ALTERATION OF CAPITAL CLAUSE

Brief outlook:

Out of the five clauses comprising the Memorandum of Association of the Company Capital Clause is the Fifth clause depicting the capital of the company like whether it is limited or unlimited and if limited then whether limited by shares or by guarantee and this Capital clause is also sub divided into various parts viz. Authorised, Subscribed, Issued & Paid-up Capital.

What is Alteration?

Alteration is making changes whether by way of addition, deletion or modification to the existing thing. Similarly in case of alteration of Capital Clause means making changes to the existing Capital Structure of the company, which may be required at several times and on several occasions like if company goes for capital restructuring or if it is looking for some extra funds and the Authorised Share Capital of the Company don’t permit it to do so because of the limited Capital stated there.

Why the alteration is required?

At various instances & occasions there arises a need to alter its various parts in various forms like increase, subdivision, reclassification, consolidation conversion, cancellation, reduction & many more. Generally the people have a misconception that alteration of capital is alteration of Authorised Share capital but it’s not true at all as alteration can be made at various stages like by just increasing the paid up capital.

How it is done?

If the alteration is made to any clause other than Authorised Capital then all what we need not to modify the Charter of the Company i.e Memorandum  of Association of Company &/or Articles of Association of the Company, as it can just be done either by according the Board Consent or shareholders Consent as the situation demands. However if the Authorised Share Capital is to be altered we need to follow a detailed procedure depicted as below:

STAGE I- PRIOR STAGE

At this stage the in-house consent i.e of management is accorded by passing a Board Resolution by simple majority at a duly convened Board Meeting or either by circulation. When such consent is attained then a proper notice¹ is sent to all the shareholders of the company to intimate them about the ensuing General Meeting² for the said purpose. The Notice is to be attached with the relevant Explanatory Statement³

STAGE II- Conduction of Meeting & according the consent of shareholders

When a proper notice is sent then comes the stage of convening the meeting which can be convened only if there is a proper Quorum⁴. At the meeting we need to accord the consent of shareholders of the company by passing an ordinary resolution/ or special resolution as the situation demands like if it’s the case of increase, consolidation, sub-division, conversion or cancellation of Share Capital under section 94 of the Companies Act, 1956 then ordinary resolution is required however in case of reduction of Share Capital under Section 100 of the Companies Act, 1956 then consent is to be accorded by way of Special Resolution and not only this along with the special resolution the consent of court is also required.

STAGE III- Proceedings on the consent accorded

Once the consent of the shareholders is accorded & in case of reduction of share capital the approval of court is also obtained then the necessary changes are to be made to the Memorandum of Association of the Company & if required then to the Articles of Association of the company as well and an intimation to the Registrar of Companies is made by way of filing the E-form 5, E-form 23 and E-form 21 as may be required according to the alteration made. Stamp duty is also to be paid in case of increase which is to be paid as per the relevant State Stamp Act. The said E-Forms are to be filed with the concerned Registrar of Companies

STAGE IV- Approval of the said Change

It not just that the intimation is made to the Registrar of Companies and the alteration is made. The form needs to be get approved by the concerned Registrar of Companies. Hence it is always advisable to keep a check on the status of the E-form filed.

Conclusion:

Once all these exercises are completed the relevant change/alteration to the Capital Clause are considered to be made and then company can validly move ahead with the altered capital.

FOOT NOTE:

1. Proper notice means a notice duly sent under the provisions of Section 171(1) of the Companies Act, 1956 i.e a notice of not less than 21 clear days. However in case it is not feasible to give such notice then consent of 95% of the shareholders/ members in case of Extra ordinary General Meeting & all the shareholders in case of Annual General Meeting is to be obtained in writing in form 22A of General Rules & Forms.
2. General Meeting  could be any of the General Meeting either Annual General Meeting or the Extra-Ordinary General Meeting
3. Explanatory Statement  is the detailed statement given under section 173(2) narrating about the item to be proceeded and need for the item
4. Quorum as defined under Section 174 of the Companies Act, 1956 means if the articles don’t specify any other thing then in person presence of atleast 2 members in case of a Private Limited Company and atleast 5 members in case of a Public Limited Company.