Methods including alteration of Share capital, variation of share-holder rights, sub division, consolidation, surrender and reissue/cancellation, reduction of share capital, with relevant legal provisions and accounting treatments for same
Alteration of share capital
Alteration of Share Capital refers to changes in the firm’s current capital structure. A company’s share capital may only be changed if its Articles of Association allow it to. An article of association is a document created at the moment of formation to manage the company’s internal affairs.
In the event of a publicly traded corporation, the public subscribes for shares. As a result, the limited business must also amend its memorandum of association provision. The memorandum of association includes a capital provision that specifies how much share capital the firm may raise throughout its existence. The capital clause must be amended by the registrar appointed under the Companies Act 2013.
Section: 61. Way to Change Share Capital
Section 61 of the Companies Act, 2013 specifies five methods to change the share capital, which are as follows:
Increase in Authorized Capital: Authorized capital is often referred to as registered or nominal capital. This is the capital used to incorporate a corporation. The corporation may enhance its share capital by amending the capital provision in the Memorandum of Association.
Consolidation of Shares: The company may also change its share capital by combining lower denomination shares into bigger denominations. If there is a change in shareholders’ voting rights as a consequence of the consolidation, the tribunal or court must approve it. In case of share consolidation, the following journal entry is passe.d:
Share Capital (Old) A/c Dr.
To Share Capital (New) A/c
Variation of share-holder right
| This provision must be mentioned in the memorandum or articles of the company; and if not altered them accordingly: |
| If variation by one class of shareholders affects the rights of any other class of shareholders, the consent of three-fourths of such other class of shareholders shall also be obtained and the provisions of this section shall apply to such variation. |
| Where the holders of not less than 10% of issued class of shares did not consent in favour of Special Resolution, they may apply to the Tribunal to have the variation cancelled. |
| If such application is received by the Tribunal, the variation shall not effect unless and until it is confirmed by Tribunal. |
| Provided that an application under this section shall be made within 21 days after the date on which the consent was given or the resolution was passed, and may be made on behalf of the shareholders entitled to make the application by such one or more of their number as they may appoint in writing for the purpose. |
| The decision of the Tribunal on any application shall be binding on the shareholders. |
| The company shall, within thirty days of the date of the order of the Tribunal, file a copy thereof with the Registrar. |
Sub Division
- A company can also alter its share capital by sub dividing the value of the shares held By the stockholders. Section 61 enables the firm to subdivide its shares of higher denominations into lower denominations. The corporation may only do so if its memorandum of association allows it to. If partially paid-up shares are subdivided, the gap between the paid-up and unpaid amounts must remain constant. This method of changing share capital results in a bigger number of shares in the hands of shareholders with small denominations. The journal entry to be sent via this method is as follows:
- Share Capital (Old A/c: Dr. to Share Capital (New) A/C consolidation.
- The company may consolidate and split its shares into bigger shares only if approved by its Articles of Association and after receiving permission from members by ordinary resolution. (Section 61.1)
- The company should guarantee that any planned share consolidation or split does not result in a change in the voting proportion of shareholders. Otherwise, the company must approach the Tribunal (now, the Company Law Board) to request authorization for the planned consolidation and division of shares, which would result in a change in the voting % of shareholders. (Proviso to Section 61(1)(b)).
- When a business consolidates and divides its shares, it may replace all existing certificates with new certificates, subject to the restrictions that apply.