A company's share capital is more than just a number on it’s balance sheet; it is the financial backbone that supports it’s operations, growth and future aspirations. As businesses evolve, so do their capital requirements. Whether it is to scale up, attract new investors or restructure finances, altering your company's share capital can be a critical strategic move. Praman Advisors Private Limited specializes in guiding businesses through these changes, ensuring full compliance and a smooth transition.
1. Overview: What is "Change in Share Capital"?
"Change in Share Capital" is a broad term encompassing any modification to a company's authorized, issued, subscribed or paid-up capital. This is not just about increasing capital; it can involve various alterations to the capital structure based on the company's strategic needs.
Key types of changes in share capital include:-
- Increase in Authorized Share Capital: This is the most common type, expanding the maximum limit of shares a company can issue as per it’s Memorandum of Association (MoA). It is essential for future fundraising and growth.
- Allotment of New Shares: Issuing shares to new or existing investors, which increases the company's issued and paid-up capital. This can be through various methods like a Rights Issue, Private Placement or Bonus Issue.
- Reduction of Share Capital: Decreasing the company's paid-up or issued capital. Reasons can include returning surplus capital to shareholders, writing off accumulated losses or extinguishing unissued shares. This is a more difficult process and generally requires National Company Law Tribunal (NCLT) approval.
- Sub-division (Stock Split) or Consolidation of Shares:
- Sub-division: Splitting existing shares into a larger number of shares with a proportionally reduced face value (e.g. one ₹10 share becoming ten ₹1 shares). This increases the liquidity and affordability of shares.
- Consolidation: Combining multiple shares into a single unit with a higher face value (e.g. ten ₹1 shares becoming one ₹10 share). This can be done to increase the share price or simplify the capital structure.
- Conversion of Shares into Stock: Converting fully paid-up shares into stock, which represents the consolidated value of shares. Stock is typically divisible into any amount, unlike shares which have fixed denominations.
- Buy-back of Shares: A company buying it’s own shares from the market or from existing shareholders which reduces the number of outstanding shares and more often the paid-up capital.
Each type of change has specific legal requirements and implications, making expert guidance invaluable.
2. Benefits of Changing Share Capital:
Strategically altering your share capital can yield numerous benefits for your company:-
- Optimized Fundraising: Whether increasing capital for new investments or adjusting it for a buy-back, it allows for efficient capital raising or deployment.
- Enhanced Financial Structure: A well-managed share capital structure can improve financial ratios, making the company more attractive to lenders and investors.
- Improved Liquidity and Affordability (through stock split): Lowering the per-share price can make shares more accessible to a wider range of investors, boosting trading activity.
- Consolidation of Ownership (through consolidation or buy-back): Can help reduce the number of shareholders or increase the stake of existing promoters.
- Enhanced Market Perception: Reflects a proactive management approach and commitment to financial health and growth.
- Compliance and Governance: Ensures the company's capital structure remains aligned with its business activities and regulatory requirements.
3. Documents Required for Changing Share Capital:
The specific documents required depend heavily on the type of share capital change. However, common documents often include:-
- Current Memorandum of Association (MoA): Especially the capital clause.
- Current Articles of Association (AoA): To check if the proposed change is permitted. If not, the AoA needs prior amendment.
- Board Resolution: Certified true copy of the resolution passed by the Board of Directors, approving the proposed change and calling for an Extraordinary General Meeting (EGM).
- Shareholder Resolution (Ordinary/Special): Certified true copy of the resolution (Ordinary Resolution for increasing authorized capital, Special Resolution for most other changes like reduction, AoA amendment, consolidation, subdivision) passed at the EGM.
- Notice of EGM along with Explanatory Statement: Detailing the purpose and rationale behind the change.
- Amended MoA and AoA (if applicable): Reflecting the new capital structure or provisions.
- Digital Signature Certificates (DSC) and Director Identification Numbers (DIN) of signing directors.
- Audited Financial Statements: Often required for capital reduction or buy-back.
- Valuation Report: May be required for share issuance at a premium or for specific types of transactions.
- Specific forms related to the change (e.g. Form PAS-3 for allotment, Form SH-7 for authorized capital increase, Form SH-11 for buy-back).
- Any other approvals: Depending on the nature of the change (e.g. NCLT approval for capital reduction).
4. Process to Apply for Change in Share Capital:
Praman Advisors Private Limited simplifies the intricate process of share capital alteration. While specific steps vary for each type of change, a general outline for significant changes (like increasing authorized capital or issuing new shares) is as follows:-
- Review Articles of Association (AoA): Our experts will first verify if your company's AoA permits the intended change. If not, the AoA must be amended through a Special Resolution.
- Convene a Board Meeting: The Board of Directors passes a resolution to approve the proposed share capital change and to call for an Extraordinary General Meeting (EGM) of shareholders.
- Issue Notice of EGM: A minimum of 21 days' clear notice (or a shorter notice, if agreed by 95% of voting members) is sent to all shareholders, directors and auditors, detailing the agenda.
- Hold Extraordinary General Meeting (EGM): Shareholders convene and pass the required resolution (Ordinary or Special, depending on the change) to approve the alteration.
- File Forms with ROC: Within the stipulated timeline (typically 15 or 30 days) from the date of passing the resolution, the relevant e-forms are filed with the Registrar of Companies (ROC) via the MCA portal. Common forms include:-
- e-Form SH-7: For increasing authorized share capital.
- e-Form MGT-14: For filing special resolutions (e.g. for AoA amendment, capital reduction, consolidation, sub-division, buy-back).
- e-Form PAS-3: For allotment of new shares.
- Other specific forms as required.
- Payment of Fees and Stamp Duty: Applicable ROC filing fees and stamp duty (especially for authorized capital increase) are paid online.
- ROC Approval and Master Data Update: The ROC reviews the submitted documents and upon satisfaction, updates the company's master data on the MCA portal.
- Further Steps (if applicable): For changes like capital reduction, NCLT approval will be a crucial and lengthy additional step. For share allotments, share certificates are issued to the allottees.
5. Fees and Timelines:
The fees and timelines for changing share capital are highly dependent on the nature and complexity of the alteration:-
Fees:
- ROC Filing Fees (Government Fees): These are statutory fees based on the type of form and for authorized capital increases, on the new total capital. For example, Form SH-7 fees is tiered based on authorized capital. Form MGT-14 also has fixed fees.
- Stamp Duty: Primarily applicable for increasing authorized capital. This is a state-specific fee calculated on the increased amount of authorized capital, varying from 0.15% to 0.5% (approx) subject to state-specific caps.
- Professional Fees: Praman Advisors Private Limited charges a professional fee for comprehensive services including advisory, drafting documents, managing meetings and filing forms. These fees are tailormade to the scope and complexity of the required changes
- Other Costs: May include valuation fees, legal counsel fees (especially for NCLT cases) and advertising costs (for capital reduction).
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Timelines:
- Increase in Authorized Capital/Allotment: The process can typically be completed within 07-15 working days, assuming all documents are readily available and no significant complexities. This includes notice periods for meetings and ROC filing time.
- Other Changes (e.g. Capital Reduction): These processes are significantly more time-consuming, often taking several months due to regulatory approvals (like NCLT approval) and multiple public notices.
- Statutory Filing Deadlines: Most ROC forms have a 30-day filing deadline from the date of the relevant resolution. Missing these deadlines incurs significant late filing penalties.
Praman Advisors strives to ensure timely and efficient completion, mitigating risks of delays and penalties.
Frequently Asked Questions
Not for every change. For instance, a simple allotment of shares from within the existing authorized capital would not require MoA/AoA amendments. However, increasing authorized capital always requires MoA amendment. Other changes like consolidation, sub-division or conversion of shares might require AoA amendment if the existing AoA does not permit such actions.
The Ordinary Resolution needs a simple majority (more than 50%) of votes casted. However, the Special Resolution needs super majority (at least 75%) of votes casted. Specific sections of the Companies Act 2013, dictate which type of resolution is needed for particular actions.
Yes, a company can reduce it’s share capital to write off accumulated losses. This is a common reason for capital reduction and helps present a more accurate financial picture. However, it is a stringent process requiring NCLT approval and creditor consent/protection.
Delays in filing ROC forms attract substantial penalties. The penalty amount increases as per the duration of the delay and can accumulate significantly. It is crucial to adhere to the prescribed timelines to avoid financial burdens.
Praman Advisors provides end-to-end professional services including:-
* Comprehensive legal and procedural advice on the best course of action.
* Drafting all necessary resolutions, notices and altered constitutional documents.
* Managing and facilitating Board Meetings and EGMs.
* Preparing and filing all required e-forms with the ROC.
* Assisting with NCLT applications and appearances for complex changes like capital reduction.
* Compliance with all provisions of the Companies Act 2013 and other relevant regulations.
* Handling stamp duty payments and other statutory fees.
