ALTERATION OF SHARE CAPITAL

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.

PROVISIONS REGARDING ALTERATION OF SHARE CAPITAL

The following are the provisions regarding the alteration of share capital of the company:

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

EXAMPLE: A company has 50,000 equity shares of Rs. 10 each fully paid up. A resolution was passed to consolidate the shares into shares of Rs. 100 each. The journal entry to be passed is as follows:

Equity share capital A/c (Rs. 10)      Dr.                     5,00,000

     To Equity Share Capital A/c (Rs. 100)                                   5,00,000

(Being the consolidation of 50,000 equity shares of Rs. 100 each into 5,000 shares of Rs. 100 each fully paid up.)  

Sub-Division of Shares: 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 more 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

EXAMPLE: A company has passed the resolution for conversion of 4,000 equity shares of Rs. 10 each and Rs. 80 paid up into 10,000 equity shares of Rs. 40 each and Rs. 32 paid up. The journal entry will be:

Equity share capital A/c (Rs. 100)      Dr.                   3,20,000

     To Equity Share Capital A/c (Rs. 40)                                     3,20,000

(Being the sub-division of 4,000 equity shares of Rs. 100 each Rs. 80 paid up into 10,000 equity shares of Rs. 40 each Rs. 32 paid up)

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

EXAMPLE: A  company passed the resolution for conversion of 8,000 shares of Rs. 50 each fully paid into the stock. The journal entry to be passed is as follows:

Equity share capital A/c    Dr.                       4,00,000

     To equity stock A/c                                                    4,00,000

SECTION 64- PASSING OF SPECIAL RESOLUTION

The company must pass a special resolution in the general meeting to take the consent of the shareholders in the presence of board of directors regarding the alteration of share capital. The special resolution must contain the details regarding the method to be followed for the alteration of share capital along with the value of shares to be altered.  

SECTION 64- NOTICE TO REGISTRAR

The company can never alter its capital without providing the details of alteration to the Registrar appointed under the Companies Act, 2013. The company must furnish all the details by filing the e-Form SH-7. The notice must be given to the registrar within 30 days of passing of the resolution.

SECTION 99- RESERVE CAPITAL

The uncalled capital of the company is known as the reserve capital or reserve liability. This capital can be called upon only in the case of company being wound up. So while making alteration of share capital, this capital should remain untouched.

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