Alteration of Share Capital refers to the lawful changes a company can make to its existing capital structure as authorized by its Articles of Association (AoA) and the Companies Act, 2013. It involves modifying the quantity, nature, or rights of issued or authorized share capital. Common forms include: increasing authorized capital, consolidating shares into larger denominations, sub-dividing shares into smaller ones, converting fully-paid shares into stock, or cancelling unissued shares. Alteration must be approved by shareholders via an ordinary resolution (unless AoA requires stricter approval). It is a procedural restructuring to reflect corporate changes, distinct from reduction of capital, which diminishes liability.
Reasons of Alteration of Share Capital:
1. Facilitating Fresh Capital Infusion
A company may need to increase its authorized share capital to create room for issuing new shares to raise funds for expansion, acquisitions, or debt repayment. Altering the capital clause in the Memorandum of Association (MoA) allows the company to legally issue shares beyond its previous limit. This is a prerequisite for future equity fundraising via public issues, rights issues, or private placements, ensuring the company has the legal headroom to secure growth capital without procedural delays.
2. Enhancing Marketability and Liquidity
By sub-dividing shares (e.g., splitting a ₹100 share into 10 shares of ₹10 each), a company can lower the market price per share, making it more affordable and attractive to retail investors. This increases trading liquidity and broadens the shareholder base. Conversely, consolidating shares (e.g., combining 10 shares of ₹10 into one ₹100 share) can improve perception for institutional investors or meet stock exchange listing requirements in certain markets, adjusting the share’s nominal value to a more conventional range.
3. Restructuring Capital for Strategic Goals
Alteration allows a company to convert equity shares into stock (or vice versa), which simplifies the transfer and division of holdings, as stock can be transferred in fractional amounts. This is often part of internal restructuring to streamline share administration. It may also involve reclassifying share classes (e.g., creating differential voting rights shares) to attract specific investors or founders while retaining control, aligning the capital structure with long-term strategic and governance objectives.
4. Cancelling Unissued Capital
A company may cancel unissued shares that it does not intend to issue, thereby reducing its authorized capital. This is a form of alteration that simplifies the capital structure and removes the obligation to pay stamp duty or fees on the unused authorized capital in some jurisdictions. It reflects a strategic decision that the company’s future funding needs will be met through other means (like debt or internal accruals), or that the existing authorized capital is more than adequate.
5. Facilitating Corporate Actions (Bonus, ESOPs)
Alteration is often necessary to accommodate corporate actions like issuing bonus shares or implementing Employee Stock Option Plans (ESOPs). Increasing authorized capital ensures sufficient unissued share capital is available to issue bonus shares from reserves or to create a pool of shares for ESOPs without needing repeated shareholder approvals. It provides the flexibility to reward shareholders and employees efficiently, supporting talent retention and shareholder value enhancement programs.
Types of Alteration of Share Capital:
1. Increase in Authorized Share Capital
This involves raising the maximum limit of capital a company is authorized to issue, as specified in its Memoratory of Association (MoA). The process requires passing an Ordinary Resolution in a general meeting (if authorized by AoA) and filing Form SH-7 with the Registrar of Companies (RoC). It is typically done to accommodate future fundraising via equity issuances, ESOPs, or bonus shares. This alteration does not change the issued or paid-up capital immediately but creates the legal headroom for such changes. It is the most common form of alteration.
2. Consolidation of Share Capital
Consolidation involves combining shares of smaller denomination into shares of a larger nominal value. For example, converting ten ₹10 shares into one ₹100 share. This reduces the number of issued shares without changing the total nominal value. It requires shareholder approval via an Ordinary Resolution. Companies may consolidate to improve market perception, meet stock exchange requirements, or simplify the capital structure. However, it may reduce liquidity as the share price per unit increases, potentially making them less accessible to small investors.
3. Sub-division of Share Capital
This is the opposite of consolidation. It involves dividing shares of a larger denomination into smaller units. For example, splitting one ₹100 share into ten ₹10 shares. The total nominal value remains unchanged, but the number of shares increases. This is done primarily to enhance liquidity and marketability by lowering the market price per share, making it more affordable for retail investors. It requires an Ordinary Resolution and is a common strategy before a public offering to attract a broader investor base.
4. Conversion of Shares into Stock
This process converts fully paid-up shares of a fixed denomination into a single consolidated fund of capital called “stock.” Stock can be transferred in fractions, unlike shares. It simplifies the transfer process and administrative record-keeping for large, frequently traded holdings. However, stock cannot be issued directly; shares must first be fully paid and then converted. It is governed by the AoA and requires an Ordinary Resolution. This type is less common today, especially with the prevalence of dematerialized holdings.
5. Cancellation of Unissued Share Capital
A company may cancel a portion of its authorized capital that has not been issued or agreed to be issued. This effectively reduces the authorized capital limit. It does not constitute a reduction of capital as no issued capital or shareholder liability is affected. The process requires an Ordinary Resolution. Companies do this to simplify their capital structure, reflect realistic fundraising plans, or avoid paying fees on unnecessarily high authorized capital. It is a formal way of retiring unused capital authority.
Procedure of Alteration of Share Capital:
1. Check Authorizing Provision in Articles of Association
Before any alteration, the company must verify that its Articles of Association (AoA) permit the proposed change. If the AoA are silent or restrictive, they must first be amended to include the necessary power. This amendment itself requires a Special Resolution of shareholders. The Companies Act, 2013, allows alteration if authorized by the AoA; thus, ensuring the AoA provides the enabling clause is the critical first legal step to ensure the entire process is valid and compliant.
2. Convene Board Meeting for Proposal
The Board of Directors must convene a meeting to approve the proposal for alteration. The Board reviews the need, type, and extent of alteration (e.g., increase in authorized capital, subdivision). It then passes a Board Resolution recommending the alteration and authorizing the convening of a General Meeting of shareholders to seek their approval. The Board also fixes the date, time, and venue for the General Meeting and approves the draft notice and explanatory statement.
3. Issue Notice for General Meeting
A formal notice of the General Meeting, along with an explanatory statement (as required under Section 102 of the Companies Act, 2013), must be dispatched to all shareholders, directors, and auditors. The notice must clearly state the intent to pass an Ordinary Resolution for the alteration (unless the AoA mandates a Special Resolution). For listed companies, the notice must also be sent to the stock exchanges and published as per SEBI (LODR) Regulations.
4. Pass Ordinary Resolution at General Meeting
At the General Meeting, shareholders discuss and vote on the proposed alteration. An Ordinary Resolution (simple majority of votes cast) is sufficient if the AoA authorizes it. The resolution must specify the exact alteration (e.g., “Increase authorized capital from ₹10 crore to ₹20 crore”). The minutes of the meeting are recorded. For certain alterations like conversion of shares into stock, the resolution must also authorize the Board to finalize and implement the decision.
5. File Form SH-7 with Registrar of Companies (RoC)
Within 30 days of passing the resolution, the company must file Form SH-7 (Notice of alteration of share capital) with the Registrar of Companies, along with the prescribed fee. The form must be accompanied by the certified true copy of the resolution and the amended Memorandum of Association (if the capital clause is altered). Timely filing is mandatory; delay attracts additional fees and penalties. The alteration is legally effective only upon RoC recording the filing.
6. Update Records and Issue Notices
Upon RoC registration, the company must update its statutory registers, including the Register of Members and the capital records. If the alteration involves a change in share denomination (sub-division/consolidation), the company must call in old share certificates and issue new ones reflecting the changed capital within 3 months. For listed companies, an intimation and the new ISIN (if applicable) must be given to the stock exchanges and depositories. The company may also publish a general notice in newspapers.
Accounting Treatment for Alteration of the Share Capital:
Alteration of share capital means change in the structure of existing share capital without changing the total capital. It includes increase, decrease, consolidation, sub division, and conversion of shares. Accounting entries depend on the type of alteration.
1. Increase in Share Capital
When authorised capital is increased
No journal entry is required
Only memorandum is altered
2. Consolidation of Shares
For example, 10 shares of ₹10 each converted into 5 shares of ₹20 each
No journal entry required
Only number and face value change
3. Sub division of Shares
For example, one share of ₹10 divided into 5 shares of ₹2 each
No journal entry required
Only share structure changes
4. Conversion of Fully Paid Shares into Stock
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Share Capital A/c Dr | Amount | – |
| To Stock A/c | – | Amount |
5. Conversion of Stock into Fully Paid Shares
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Stock A c Dr | Amount | – |
| To Share Capital A c | – | Amount |
6. Reduction of Share Capital
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Share Capital A c Dr | Reduced amount | – |
| To Capital Reduction A c | – |
Reduced amount |
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