue another twenty lakh shares, which would take it past the ceiling. Under section 61(1)(a), being authorised by its articles, it passes a resolution in general meeting increasing the authorised capital to eight crore rupees, and files notice with the Registrar with the altered memorandum within thirty days under section 64.

Sub-division. Its shares trade at nine hundred rupees and it wants them accessible to small investors. Under section 61(1)(d) it sub-divides each ten rupee share into ten shares of one rupee. On its partly paid shares, where six rupees is paid and four unpaid, each resulting one rupee share must carry sixty paise paid and forty paise unpaid, preserving the proportion.

Consolidation. Later it consolidates every ten one rupee shares back into a ten rupee share under section 61(1)(b). Because some members hold numbers not divisible by ten, the consolidation would change voting percentages. By the proviso it does not take effect unless approved by the Tribunal on an application in the prescribed manner.

Conversion into stock. It converts its fully paid shares into stock under section 61(1)(c), and may reconvert into fully paid shares of any denomination later. Its partly paid shares cannot be converted.

Cancellation. Ten lakh shares of the increased authorised capital were never taken or agreed to be taken by anybody. Under section 61(1)(e) the company cancels them at the date of the resolution and diminishes its authorised capital accordingly. This is not a reduction of capital under section 61(2), so the Tribunal is not involved and creditors have nothing to object to: no money ever came in on those shares.

Contrast. Now suppose the company wanted to return two rupees a share to its members on fully paid shares. That is a reduction: money leaves the company. It would need section 66, a special resolution and confirmation by the Tribunal, with creditors entitled to object.

Reserve capital. Had the company been an unlimited company converting to limited, it could under section 65 have increased the nominal amount of each share on the footing that the increase is callable only in a winding up and for its purposes, or set aside a specified portion of uncalled capital on the same terms.

Distinctions that carry marks

What this does NOT mean

It does not mean any company may do this. Section 61 applies to a limited company having a share capital, and only if so authorised by its articles.

It does not mean the capital clause needs a special resolution. Section 13(1) is expressly "save as provided in section 61".

It does not mean sub-division can extinguish a liability. The proportion of paid to unpaid must be preserved.

It does not mean cancellation of unsubscribed shares affects creditors. Section 61(2) declares it is not a reduction of share capital.

Quick revision

• Section 61(1), five powers, for a limited company with share capital, authorised by its articles, in general meeting: (a) increase authorised capital; (b) consolidate and divide, Tribunal approval if voting percentages change; (c) convert fully paid shares into stock and back into shares of any denomination; (d) sub-divide, preserving the paid to unpaid proportion; (e) cancel shares not taken or agreed to be taken at the date of the resolution, and diminish capital accordingly.
• Section 61(2): that cancellation is not a reduction of share capital.
• Resolution: ordinary, because section 13(1) opens "save as provided in section 61".
• Section 64: notice to the Registrar within thirty days with the altered memorandum, also on a Government order under section 62(4) and on redemption of redeemable preference shares. Default, one thousand rupees a day or five lakh rupees, whichever is less.
• Section 65: an unlimited company converting to limited may create reserve capital, callable only in a winding up and for its purposes. Not the same as a capital reserve.

Test yourself

1. In what five ways may a limited company alter its share capital under section 61? Increase its authorised share capital; consolidate and divide into shares of a larger amount; convert fully paid shares into stock and reconvert; sub-divide into shares of smaller amount; and cancel shares not taken or agreed to be taken and diminish the capital accordingly.

2. When does a consolidation require the Tribunal's approval? Where the consolidation and division results in changes in the voting percentage of shareholders. It does not take effect unless approved by the Tribunal on an application made in the prescribed manner: proviso to section 61(1)(b).

3. What condition attaches to a sub-division? The proportion between the amount paid and the amount, if any, unpaid on each reduced share must be the same as it was on the share from which the reduced share is derived: section 61(1)(d).

4. Is cancelling unsubscribed shares a reduction of capital? No. Section 61(2) provides expressly that the cancellation of shares under sub-section (1) shall not be deemed to be a reduction of share capital, because no money was ever received on those shares.

5. What resolution is needed to alter the capital clause, and why is it not a special resolution? An ordinary resolution in general meeting, unless the articles require more, because section 13(1), which requires a special resolution for alteration of the memorandum, opens with the words "save as provided in section 61".

6. What is reserve capital? Under section 65, an unlimited company having a share capital may, on conversion into a limited company and if its articles so provide, increase the nominal amount of its shares, or set aside a specified portion of its uncalled capital, on the footing that it shall not be capable of being called up except in the event and for the purposes of the company being wound up.